Wenning: Continuing success for Bayer both strategically and operationally
* Strong second quarter in 2006
* Sales up 5.8 percent to EUR 7,072 million / EBITDA before special items advances 11.2 percent to EUR 1,342 million / EBIT before special items climbs 14.1 percent to EUR 928 million / Bayer Group targets improvement in underlying operating result for 2006 / New restructuring program launched at Bayer CropScience
Tuesday - August 29, 2006 - Leverkusen – The positive business trend at Bayer continued in the second quarter of 2006, with substantial increases in both sales and earnings. Sales from continuing operations advanced by 5.8 percent to EUR 7,072 million (Q2 2005: EUR 6,686 million), due to higher sales of the HealthCare and MaterialScience subgroups. Sales of CropScience were slightly below the prior-year quarter. Earnings before interest, taxes, depreciation and amortization (EBITDA) before special items rose by 11.2 percent to EUR 1,342 million (EUR 1,207 million). “Bayer remains on a successful path both strategically and operationally, as our gratifying second-quarter performance shows,” commented Management Board Chairman Werner Wenning. “Particularly in light of the long-term optimization of our portfolio, we remain optimistic about the Bayer Group’s future development.” For the Bayer CropScience subgroup, Wenning announced the launch of a new restructuring program designed to achieve annual savings of approximately EUR 300 million.
Bayer also had a very successful second quarter in strategic terms: the acquisition of Schering AG is the largest transaction in Bayer’s history, and the agreed divestiture of the Diagnostics Division is fully in line with the company’s strategy of sharpening the focus of its HealthCare business and concentrating on human and animal medicines and consumer health products.
Group sales in the second quarter included EUR 144 million in revenues from the Schering business for the period June 23 through June 30, 2006. By contrast, the Diagnostics Division to be divested to Siemens is reported as a discontinued operation. Adjusted for currency and portfolio effects, sales of the Bayer Group for the period April through June rose by 3.6 percent.
“We further improved the Group’s earning power as well,” Wenning explained. In the previous corporate structure (excluding Schering, including Diagnostics), EBITDA before special items rose by 7.6 percent to EUR 1,383 million in the second quarter. The operating result (EBIT) before special items rose by 12.4 percent to EUR 958 million.
Earnings from continuing operations (including Schering, excluding Diagnostics) showed an even bigger improvement, with EBITDA before special items up 11.2 percent to EUR 1,342 million, due mainly to a positive earnings trend at Bayer HealthCare. EBIT before special items climbed by 14.1 percent in the second quarter, to EUR 928 million (Q2 2005: EUR 813 million).
Special items in continuing operations totaled EUR 50 million in the second quarter. After special items, EBITDA advanced by 18.8 percent to EUR 1,308 million (EUR 1,101 million), while EBIT climbed by 24.2 percent to EUR 878 million (EUR 707 million). Group net income rose by 11.3 percent to EUR 452 million (EUR 406 million). Benefiting from the positive business trend, gross cash flow improved by 11.2 percent to EUR 964 million (EUR 867 million), while net cash flow from continuing operations came in EUR 85 million below the prior-year quarter, at EUR 895 million, due to an increase in working capital. Net debt totaled EUR 19.9 billion on June 30, 2006, the EUR 14.2 billion increase compared to March 31, 2006, being mainly due to the Schering acquisition.
Bayer also achieved a gratifying operating performance in the first half of 2006, with sales from continuing operations up 8.5 percent to EUR 14,188 million (H1 2005: EUR 13,072 million). EBITDA before special items increased by 8.3 percent to EUR 2,952 million (EUR 2,727 million), while EBIT before special items advanced by 10.1 percent to EUR 2,133 million (EUR 1,937 million). First-half net income remained on a par with the same period of 2005, at EUR 1,052 million.
Bayer HealthCare remains primary growth engine
Of the three subgroups, Bayer HealthCare again achieved the strongest growth in sales and earnings, as it did in the first quarter. Sales from continuing operations rose by 12.7 percent to EUR 2,257 million. The Pharmaceuticals segment grew sales by a substantial 20.2 percent, to EUR 1,188 million. This figure contains EUR 144 million in Schering revenues between June 23 and June 30, 2006. Adjusted for currency and portfolio effects, sales were up by 9.0 percent. Sales of the new Consumer Health reporting segment increased by 5.3 percent to EUR 1,069 million. This segment comprises the Consumer Care Division, which markets non-prescription medicines, along with the Diabetes Care and Animal Health divisions.
Underlying EBITDA of Bayer HealthCare in the second quarter advanced by 27.4 percent to EUR 470 million, including EUR 30 million from the acquired Schering business.
Market conditions for Bayer CropScience remain difficult
Second-quarter sales of the Bayer CropScience subgroup declined by 1.6 percent to EUR 1,578 million in a difficult market environment. The Crop Protection segment achieved sales of EUR 1,269 million, down 3.7 percent. While sales of the Herbicides and Seed Treatment units came in at around the prior-year level, business in the Insecticides and Fungicides units declined. The lower insecticide sales were due in part to the divestiture of some older active ingredients in 2005. The decline in fungicide sales in the second quarter resulted partly from advance demand in the first quarter in the United States and partly from the dry weather in many parts of Europe. By contrast, sales of the Environmental Science, BioScience segment advanced by a pleasing 8.0 percent to EUR 309 million.
EBITDA before special items of Bayer CropScience posted a year-on-year improvement of 11.2 percent to EUR 368 million, thanks mainly to the effectiveness of cost-containment and efficiency-improvement programs. First-half underlying EBITDA rose by 2.5 percent to EUR 919 million.
Strong polyurethane sales at Bayer MaterialScience
The positive business trend in the Bayer MaterialScience subgroup continued in the second quarter of 2006, with sales increasing by 5.4 percent to EUR 2,883 million. Business growth was mainly volume-driven, with the Polyurethanes and the Coatings, Adhesives, Sealants business units the main contributors. Underlying EBITDA of the Bayer MaterialScience subgroup came in at EUR 489 million, up 3.2 percent from the prior-year period. A mainly price-related earnings decline in the Materials segment was more than offset by a gratifying increase in the Systems segment.
Good growth in North American business
A major portion of Bayer’s second-quarter sales increase was achieved in the North America region, where business was up by 7.9 percent, or EUR 140 million, to EUR 1,908 million. Growth was strongest in Pharmaceuticals. In Europe, Group sales grew by 4.0 percent to EUR 3,169 million, with particularly pleasing gains in the Pharmaceuticals and Systems segments. Sales in Germany rose by 6.0 percent to EUR 1,126 million, but dipped by 0.6 percent year on year when adjusted for portfolio changes. In the Asia/Pacific region, sales grew by 4.2 percent to EUR 1,136 million, with business in China expanding by 22 percent. Sales in the Latin America/Africa/Middle East region moved ahead by 10.0 percent to EUR 859 million.
Positive business outlook for the full year 2006
For the previous corporate structure (excluding Schering, including Diagnostics), Bayer fully confirms its guidance of a slight increase in underlying EBIT and EBITDA and an underlying EBITDA margin of 19 percent for the full year 2006.
Wenning gave an even more optimistic outlook for continuing operations, predicting higher underlying EBITDA and underlying EBIT in 2006, even without the inclusion of Schering. The corresponding figures for 2005 are underlying EBITDA of EUR 4,787 million and underlying EBIT of EUR 3,158 million (excluding Diagnostics). In addition, Bayer expects the acquired Schering business to contribute some EUR 600 million to Group EBITDA before special items in the second half of 2006, before non-cash charges arising from the step-up of Schering inventories for the first-time consolidation. This adjustment ensures comparability with future periods.
The Group is also raising the 2006 earnings targets for Bayer HealthCare, with underlying EBIT from continuing operations (excluding Schering) now expected to grow by about 20 percent, compared to previous guidance of more than 10 percent. The corresponding underlying EBITDA margin is predicted to increase to around 20 percent.
Bayer currently views the market environment for its MaterialScience business as positive despite a significant rise in raw material costs. Business so far in 2006 and the prospects for the second half of the year are ahead of expectations. Against this background, BMS now plans to achieve underlying EBIT and EBITDA for the full year on a par with the outstanding 2005 level.
Bayer CropScience predicts a decline in sales for the full year 2006. Due to the difficult market conditions, the subgroup now assumes that it will be unable to match the previous year’s underlying EBITDA margin.
Bayer CropScience plans to achieve savings of roughly EUR 300 million
To improve its cost structures, the Bayer CropScience subgroup is initiating a new program of measures, due to be largely completed by 2009 and designed to achieve annual savings of roughly EUR 300 million. The principal aim of the new efficiency program is to sustainably shrink the company’s infrastructure and process costs in areas such as manufacturing, supply chain, development and marketing. About half of the planned savings are to be achieved through consolidation of production sites, optimization of procurement activities and a reduction in personnel costs.
As part of the program, a number of formulation and production sites worldwide will be either restructured or closed, and a total of approximately 1,500 positions are to be eliminated, primarily in North America, through the end of 2009.
In this connection Bayer CropScience anticipates special cash charges of some EUR 330 million along with write-downs of about EUR 120 million. These amounts will be reflected mainly in the 2007 and 2008 financial statements. Bayer CropScience expects the measures to be accretive to EBIT after special items starting in 2008.
This news release contains forward-looking statements based on current assumptions and forecasts made by Bayer Group management. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. These factors include those discussed in our public reports filed with the Frankfurt Stock Exchange and with the U.S. Securities and Exchange Commission (including our Form 20-F). The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.
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