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Bayer optimistic about future business trend
Leverkusen, October 29, 2008 - Following a strong performance in the third quarter, the Bayer Group confirms its targets for 2008. "Despite the difficult environment we expect in the fourth quarter, we are confirming our guidance for 2008 as a whole," Management Board Chairman Werner Wenning stressed during a conference call on Wednesday. "We are also confident about the future development of the business and aim to grow earnings again next year," he added. The company continued on its path of growth after a very successful first half, increasing sales in the third quarter by 2.0 percent to EUR 7,948 million (Q3 2007: EUR 7,793 million). Business expanded by a gratifying 5.1 percent on a currency- and portfolio-adjusted basis, Wenning explained. While sales were up in HealthCare and particularly CropScience, business at MaterialScience held steady year on year in a difficult market environment.
Earnings were diminished by an increase of some EUR 230 million in energy and raw material costs at MaterialScience and by negative exchange rate effects amounting to about EUR 110 million. Even the improved earning power of HealthCare and CropScience did not suffice to completely offset these factors. Group earnings before interest, taxes, depreciation and amortization (EBITDA), before special items, declined by EUR 66 million, or 4.2 percent, to EUR 1,493 million (Q3 2007: EUR 1,559 million). The underlying operating result (EBIT) moved 6.5 percent lower, to EUR 891 million (Q3 2007: EUR 953 million).
Solid growth at Bayer HealthCare
Sales of Bayer HealthCare rose by 3.3 percent in the third quarter, to EUR 3,802 million (Q3 2007: EUR 3,680 million). The currency- and portfolio-adjusted increase was 6.1 percent. Both segments - Pharmaceuticals and Consumer Care - contributed to this improvement.
Sales of the Pharmaceuticals segment expanded by 2.6 percent (currency- and portfolio-adjusted: 5.9 percent) to EUR 2,638 million. "A notable factor was the performance of the YAZ® family of oral contraceptives, sales of which rose by 15.1 percent after adjusting for shifts in exchange rates," said Wenning. "Business with the YAZ® product family expanded in the United States too, despite the fact that a generic version of Yasmin® has been on the market there since July." Very pleasing growth was also achieved by the cancer drug Nexavar®, sales of which climbed by a currency-adjusted (Fx adj.) 62.9 percent. Sales of the multiple sclerosis treatment Betaferon®/Betaseron® gained 15.2 percent (Fx adj.), while business with the hemophilia medicine Kogenate® expanded by 14.8 percent (Fx adj.). Wenning described the European registration of the new antithrombotic drug Xarelto® at the beginning of October as a key breakthrough. The orally administered drug can now be used for prophylaxis of venous thromboembolism following elective hip or knee replacement surgery in adult patients. Clinical studies in further indications are already at advanced stages. "We believe this innovative drug has the potential to achieve peak annual sales of more than EUR 2 billion in the future," Wenning commented.
Sales of the Consumer Health segment increased by 4.9 percent (currency- and portfolio-adjusted: 6.7 percent) to EUR 1,164 million. All divisions contributed to this increase. In the non-prescription medicines business (Consumer Care), the Bepanthen®/Bepanthol® product line performed particularly well with sales increasing by 21.4 percent (Fx adj.). Sales of the antifungal medication Canesten® advanced by 11.4 percent (Fx adj.). In the Diabetes Care Division, sales of the blood glucose measurement systems Contour® (Fx adj. +19.1 percent) and Breeze® (Fx adj. +37.8 percent) improved significantly, while business with the older Elite® systems moved back by 28.7 percent (Fx adj.). The Animal Health Division benefited from the particularly strong performance of the flea control product Advantage® (Fx adj. +19.0 percent).
EBITDA before special items of the HealthCare subgroup rose by 6.8 percent to EUR 1,018 million (Q3 2007: EUR 953 million). This increase was mostly attributable to the gratifying expansion of business and the synergies realized from the integration of Schering, Berlin, Germany. Earnings were diminished by negative currency effects and considerably higher marketing costs for the expansion of activities in emerging markets and the introduction of new products.
Bayer CropScience raises sales and earnings in all business units
"We continue to be pleased with the performance of CropScience. This subgroup expanded sales in all business units in what remained a positive market environment," Wenning remarked. Sales moved ahead by 7.9 percent (currency- and portfolio-adjusted: 14.0 percent) to EUR 1,248 million (Q3 2007: EUR 1,157 million).
Business in the Crop Protection segment expanded by 8.3 percent (Fx adj. +14.7 percent) to EUR 1,067 million. Especially good gains were recorded for seed treatment products, insecticides and fungicides. The Latin America/Africa/Middle East region saw particularly strong growth, with sales advancing by 29.8 percent (Fx adj.).
Sales of the Environmental Science, BioScience segment expanded by 5.2 percent (currency- and portfolio-adjusted: 10.5 percent) to EUR 181 million. The Environmental Science business unit grew sales by 6.7 percent (Fx adj.). In Europe, sales of products for professional users and consumers were well ahead of the prior-year period. Sales of the BioScience business unit climbed by 21.2 percent after adjusting for currency and portfolio effects. Here the vegetable seed business developed particularly well.
EBITDA before special items at Bayer CropScience grew by 24.0 percent in the third quarter, to EUR 207 million (Q3 2007: EUR 167 million), due especially to higher volumes and selling price increases for Crop Protection products.
Bayer MaterialScience weighed down by raw material and energy costs
Sales of Bayer MaterialScience came in at EUR 2,549 million in the third quarter, down 2.9 percent from the prior-year figure of EUR 2,625 million. Adjusted for portfolio and currency effects, business remained at the previous year's level. Here the decline in volumes was almost completely offset by higher selling prices. Business in North America was impacted by Hurricane Ike.
Sales in the Systems segment held steady year on year at EUR 1,850 million. In the foam raw materials business (polyurethanes), there was a gratifying improvement in sales of TDI (toluene diisocyanate), while sales of MDI (diphenylmethane diisocyanate) receded slightly. In regard to the business with raw materials for coatings, adhesives and specialties, sales gains in Asia-Pacific did not fully compensate for lower sales in the European market.
Sales in the Materials segment declined by 8.9 percent (currency- and portfolio-adjusted: minus 2.3 percent) to EUR 699 million. While sales of polycarbonates fell by 2.8 percent after adjusting for currency and portfolio effects, the Thermoplastic Polyurethanes business unit saw business expand by an adjusted 2.9 percent.
Compared to the prior-year period, earnings of MaterialScience were greatly hampered by raw material and energy price increases totaling some EUR 230 million. "Selling price increases and cost savings from our restructuring program only partly offset these effects," explained Wenning. EBITDA of the subgroup before special items fell by EUR 166 million to EUR 255 million.
Core earnings per share slightly improved
The Bayer Group took net special charges of EUR 207 million in the third quarter (Q3 2007: EUR 276 million). After special items, EBIT edged ahead by 1.0 percent to EUR 684 million (Q3 2007: EUR 677 million). Net income came in at EUR 277 million. The prior-year figure of EUR 1,175 million contained EUR 911 million in one-time non-cash tax income arising in connection with the corporate tax reform in Germany. Core earnings per share increased to EUR 0.85 (Q3 2007: EUR 0.81).
Gross cash flow amounted to EUR 1,171 million, up 0.5 percent from the third quarter of 2007. Due to a smaller decline in working capital than in the prior-year quarter, net cash flow was down by 24.0 percent to EUR 1,234 million. Net debt was EUR 13,687 million on September 30, an increase of EUR 383 million compared to the end of June. This increase was due, among other factors, to changes in the rates for major currencies against the euro - which had an effect of EUR 0.5 billion - and to acquisitions, which had a EUR 0.4 billion effect.
Performance further improved in the first nine months
The Bayer Group continued to improve its operating performance in the first three quarters of 2008. Sales from continuing operations advanced by 2.7 percent to EUR 24,995 million (9M 2007: EUR 24,345 million). After adjusting for currency and portfolio effects, the increase came to 7.2 percent. EBITDA before special items improved by 4.1 percent to EUR 5,574 million (9M 2007: EUR 5,355 million), while EBIT before special items rose by 3.5 percent to EUR 3,636 million (9M 2007: EUR 3,513 million). Group net income for the first nine months amounted to EUR 1,613 million. The prior-year figure of EUR 4,644 million contained proceeds from the divestitures of the Diagnostics business, H.C. Starck and Wolff Walsrode, as well as a one-time non-cash tax gain. Core earnings per share improved to EUR 3.46 (9M 2007: EUR 3.09).
Secure perspectives for Bayer employees
Wenning expressed his optimism about the company's future perspectives. He believes that although it is difficult to assess how the financial crisis will play out, it will not have a direct impact on the company's financial status. "In particular, the Schering acquisition was soundly financed right from the start. As a result, we currently have no need for refinancing - and debt that matures in the coming years is intended to be paid down out of operating cash flow," said the Management Board Chairman. "However, we are of course affected by the economic environment as a whole." In his opinion there is no question that the profound turbulence on the international financial markets is increasingly restraining global economic development and harbors substantial additional risks for the real economy.
Wenning pointed out that the crisis tends to cause anxiety in the workforce: "So it's precisely at times like these that we must have special consideration for our employees." He stressed that the company will do all it can to address understandable concerns about the employees' personal and financial situation, remarking that job security is particularly important: "For years Bayer has concluded agreements with the Works Council that rule out dismissals for operational reasons in Germany - currently until the end of 2009," Wenning stressed. The company also intends that salaries should continue to develop as has been customary in the past. The employees' company pension rights are also safe: "Speculative behavior is not part of the investment strategy of our pension funds."
Outlook for 2008 confirmed
"Despite the difficult economic conditions expected in the fourth quarter, we confirm our full-year guidance for 2008," Wenning said. The company continues to target over 5 percent currency- and portfolio-adjusted growth in Group sales, which would mean sales of approximately EUR 33 billion. Bayer plans to further improve EBITDA before special items and the underlying EBITDA margin compared to 2007.
"We remain confident about the performance of our HealthCare business. We continue to expect all divisions to grow with or above the market after adjusting for currency changes," said Wenning. Bayer aims to improve the EBITDA margin before special items in this subgroup toward 27 percent.
The company expects the generally positive market environment for its CropScience business to continue in the fourth quarter. Against this background, Bayer continues to believe that it can increase sales by well over 10 percent on a currency- and portfolio-adjusted basis and improve the EBITDA margin before special items to about 25 percent.
Bayer anticipates a further weakening of the economic environment for its MaterialScience business in the fourth quarter of 2008, with this subgroup's earnings continuing to decline compared to the third quarter. The subgroup's EBITDA before special items for the full year 2008 is therefore expected to come in well below the 2007 figure. However, it is anticipated that MaterialScience will again achieve a good, value-creating earnings level.
Wenning: "We remain on track"
The Management Board Chairman stressed that Bayer remains on track despite the financial crisis and the weakening economy. "Some 70 percent of the business - namely health care and agriculture - is less dependent on cyclical fluctuations, and this is paying off." Bayer therefore confirms its goal for 2009 of an underlying EBITDA margin of around 28 percent for HealthCare and 25 percent for CropScience, Wenning said. However, underlying EBITDA at MaterialScience is expected to decline. Summing up, Wenning said: "For the Bayer Group as a whole, we plan a further improvement in EBITDA before special items in the coming year." Bayer intends to narrow its forecast for 2009 at the Spring Financial News Conference on March 3.
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