Wednesday - February 22, 2017

Financial News Conference

Address by Johannes Dietsch

Member of the Board of Management

(Please check against delivery)


Ladies and gentlemen,

As in previous years, I’d like to take this opportunity to explain the Bayer Group’s financial report in more detail. Before I talk about 2016 as a whole, let’s look first at the business development in the fourth quarter of the year.


(2017-1501e-1)

Our business continued to develop positively in the last quarter of 2016. Group sales rose by 4.8 percent to EUR 11.8 billion. Please note that all the sales variations I mention are adjusted for currency and portfolio effects. Sales of the Pharmaceuticals segment were up by 7.1 percent to EUR 4.3 billion, with the key growth products making a particularly strong contribution to this very pleasing business development. Consumer Health grew sales by 4.4 percent to EUR 1.5 billion. Sales at Crop Science declined by 1.6 percent to EUR 2.4 billion in a persistently difficult market environment. Following the reorganization of the Group, we are now publishing the financial development of Animal Health as well, starting with the 2016 reporting year. Fourth-quarter sales of this segment increased by 3.1 percent to EUR 0.3 billion. Total sales of our Life Science businesses amounted to EUR 8.8 billion. We continue to fully consolidate the Covestro business because we currently hold about 64 percent of the shares. That means 100 percent of Covestro’s sales and EBITDA are included in Bayer’s consolidated financial statements. And as you’ve probably seen already from Covestro’s published annual report, sales at Covestro in the fourth quarter were up by more than 8 percent to around EUR 3 billion. Covestro benefited from volume and price increases in that quarter.

EBITDA before special items of the Bayer Group improved by 13.7 percent in the fourth quarter to nearly EUR 2.2 billion, mainly due to the positive business development at Pharmaceuticals and Covestro. But now let’s take a closer look at earnings development by segment:

At Pharmaceuticals, EBITDA before special items came in 12.2 percent above the prior-year quarter at EUR 1.2 billion. This growth in earnings was due to the very good development of business, particularly for our key growth products. Consumer Health, on the other hand, saw its clean EBITDA decline by 3.4 percent to EUR 372 million. At Crop Science, EBITDA before special items increased by just 1.2 percent to EUR 351 million. The Life Science businesses as a whole posted clean EBITDA of EUR 1.8 billion – nearly 9 percent ahead of the prior-year quarter. At Covestro, EBITDA before special items rose by more than 45 percent to EUR 373 million, thanks to the positive price and volume effects on sales and the continuing low level of raw material costs.

Core earnings per share from continuing operations for the fourth quarter rose by over
10 percent, from EUR 1.08 in 2015 to EUR 1.19 in 2016. Core earnings per share include 64 percent of Covestro’s earnings, with Covestro accounting for approximately 11 cents out of the Bayer Group’s core earnings per share for the fourth quarter of 2016.



(2017-1501e-2)

Now let’s move on to the full year 2016, which was very successful both strategically and operationally.

We set a new record in terms of our operational performance. Sales advanced by 3.5 percent to EUR 46.8 billion. EBITDA before special items improved by 10.2 percent to EUR 11.3 billion. We therefore saw profitable growth in 2016, with the EBITDA margin before special items up by 1.9 percentage points to 24.2 percent. EBIT before special items also moved ahead, posting a 15.2 percent increase to EUR 8.1 billion.

Reported EBIT, however, was held back by special items of nearly EUR 1.1 billion. The special items were EUR 269 million above the prior year and resulted mainly from impairment losses of EUR 561 million recognized on intangible assets, particularly in connection with Essure. There were also charges of EUR 242 million for efficiency improvement programs. Further expenses of EUR 100 million were incurred for the integration of acquired businesses at Consumer Health, and EUR 86 million was attributable to the agreed acquisition of Monsanto. Earnings were also diminished by accounting measures of EUR 94 million for legal defense costs, mainly in the Pharmaceuticals segment.

Even after these special items, however, EBIT of the Bayer Group rose by 12.8 percent to more than EUR 7 billion.


(2017-1501e-3)

This brings us to the financial result, which worsened by EUR 150 million compared with 2015, primarily due to higher net interest expense. In the previous year we benefited from interest income of EUR 109 million in connection with the breach-of-contract and patent infringement proceedings against Dow AgroSciences. Tax expense rose to more than EUR 1.3 billion in 2016. The effective tax rate thus amounted to 22.6 percent.

Considering income from discontinued operations after income taxes, along with noncontrolling interest, net income came to EUR 4.5 billion, up 10.2 percent from the previous year. Earnings per share advanced by 9.5 percent to EUR 5.44. Please remember that the number of shares this is based on changed when the mandatory convertible notes were issued in November 2016. According to the International Financial Reporting Standards, the weighted average number of shares increased as soon as the notes contract was signed, although the new shares will not be issued until the notes are converted – which will be in November 2019 at the latest. Our earnings per share for 2016 are based on 832.5 million shares. Core earnings per share from continuing operations came in at a gratifying EUR 7.32 – with Covestro accounting for approximately 71 cents of this – compared with EUR 6.82 in 2015. Without the effect of the mandatory convertible notes, core earnings per share would be 5 cents higher.


(2017-1501e-4)

Now let’s turn to the development of our cash flow in 2016 compared with the preceding year. Operating cash flow from continuing operations showed encouraging growth of more than 20 percent to EUR 8.3 billion. Here we benefited mainly from the improved earnings situation and a decrease in additional cash tied up in working capital. Income tax payments, however, rose to almost EUR 2.1 billion for the full year 2016.

Last year we again made substantial capital expenditures, such as in the increase in manufacturing capacity for the new rFactor VIII therapies in Wuppertal and Leverkusen and in capacity expansions for the production of herbicides in the United States and Germany.

Net financial debt declined from EUR 17.5 billion at the end of 2015 to EUR 11.8 billion at the end of 2016. Cash inflows from operating activities and the issuance of the mandatory convertible notes were set against cash outflows for dividends and capital expenditures. Net financial debt was also diminished by a cash inflow from the sale of the Diabetes Care business.


(2017-1501e-5)

Mr. Baumann has already outlined certain aspects of the merger agreement with Monsanto and the status quo in this regard. Now I’d like to give you a few more details on last year’s financing activities concerning this planned acquisition.

In the first four months of 2016, preparations for the bank financing began with the development of loan documentation. At a very early stage in the process we obtained a non-binding financing confirmation – known as a “highly confident letter” – from two banks. This contained an agreement on the financing arrangements and the costs involved. Once the planned transaction became public, the bank consortium was enlarged to include three more banks in order to spread the financing risk. The US$57 billion financing with these five banks was signed at the same time as the merger agreement. At the beginning of October 2016, the bank financing was successfully syndicated to a further 21 relationship banks. This is the largest bank loan facility ever arranged by a German company and the third largest acquisition financing worldwide.

We are also making good progress with refinancing the Monsanto acquisition. Refinancing in the capital markets will depend on respective market conditions. We began this process in November 2016 with the successful placement of EUR 4 billion in mandatory convertible notes with a three-year term. The notes will be converted into new shares of Bayer AG at maturity. With their 5.625 percent coupon, up to 20 percent premium and full dividend adjustment, this unusually high volume of notes met with strong demand. The reason we decided to place the notes as early as November 2016 was the favorable market environment. It was the largest mandatory convertible notes issue ever placed by a European corporation outside the financial sector. After deducting the transaction costs along with EUR 0.2 billion in deferred taxes, a EUR 3.5 billion portion of these notes was allocated to capital reserves, while roughly EUR 0.7 billion was recognized in other financial liabilities. As I mentioned earlier, this increases the weighted average number of shares with effect from the contract date of the notes.

Ladies and gentlemen,

Transactions of this magnitude don’t necessarily go smoothly. The fact that we were so successful in these financing activities is also evidence of Bayer's good reputation in the capital markets. Further refinancing is planned to include corporate and hybrid bonds and the raising of additional equity via a rights issue. However, should we identify options to further optimize financing structures, instruments and also the timing of financing steps in the context of this transaction, we will consider these.


(2017-1501e-6)

To end, let me summarize our business development in the context of recent years:

• We grew sales again in 2016, to EUR 46.8 billion. The increase was mainly due to higher volumes.

• EBITDA before special items improved once again, to EUR 11.3 billion. And we significantly increased the EBITDA margin thanks to the positive earnings development at Pharmaceuticals and Covestro. Our earnings metrics improved despite higher special items.

• This is also reflected in core earnings per share, which reached a new high of
EUR 7.32.


• Our stockholders have seen steady growth in the dividend in past years. This year again, the Board of Management and the Supervisory Board are proposing to the Annual Stockholders’ Meeting that the dividend for 2016 be increased by 20 cents a share to EUR 2.70 in light of the gratifying business development. This would be equivalent to 37 percent of core earnings per share, and the dividend payment would amount to EUR 2.2 billion. We are pleased that our stockholders are also able to share in Bayer’s positive business performance through a higher dividend payment.

Thank you very much.


Cautionary Statements Regarding Forward-Looking Information
Certain statements contained in this communication may constitute “forward-looking statements.” Actual results could differ materially from those projected or forecast in the forward-looking statements. The factors that could cause actual results to differ materially include the following: uncertainties as to the timing of the transaction; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the merger within the expected time-frames or at all and to successfully integrate Monsanto’s operations into those of Bayer; such integration may be more difficult, time-consuming or costly than expected; revenues following the transaction may be lower than expected; operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) may be greater than expected following the announcement of the transaction; the retention of certain key employees at Monsanto; risks associated with the disruption of management’s attention from ongoing business operations due to the transaction; the conditions to the completion of the transaction may not be satisfied, or the regulatory approvals required for the transaction may not be obtained on the terms expected or on the anticipated schedule; the parties’ ability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger; the impact of indebtedness incurred by Bayer in connection with the transaction and the potential impact on the rating of indebtedness of Bayer; the effects of the business combination of Bayer and Monsanto, including the combined company’s future financial condition, operating results, strategy and plans; other factors detailed in Monsanto’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended August 31, 2016 and Monsanto’s other filings with the SEC, which are available at http://www.sec.gov and on Monsanto’s website at www.monsanto.com; and other factors discussed in Bayer’s public reports which are available on the Bayer website at www.bayer.com. Bayer and Monsanto assume no obligation to update the information in this communication, except as otherwise required by law. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date.

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Last updated: February 22, 2017 Copyright © Bayer AG