The Bayer Group’s performance in the second quarter of 2017 matched the prior-year period, despite the company registering declines in Crop Science.
“At Crop Science, we experienced a significant decline in sales and earnings in connection with high channel inventories in Brazil, the world’s second-largest agriculture market,” CEO Werner Baumann said when he presented the interim report for the second quarter on Thursday, July 27. “However, we generated an encouraging increase in earnings and margins at Pharmaceuticals and Animal Health."
Business declined at Consumer Health, primarily due to the difficult market environment in the United States. Sales and earnings of the company’s Life Science businesses were down overall. Covestro, for its part, once again posted substantial growth in sales and earnings. In view of performance at Crop Science and Consumer Health, the Bayer Group has revised its outlook for the full year.
As regards the planned acquisition of Monsanto, Baumann believes the company remains on track.
“We are making progress in our discussions with regulatory authorities and are on schedule,” he said. On June 30, 2017, Bayer had filed an application with the European Commission seeking approval for the planned acquisition of Monsanto, representing a further significant milestone in the transaction.
Sales of the Bayer Group increased by 3.0% to EUR 12,193 million in the second quarter of 2017. Adjusted for currency and portfolio effects, sales advanced by 1.9%. Sales of the Life Science businesses amounted to EUR 8,714 million, down by 2.8% year on year. Group EBITDA before special items came to EUR 3,056 million, matching the prior-year quarter. At EUR 2,151 million, EBIT was also in line with the previous year and included net special charges in the amount of EUR 205 million. These primarily reflected value adjustments at the Pharmaceuticals segment, expenses in conjunction with the acquisition of Monsanto, and charges relating to efficiency improvement programs. EBIT before special items moved ahead by 5.1% to EUR 2,356 million.
Net income declined by 11.3% to EUR 1,224 million (Q2 2016: EUR 1,380 million), and core earnings per share (total) by 16.2% to EUR 1.40 (Q2 2016: EUR 1.67). Core earnings per share from continuing operations fell by 12.6% to EUR 1.81 (EUR 2.07). Material effects included the reduction of Bayer’s interest in Covestro and the increased number of shares following the issuance of the mandatory convertible notes in November 2016.
Net cash provided by operating activities (total) climbed by 16.7% to EUR 2,313 million. Net financial debt of the Bayer Group declined by EUR 1.0 billion to EUR 9.4 billion between March 31, 2017, and the end of the second quarter. Cash inflows from operating activities and positive currency effects offset the outflow for the dividend payment. The Group generated proceeds of approximately EUR 1.0 billion from the sale of Covestro shares.
Substantial decline in sales and earnings at Crop Science
Second-quarter sales of the agricultural business fell by 15.8% to EUR 2,163 million (Q2 2016: EUR 2,518 million).
“This decline is mainly due to significantly higher provisions for crop-protection product returns in Brazil,” Baumann explained.
At the end of the harvest season, regular stocktaking revealed high channel inventories in the Brazilian market, requiring measures to be taken to normalize the situation. The high level of channel inventories was caused by weaker demand due to significantly lower insect and fungal infestation levels, while inventory-building among distributors remained at a high level. Excluding the EUR 428 million decline in sales in Brazil, business at Crop Science was up slightly year on year on a currency-adjusted basis.
- Sales advanced by 5% in North America, while sales in Europe/ Middle East/Africa matched the prior-year level. In the Asia/Pacific region, sales declined by 2%
- In Crop Protection, sales were lower across all product groups, especially at Fungicides, where they fell by 40.2% and at Insecticides, where they declined by 16.9%.
- In SeedGrowth, sales were down by 6.3% year on year.
- Sales at Herbicides retreated by 6%.
- Sales at Seeds (which also includes the traits business) rose by 4.6%.
- Environmental Science also delivered positive performance, with sales climbing by 20.6%, in part due to the delivery of products to the company that acquired the consumer business.
EBITDA before special items of Crop Science declined by 52.2% to EUR 317 million, in particular due to the situation in Brazil, where Bayer recorded a substantial negative impact on earnings in the amount of EUR 355 million in total. This figure included EUR 173 million in provisions for product returns, EUR 53 million in impairment losses recognized on receivables and EUR 56 million in inventory write-offs, as well as EUR 73 million in other effects. Excluding the Brazil business, earnings were up slightly year on year.
Strong increase in earnings at Animal Health
Sales of the Animal Health business moved ahead by 2.1% to EUR 450 million. The development of business in the Asia/Pacific region was encouraging. In North America, the Cydectin product portfolio that was acquired in January 2017 contributed to sales growth on a currency-adjusted basis. Bayer once again achieved double-digit percentage sales gains with its Seresto flea and tick collar, thanks largely to strong demand in the United States and Europe. Sales of the Advantage family of flea, tick and worm control products declined overall, primarily due to lower than expected demand in the United States. EBITDA before special items increased by 16% to EUR 116 million. Positive earnings contributions resulted from price increases, the lower cost of goods sold as well as the Cydectin business that Bayer acquired. These more than offset a decline in volumes and slightly higher expenses for research and development.
Outlook for the full year 2017 adjusted
Due to the current business and currency development, Bayer is adjusting its forecast for the fiscal year 2017. Its forecast for the second half is based on the exchange rates as of June 30, 2017, including a rate of USD 1.14 to the euro. Sales of the Bayer Group are now expected to increase to more than EUR 49 billion. This now corresponds to a mid-single-digit percentage increase on a currency- and portfolio-adjusted basis. EBITDA before special items is now targeted to increase by a high-single-digit percentage. The company now aims to grow core earnings per share from continuing operations by a low- to mid-single-digit percentage.
For its Life Science businesses, Bayer is now budgeting for sales of between EUR 35 billion and EUR 36 billion. This corresponds to a low-single-digit percentage increase on a currency- and portfolio-adjusted basis
For Crop Science, Bayer is now budgeting sales of below EUR 10 billion. This corresponds to a low-single-digit-percentage decline on a currency- and portfolio-adjusted basis. Meanwhile, Bayer now expects the division’s EBITDA before special items to decline by a mid-teens percentage.