Bayer posts strong earnings growth

The Bayer Group made further strategic progress and posted strong earnings growth in the third quarter of 2015. "A few weeks ago we announced changes to our organizational structure. The new organization is aimed at supporting our strategy as a leading Life Science company and putting us in an even stronger position vis-à-vis our competitors," Bayer Management Board Chairman Dr. Marijn Dekkers commented when the interim report was published on Thursday. He said the carve-out of MaterialScience had been completed and that business floated on the stock market under the name Covestro. Bayer currently still holds a 69 percent interest in Covestro AG, which is therefore still included in the Consolidated Financial Statements of Bayer as a fully consolidated company.

In the third quarter of 2015, Bayer increased sales on a currency- and portfolio-adjusted basis (Fx & portfolio adj.) and posted strong earnings growth of 28 percent. HealthCare benefited once again from the positive development of the recently launched pharmaceutical products and from expanded sales (Fx. and portfolio adj.) in all Consumer Health divisions. Earnings of HealthCare rose substantially. Despite a weaker market environment, sales at CropScience were up (Fx. and portfolio adj.) against the strong prior-year period. Earnings rose due to currency effects. Covestro significantly raised earnings again, due mainly to lower raw material costs, while sales receded as expected. "We are confirming our Group forecast for 2015," said Dekkers.

Sales of the Bayer Group moved ahead by 10.7 (Fx & portfolio adj. 1.9) percent in the third quarter to EUR 11,036 million (Q3 2014: EUR 9,967 million). EBITDA before special items climbed by a substantial 27.6 percent to EUR 2,523 million (Q3 2014: EUR 1,977 million). The good sales development was accompanied by higher R&D and selling expenses. Positive currency effects buoyed earnings by about EUR 170 million. EBIT also rose by a substantial 16.3 percent to EUR 1,565 million (Q3 2014: EUR 1,346 million), reflecting special items of minus EUR 204 million (Q3 2014: plus EUR 45 million). These mainly comprised charges in connection with the carve-out and stock market flotation of Covestro and costs for the integration of acquired businesses. Net income advanced by 20.9 percent to EUR 999 million (Q3 2014: EUR 826 million), and core earnings per share for continuing operations by 28.0 percent to EUR 1.69 (Q3 2014: EUR 1.32).

Gross cash flow from continuing operations declined by 2.7 percent to EUR 1,427 million (Q3 2014: EUR 1,466 million). The increase in earnings was partly offset by additional tax expenses connected with the carve-out of Covestro. Net cash flow (total) rose by 28.3 percent to EUR 2,330 million (Q3 2014: EUR 1,816 million), due mostly to a decrease in cash tied up in other working capital. Net financial debt fell from EUR 21.1 billion on June 30, 2015, to EUR 19.3 billion on September 30, 2015 - mainly as a result of cash inflows from operating activities.

Higher earnings at Covestro
Sales of the high-tech polymer materials business (Covestro, formerly MaterialScience) fell by 0.9 percent (Fx & portfolio adj. 7.7 percent) as expected, to EUR 3,009 million (Q3 2014: EUR 3,036 million). Selling prices declined in the three business units, primarily at Polyurethanes. This was chiefly attributable to the development of raw material prices. Overall, volumes remained at the level of the prior-year quarter. EBITDA before special items improved by a substantial 41.3 percent to EUR 472 million (Q3 2014: EUR 334 million). Considerably lower raw material prices more than offset the decline in selling prices due to a more favorable supply-and-demand situation in some markets. Earnings were additionally buoyed by positive currency effects of around EUR 70 million.

Gratifying earnings growth in the first nine months
Sales of the Bayer Group increased by 14.6 percent (Fx & portfolio adj. 2.8 percent) in the first nine months of 2015, to EUR 35,005 million (9M 2014: EUR 30,547 million), mainly as a result of the expansion of business at HealthCare. Sales of CropScience were flat with the strong prior-year level (Fx & portfolio adj.), while business at Covestro decreased as expected. EBITDA before special items climbed by 22.0 percent to EUR 8,363 million (9M 2014: EUR 6,856 million). All subgroups contributed to this significant improvement, particularly HealthCare and Covestro. EBIT climbed by 10.2 percent to EUR 5,342 million (9M 2014: EUR 4,846 million) and net income by 9.2 percent to EUR 3,497 million (9M 2014: EUR 3,202 million). Core earnings per share advanced by 22.0 percent to EUR 5.76 (9M 2014: EUR 4.72).

Strategic focus on Life Science businesses
Dekkers described the separation of Covestro as an important step in Bayer's successful development as a Life Science company. "By focusing on the Life Science businesses, we will concentrate even more intensively in the future on two of the greatest challenges of the 21st century," said the Management Board Chairman. First, he explained, the aging and growing world population urgently needs new and better medicines because many diseases still cannot be adequately treated despite tremendous advances. Second, Dekkers said, innovative chemical and biological crop protection products and more resilient plants are also needed to ensure an adequate supply of high-quality food for the growing global population in the future. "Only with true innovations will we be able to offer solutions to these challenges. Our business portfolio now focuses specifically on addressing these challenges," emphasized Dekkers.

He explained that Bayer’s new organizational structure will support this strategy and put the company in an even stronger position vis-à-vis its competitors. From January 1, 2016, Bayer’s business will be managed by three divisions: Pharmaceuticals, Consumer Health and Crop Science. "Each of these three divisions serves an attractive market and generates good financial returns. And each business is characterized by different cycles and risks, ensuring that our portfolio is diversified and balanced," Dekkers said. The heads of the divisions will also be members of the Board of Management in the future - with the aim of better integrating strategy and business operations and of further improving innovation strength and customer centricity.

Core earnings per share targeted to rise by a high-teens percentage in 2015
For the full year 2015, Bayer continues to predict that Group sales will rise by a low-single-digit percentage (Fx & portfolio adj.). With regard to the Group forecast, the company is now applying the exchange rates prevailing on September 30, 2015, for the fourth quarter of 2015. The Bayer Group now expects positive currency effects to raise sales by approximately 6 percent (previously: approximately 7 percent) compared with the prior year and is planning sales in the region of EUR 46 billion (previously: in the region of EUR 47 billion). The expectation regarding the company’s earnings development is largely unchanged. It remains the aim to raise EBITDA before special items by a high-teens percentage, allowing for expected positive currency effects of now about 4 percent (previously: around 5 percent). Bayer continues to target a high-teens percentage increase in core earnings per share and expects positive currency effects of now around 4 percent (previously: around 5 percent).

As before, the company expects to take special charges in the region of approximately EUR 900 million, with the integration of the acquired consumer care businesses, the carve-out and stock market flotation of Covestro and the optimization of production structures accounting for most of this amount. Taking into account the proceeds from the stock market flotation of Covestro, Bayer is aiming to reduce net financial debt to below EUR 18 billion (previously: below EUR 20 billion) by year end.

Covestro continues to plan further volume growth in 2015 accompanied by declining selling prices. This will lead to lower sales on a currency- and portfolio-adjusted basis. However, the company continues to expect a significant increase in EBITDA before special items for the full year. Covestro aims to return to earning the cost of capital in 2015.

Source: Bayer