International 
Spring Financial News Conference Address by Werner Wenning
Tuesday - March 3, 2009
Spring Financial News Conference
Address by Werner Wenning
Chairman of the Board of Management
(Please check against delivery)
Ladies and gentlemen,
On behalf of the Board of Management, I too would like to welcome you to Leverkusen today.
We are proud to report that from an operational standpoint, 2008 was the most successful year in Bayer's long history.
We again improved the key data for the Group compared to the prior year and met the earnings targets we had announced:
- Sales rose to EUR 32.9 billion. After adjusting for currency effects and portfolio changes, the increase came to 4.4 percent.
- EBITDA before special items advanced by 2.3 percent to reach a record high of EUR 6.9 billion.
- We met our profitability target, achieving a margin of 21.1 percent.
- The cash flow return on investment of 13 percent was the highest in the company's history. We exceeded the internal hurdle rate by EUR 1.2 billion and thus created significant additional value.
Ladies and gentlemen,
Although there is a great deal of uncertainty surrounding the future development of the world economy, we are looking to the future with relative confidence overall.
Our corporate strategy is proving effective even in a difficult environment.
We are benefiting from the Group's alignment toward the life-science businesses, which are less dependent on global economic development.
We expect further growth in earnings at HealthCare and CropScience, along with a substantial reduction in net debt.
And I would particularly like to stress that we remain firmly committed to research and development – even in difficult times. After all, a long-term, sustainable orientation is now more essential than ever – and that's what we stand for.
Before giving you a more detailed outlook, I would like to take a closer look at our performance last year.
The effects of the unexpectedly severe financial and economic crisis left a considerable mark on our MaterialScience business, especially in the fourth quarter. As a result, Group sales and earnings for the last three months of 2008 came in below the fourth quarter of the previous year.
Sales for the full year – as I said already – rose to EUR 32.9 billion. We grew sales in Europe by a currency-adjusted 2 percent to EUR 14.5 billion, and in North America by an adjusted 5 percent to EUR 8 billion. Sales in Germany held steady year on year at EUR 4.8 billion.
I would like to stress that we continued to enjoy strong growth in the so-called BRIC countries – Brazil, Russia, India and China:
Our total sales in those countries rose by 16 percent from the previous year on a currency-adjusted basis, to EUR 4.2 billion. The BRIC countries now account for 13 percent of Group sales.
Ladies and gentlemen,
Apart from EBITDA before special items, which I already mentioned, EBIT before special items also set a new record, at EUR 4.3 billion. After special items, EBIT advanced by 12 percent to EUR 3.5 billion.
As expected, the special items totaling minus EUR 800 million mostly related to the acquisition and integration of Schering, Berlin, Germany, and to restructuring at CropScience and MaterialScience. Mr. Kühn will give you more details of these items later on.
Ladies and gentlemen,
Let's now take a look at the performance of our three subgroups in 2008.
Here I will be talking solely in terms of currency- and portfolio-adjusted growth rates, to make it easier to compare the figures.
Bayer HealthCare improved sales by 7 percent in 2008 to EUR 15.4 billion. Contributing to this growth were a strong fourth quarter and the positive business performance in both the Pharmaceuticals and the Consumer Health segments. We are particularly pleased that all divisions posted dynamic growth in sales, outperforming their respective markets.
The strongest growth took place in the Greater China region, where HealthCare sales rose by a nominal 42 percent. Bayer is currently the largest health care company in China. We are continuing to expand our presence in China – and the Asia/Pacific region as a whole – with a new global pharmaceutical research and development center with a related investment of EUR 100 million in the coming years.
Business in the Pharmaceuticals Division expanded last year by 7 percent to 10.7 billion.
The YAZ® family of oral contraceptives posted a remarkable performance, with sales up by 22 percent to EUR 1.2 billion. Business with the YAZ® product family expanded even in the United States, despite the fact that, as you know, a generic version of Yasmin® has been on the market there since last July.
Sales of the multiple sclerosis treatment Betaferon®/Betaseron® grew by 15 percent to EUR 1.1 billion.
Sales of our cancer drug Nexavar® and the intra-uterine system Mirena® advanced by 76 and 36 percent, respectively, to roughly half a billion euros each.
Among the highlights of 2008 were the first marketing authorizations for our innovative anticoagulant Xarelto®. This drug can now be administered in tablet form for prevention of venous thromboembolism following elective hip or knee-joint replacement surgery in adult patients. Xarelto® is already in the final phase of clinical development for the remaining indications – including the important long-term indications.
We believe this innovative drug has the potential to achieve peak annual sales of more than EUR 2 billion.
Ladies and gentlemen,
In our Consumer Health segment, sales moved forward by 6 percent to EUR 4.7 billion, with all divisions contributing similarly to growth.
Five of our ten best-selling products once again posted double-digit increases:
- Bepanthen®/Bepanthol® was up by 21 percent;
- the Contour® line of blood glucose monitoring devices expanded by 18 percent;
- Canesten®, our product to treat fungal infections, improved by 16 percent;
- the One-A-Day® line of vitamin products gained 14 percent;
- and sales of our Advantage® line of flea and tick control products advanced by 11 percent.
The operating result of Bayer HealthCare also showed a further improvement due to the gratifying business performance and the synergies achieved from the Schering integration.
EBITDA before special items rose by 10 percent to EUR 4.2 billion. We achieved our margin target with an EBITDA margin before special items of 27 percent.
As you can see, 2008 was a strong year for Bayer HealthCare.
And at the same time we successfully completed the integration of Schering. With the squeeze-out of the remaining minority stockholders of Bayer Schering Pharma AG entered in the commercial register, the integration was completed from a legal viewpoint as well.
In addition, we strengthened our business through further acquisitions and in-licensing.
These transactions in 2008 included:
- the acquisition of the U.S. medical equipment manufacturer Possis Medical;
- the purchase of the eastern European OTC business of Sagmel;
- the acquisition of DIREVO Biotech AG in Cologne; and
- the acquisition of the hematology development portfolio of Maxygen and a preclinical oncology program from Nycomed.
In this way we continued the successful pursuit of our long-term strategy, which also includes external growth.
We confirm this business strategy, but for the time being we will give priority to our liquidity and to safeguarding earnings. That is because we believe this strategy should now be implemented a little more cautiously in view of the considerable uncertainties associated with the economic crisis.
Ladies and gentlemen,
Bayer CropScience achieved the best performance in the history of our crop protection business.
The subgroup raised sales by a substantial 14 percent to a record EUR 6.4 billion.
The underlying conditions on the world agricultural markets were highly favorable overall.
The price level for major agricultural products was very high, particularly in the first half of the year. This was primarily attributable to the steady growth in the world population, increasing nutritional requirements, low inventories worldwide and stronger demand for plants as alternative energy sources. This led to greater investment by farmers in high-quality seed and innovative crop protection products.
However, we not only saw robust volume growth, but also succeeded in implementing selling price increases – particularly in our crop protection business.
Sales of our Crop Protection segment, which covers conventional agrochem products, expanded significantly in 2008 to EUR 5.3 billion, a gratifying 16 percent above the prior-year figure.
In a positive market environment with generally more favorable weather patterns than in the previous year, sales of all business units improved significantly.
We registered particularly strong growth rates in our fungicides business, where sales rose by 28 percent.
Key growth drivers were our young products based on active ingredients introduced since 2000. Sales of these products climbed by some 36 percent to EUR 1.8 billion.
Given the positive market environment and the high demand for innovative products, we anticipate that we will reach our sales target of EUR 2 billion for these young active ingredients by the end of this year. That would be two years earlier than originally planned.
In light of this success, we have already set ourselves a new goal: Between 2008 and 2012 we plan to launch new active substances with a peak sales potential totaling over EUR 1 billion. This underscores the success of our alignment toward the research and development of new crop protection products and our innovation leadership in this area.
Sales in the Environmental Science, BioScience segment advanced by 2 percent to just over EUR 1 billion.
BioScience achieved a gratifying 19 percent increase. We successfully raised sales in our three core agricultural crops – canola and cotton, predominantly in North America, and rice in Asia. Sales of our vegetable seeds posted very encouraging gains, particularly in Asia, the Middle East and Eastern Europe.
By contrast, sales were down at Environmental Science. This was mainly due to lower sales of products for professional users in the North American green industry due to adverse market conditions.
Ladies and gentlemen,
Bayer CropScience achieved all-time highs in 2008 not just for sales, but also earnings.
EBITDA before special items advanced by 21 percent to EUR 1.6 billion. With an EBITDA margin before special items of 25 percent, we already achieved the target originally set for 2009.
Of course, we would be even more pleased with what we achieved last year if there had not been such a dramatic decline in business at MaterialScience in the fourth quarter.
Volumes in this subgroup fell by nearly 30 percent, and capacity utilization also declined significantly. The global financial and economic crisis impacted MaterialScience in nearly all product groups and regional markets. We have not seen anything like this before.
Measures such as temporarily shutting down certain plants and cutting back production at others, bringing forward scheduled maintenance and reducing overtime balances were introduced at MaterialScience at an early stage.
Fourth-quarter EBITDA before special items for this subgroup nonetheless fell by 85 percent to just over EUR 50 million. The relative easing of prices in the fourth quarter on the raw material markets of importance to MaterialScience did not yet bring significant relief.
Sales of the MaterialScience subgroup for the full year were down by 5 percent to EUR 9.7 billion.
Our Systems segment saw business decline by 3 percent year on year to EUR 7.1 billion.
Over the year as a whole, we almost succeeded in offsetting the sharp declines in volumes by raising our selling prices.
Business in our Materials segment shrank by 10 percent to EUR 2.6 billion.
EBITDA before special items of the MaterialScience subgroup was down by 32 percent from the previous year, at EUR 1.1 billion.
Earnings for the year were diminished by a EUR 0.5 billion rise in purchase prices for petrochemical raw materials and energies. Selling price increases, the savings from our restructuring program and other countermeasures we adopted only partially offset the negative volume and raw material cost effects.
Despite the considerable decline in business toward the end of the year, MaterialScience generated a CFROI of 10.1 percent. This was well in excess of the internal hurdle rate and represented a value-creating earnings level.
At the same time, we again strengthened the foundation for future growth. We significantly bolstered our presence in the expanding Chinese market with the inauguration of the world's biggest single-line production facility for MDI in Shanghai. The entire production complex in Shanghai also sets standards for energy-efficient and environmentally compatible production.
Ladies and gentlemen,
Now let's take a look at our financial data:
Gross cash flow rose by 11 percent to EUR 5.3 billion thanks to the gratifying business trend at HealthCare and CropScience.
Net cash flow declined by 16 percent to EUR 3.6 billion, due mainly to a considerable increase in cash tied up in working capital.
Contributing particularly to this increase was a higher level of receivables and inventories at HealthCare and CropScience due to business growth.
Net debt was EUR 14.2 billion as of December 31, 2008, compared with EUR 12.2 billion at the end of 2007. The increase was partly due to the larger amount of cash tied up in working capital and to acquisitions. Mr. Kühn will talk about this in more detail later on.
Group net income came in at EUR 1.7 billion. The prior-year figure of EUR 4.7 billion included one-time non-cash tax income as well as divestiture proceeds.
Earnings per share came to EUR 2.22.
Ladies and gentlemen,
Since 2006 we have also reported core earnings per share to facilitate a performance comparison.
Core earnings per share improved from EUR 3.80 to EUR 4.17.
Our dividend policy is also based on this indicator, and provides for a payout of between 30 and 40 percent of core earnings per share.
Together with the Supervisory Board, we will propose to the Annual Stockholders' Meeting that the dividend per share for 2008 be increased by 3.7 percent to EUR 1.40. This dividend amounts to 34 percent of core earnings per share. The total payout is once again in excess of EUR 1 billion.
Our nearly 110,000 employees worldwide will also benefit once again from Bayer's gratifying performance in 2008. It was their outstanding dedication that made last year's success possible. Bonuses for 2008 totaling some EUR 475 million are to be paid out to employees under the Group-wide incentive program.
Ladies and gentlemen,
May I draw your attention to one aspect in particular:
To help safeguard jobs, our employees in Germany regularly make a solidarity contribution not exceeding 10 percent of their variable remuneration.
This contribution, which for 2008 amounts to just under 2 percent of each employee's bonus, finances the salaries of employees whose jobs have been eliminated by structural measures and for whom new employment is not immediately available.
This solidarity pact does not just apply to payscale employees, but also to managerial staff all the way to the members of the Board of Management. It was arranged years ago – long before the current crisis scenarios appeared.
The solidarity pact is part of our agreement with the works council on safeguarding jobs. Under this agreement, dismissals for operational reasons in Germany are ruled out – currently until the end of 2009. We will be starting discussions in order to arrive at an appropriate successor arrangement under the solidarity pact.
As you can see, we take our responsibility toward our employees very seriously.
Of course, we too have to respond to the crisis.
Management and the employee representatives at MaterialScience have therefore agreed to temporarily reduce working hours at the subgroup's German sites, coupled with a corresponding reduction in collectively agreed rates of pay. Comparable measures have been instituted for managerial employees of MaterialScience. The aim of this solidarity-based solution is to help us overcome the difficult business situation at MaterialScience.
Ladies and gentlemen,
We embarked at an early stage on improving the competitiveness of all our subgroups and service companies by way of structural and efficiency programs.
In the years 2006 to 2008, for example, we implemented cost-containment measures with a total volume of some EUR 1.5 billion. In this way we have steadily strengthened the foundation for our long-term success.
We will now wait and see how things develop – particularly at MaterialScience – before we decide on any further measures. Any future adjustments will be made in a way that does not impair the sustainability of our business.
Ladies and gentlemen,
Sustainability requires sound business models, a responsible approach toward all interest groups, and investment in the future.
In keeping with this principle, we plan to increase our research spending to EUR 2.9 billion in 2009. This is the highest R&D budget in our company's history.
In these turbulent times we could, of course, help to improve earnings in the short term by cutting back on research, for example. But that would be the wrong strategy, it would not be sustainable, and it would be short-sighted. After all, our investment in research and development is intended to produce groundbreaking innovations.
That is how we safeguard growth – and with it jobs and prosperity, even if in most cases it will be many years before we reap the fruits of this investment. At Bayer, innovation and sustainability have always been linked. That is the basis of our business model. And for a company carrying out research in Germany, it is essential that this country's innovative capability also be further improved.
That's why I am once again calling for more substantial tax incentives for research and development – in the form of broader deductibility of R&D expenditures. Such incentives are needed in addition to conventional project support.
There are good arguments in favor of this: one is that other countries have created and expanded an array of far-reaching tax incentives.
Ladies and gentlemen,
Even in these far-from-easy times, we must not lose sight of the long-term challenges.
By these I mean the major issues such as demographic change, global food supplies, energy conservation and climate protection.
Our company is well positioned and we have the right answers in our portfolio that address long-term challenges and at the same time take advantage of related business opportunities.
We are making very encouraging progress with the implementation of our climate program, in particular.
And Bayer is the only European chemical and pharmaceutical company to be included in the Carbon Disclosure Leadership Index for the fourth consecutive year. This is the world's first climate protection index.
Ladies and gentlemen,
Now let's take a look at the current year.
The prospects for global economic development in 2009 are very uncertain. Indicators have now fallen worldwide, in some cases reaching all-time lows.
The sharp downturn in the United States and Western Europe will have a substantial impact. While economic growth is likely to continue in the emerging markets, it will do so at a distinctly slower pace than in previous years.
It is currently impossible to predict how the massive government measures to stabilize the financial markets and support the business cycle will affect the global economy.
We anticipate that the world economy as a whole will weaken significantly in 2009.
Our guidance for 2009 is based on an average exchange rate of 1.35 U.S. dollars to the euro.
For the markets relevant to our HealthCare business, we predict largely steady growth of between 3 and 5 percent.
For the CropScience markets we are assuming moderate growth of between 2 and 3 percent.
For HealthCare and CropScience we expect a gratifying trend in 2009, with growth in sales and EBITDA before special items.
In 2009 HealthCare plans to achieve currency-adjusted growth rates ahead of the market average in all divisions. We aim to further improve the EBITDA margin before special items toward 28 percent.
CropScience plans to continue expanding sales in a generally favorable market environment. Here we aim to maintain the EBITDA margin before special items at the high level of about 25 percent.
In the main sectors of importance for our MaterialScience business, however, we anticipate a very difficult year marked by a great deal of uncertainty. The high-tech materials business is heavily impacted by the global recession.
We expect sales and EBITDA before special items to show a further decline in the first quarter of 2009 compared with the fourth quarter of 2008, which included a comparatively steady October.
The start to the year at MaterialScience has been even weaker than anticipated, and we must expect a severe drop in this subgroup's sales and earnings for 2009.
In this negative scenario for MaterialScience we are nevertheless confident of limiting the decline in Group EBITDA before special items to about 5 percent.
Group sales would probably then be in the region of EUR 32 billion.
Ladies and gentlemen,
Should there be a tangible recovery in our MaterialScience business in the short term, Group EBITDA before special items could match the very high level of 2008 or even post a slight increase.
Another of our key goals for the coming months is to significantly reduce debt. We expect to reduce net debt toward EUR 10 billion in 2009, helped by the conversion of the mandatory convertible bond into equity when it matures in June 2009 and an improvement in net cash flow. This forecast does not take into account any possible portfolio changes.
Ladies and gentlemen, just to sum up what I have said:
- First: 2008 was the most successful year in Bayer's history from an operational viewpoint.
- Second, 2009 is dominated by uncertainty and will undoubtedly be a difficult year. Yet we believe we are well positioned, and remain relatively confident.
- Third, we are optimistic that we will emerge from this crisis even stronger than before, and believe the Group is on the right track for the long term, thanks to the innovation and growth potential of our portfolio.
As you can see, we stand for sustainable success.
Thank you very much.
Forward-Looking Statements
This release may contain forward-looking statements based on current assumptions and forecasts made by Bayer Group or subgroup 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 Bayer's public reports which are available on the Bayer website at www.bayer.com. The company assumes no liability whatsoever to update these forward-looking statements or to conform them to future events or developments.
Spring Financial News Conference Address by Werner Wenning
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