RNS Number:3766O
Bayer AG
06 August 2003
Bayer AG
Interim Report for the First Half 2003
Second-quarter EBIT up 80 percent to Euro454 million
EBIT up 40 percent to Euro1,529 million in the first half
Negative currency effects on sales largely neutralized
Bayer ended the first half of 2003 with a 40 percent increase in the operating
result (EBIT) despite the continuing weakness of the global economy. Earnings
growth was driven mainly by the performances of the Pharmaceuticals/Biological
Products, CropScience and Polyurethanes/Coatings/Fibers segments and by the
efficiency programs implemented in all parts of the company.
However, any stimulus to our business from the economic upswing anticipated
after the end of the Iraq war has so far failed to materialize. With oil prices
stable, financial markets showing a modest recovery and many countries adopting
an expansionary monetary and fiscal policy, the conditions for economic recovery
have been created. However, neither consumer nor corporate confidence is yet
well enough entrenched to trigger a recovery in industrial demand.
Bayer Group sales declined by 3.3 percent, or Euro248 million, year-on-year in the
second quarter of 2003, to Euro7,256 million, due mainly to the effects of currency
translation. In local currencies, sales expanded by 7.3 percent, driven by
increases in both prices and volumes. First-half sales dipped by 0.8 percent
after translation, but grew by 9.8 percent in local currencies.
EBIT jumped by 80.2 percent to Euro454 million in the second quarter. Before
special items, EBIT improved by Euro101 million or 30.1 percent, with the
Pharmaceuticals/Biological Products and Polyurethanes/Coatings/Fibers segments
making particularly strong contributions. EBIT for the first half of 2003 rose
by Euro437 million to Euro1,529 million.
There was also an encouraging improvement in gross cash flow, which grew 43.1
percent in the second quarter, to Euro1,089 million, and 56.2 percent in the first
half, to Euro2,491 million.
Second-quarter net income fell by 56.3 percent compared with the same period of
2002, to Euro128 million, though it should be borne in mind that the previous
year's figure was boosted by a Euro269 million tax-free gain from the sale of
Bayer's remaining interest in Agfa-Gevaert. Net income in the first half of 2003
was down by 12.5 percent to Euro714 million.
Performance by business area
Our business activities are grouped together in the HealthCare, CropScience,
Polymers and Chemicals business areas, comprising the following reporting
segments:
Business Area Segments
HealthCare Pharmaceuticals, Biological Products;
Consumer Care, Diagnostics;
Animal Health
CropScience CropScience
Polymers Plastics, Rubber; Polyurethanes, Coatings, Fibers
Chemicals Chemicals
HealthCare
Sales of the Pharmaceuticals and Biological Products segment in the second
quarter of 2003 were 2.0 percent above the same period of last year, at Euro1,190
million. In local currencies, sales grew by 15.2 percent. This increase was due
particularly to first shipments of ciprofloxacin to Barr Laboratories in the
United States. In addition, sales of the Factor VIII drug Kogenate(R) grew
significantly, thanks largely to improved product availability. Sales of our
plasma products in the United States were hampered chiefly by pressure on
prices. Although sales of the anti-infective Avalox(R)/Avelox(R) showed a
year-on-year decline in the second quarter, this was mainly attributable to
inventory management effects and seasonal factors. In the first half overall,
Avalox(R)/Avelox(R) posted strong growth from the previous year.
EBIT increased in the second quarter by 43.1 percent to Euro146 million, mainly due
to higher sales of Ciprobay(R)/Cipro(R) and Kogenate(R) and improved cost
structures.
The Euro378 million drop in net cash flow, to minus Euro152 million, was attributable
largely to disbursements of Euro231 million following the settlement reached with
U.S. authorities in the context of an investigation into pharmaceutical product
prices.
The market introduction of our new erectile dysfunction drug Levitra(R) is
proceeding on schedule. In Europe, Levitra(R) is already on the market in 16
countries, three months after its registration. We expect to receive marketing
authorization for the product in the United States in the third quarter of 2003.
Following the first two successfully concluded Baycol(R) trials in Texas and
Mississippi in March and April of this year, the number of rhabdomyolysis cases
resolved by settlement increased substantially. As of August 1, 2003, 1,211
cases had been settled for payments totaling Euro378 million (US$ 432 million).
Moreover, Bayer is in settlement negotiations with several hundred further
plaintiffs. Bayer remains willing to settle those cases in which plaintiffs
suffered serious side-effects due to our product. As of August 1, 2003
approximately 10,100 cases remain pending. Where facts have been developed in
the course of the litigation it so far appears that the vast majority of
plaintiffs did not suffer serious side-effects.
Should the U.S. plaintiffs in the Baycol(R) litigation or in the
phenylpropanolamine (PPA) product liability litigation substantially prevail
despite the existing meritorious defenses, it is possible that Bayer could face
payments that exceed its insurance coverage. The same is true should an
unexpectedly sharp increase in settlement cases occur in the Baycol(R)
litigation. PPA, which was widely used as an active ingredient in appetite
suppressants and cough-and-cold medications by many manufacturers, was
voluntarily replaced by Bayer and other producers in the U.S. in 2000 after a
recommendation by the U.S. Food and Drug Administration.
Business in the Consumer Care and Diagnostics segment decreased by 17.6 percent
in the second quarter to Euro800 million, though in local currencies there was only
a 4.2 percent decline. Sales were diminished by the divestiture of the household
insecticides business. Adjusted for the effect of this divestiture, sales in
local currencies posted an increase. Business with the ADVIA(R) Centaur and DCA
2000(R) laboratory diagnostic systems was encouraging. Sales of Rapidpoint(R)
400 systems, which offer innovative diagnostic techniques for the lung disease
SARS, also expanded considerably. Business in products for self-testing was
unsatisfactory as a result of intense competitive pressure. We believe we can
regain market share in this area through new product introductions. Volumes were
up markedly in the Consumer Care Division, with growth in sales of the recently
launched One-A-Day Weight Smart(R) in the United States along with increases for
Alka-Seltzer Plus(R) effervescent tablets.
Second-quarter EBIT improved by Euro85 million to Euro188 million, thanks to Euro122
million in proceeds from the divestiture of further parts of the household
insecticides business. Earnings in Diagnostics were sharply down due to the
weakness of the self-testing business and the cost of integrating the Visible
Genetics acquisition.
Sales of the Animal Health segment rose by 0.9 percent in the second quarter to
Euro214 million. In local currencies, sales grew by 15.1 percent, helped by the
successful U.S. launch of our anti-parasitic treatment Advantix(R).
EBIT for the second quarter, at Euro45 million, slightly exceeded the already high
level of the previous year.
CropScience
Sales of the CropScience subgroup grew by 44.7 percent, or Euro484 million, in the
second quarter to Euro1,567 million due to the acquisition of Aventis CropScience
(ACS). As in the first three months, sales in the second quarter were hampered
considerably by negative currency effects. Total first-half sales rose by 65.6
percent, or Euro1,279 million, to Euro3,228 million. Our market position held up well
during the integration of ACS, which continues to proceed on schedule.
Business in the United States benefited from sales gains in local currency for
corn herbicides and insecticides. Sales in Japan and South Korea were below
expectations. In South America we were encouraged by continuing indications that
the economy is stabilizing. In Europe we gained market share despite a difficult
business environment caused by the continuing drought conditions and lower
demand for fungicides.
EBIT increased by Euro11 million in the second quarter of 2003, to Euro33 million.
While earnings in the first quarter had been boosted by seasonal business in
high-margin products and special gains from product divestments made to comply
with antitrust conditions, second-quarter earnings were hampered by sales
declines, special charges totaling Euro49 million and further substantial
integration charges. Despite a comparatively weak second quarter, earnings
remain on target, with EBIT at Euro476 million for the first half and EBITDA at
Euro869 million, giving an EBITDA margin of 26.9 percent.
Gross cash flow for the second quarter was Euro203 million, with net cash flow
rising to Euro734 million thanks to a Euro531 million reduction in working capital.
Polymers
In the Plastics and Rubber segment, second-quarter sales dropped by 13.5 percent
to Euro1,188 million, with a 5.0 percent decline before currency translations.
Styrenics sales in Europe decreased due to lower demand and growing competition
from Asian producers. By contrast, polycarbonate volumes remained steady despite
excess capacities in the market. Sales of certain technical rubber products
receded in Europe.
The pressure on margins already evident in the first three months intensified in
the second quarter, with raw material costs remaining very high and only limited
opportunities arising for passing them along to customers. Against this
background, EBIT fell to Euro6 million after a Euro30 million gain from the sale of
PolymerLatex.
Business in the Polyurethanes, Coatings and Fibers segment dipped by 2.1 percent
to Euro1,263 million. Sales in local currencies improved by 7.8 percent, leading to
high capacity utilization, particularly in the MDI product segment. Pressure on
prices has intensified again in recent months, especially in Asia.
EBIT improved by Euro70 million in the second quarter to Euro63 million, chiefly as a
result of optimized cost structures. This figure contains charges totaling Euro49
million for termination of the joint venture Bayer-Shell Isocyanates N.V. (BSI)
and personnel adjustments.
Chemicals
Sales of the Chemicals segment fell by 26.6 percent in the second quarter to
Euro871 million. Measured in local currencies, sales decreased by 19.6 percent. The
decline was attributable to the divestiture of Haarmann & Reimer on September
30, 2002 and other portfolio effects. The Functional Chemicals product segment
achieved gratifying growth in volumes, while business in Process Chemicals was
down. Sales of H.C. Starck also declined, particularly due to the weak economy
in the electronics sector. EBIT for the -second quarter fell to Euro2 million.
Performance by Region
The economy of the euro zone remains weak, with the E.U. performing less well
than any other region. The economies of central and eastern Europe continue to
expand but are being held back by the slow pace of growth in western Europe.
Sales of our European companies fell by 2.1 percent or Euro73 million in the second
quarter of 2003, to Euro3,443 million. EBIT dropped by 34.3 percent to Euro157
million, or by 17.9 percent if special items are disregarded.
Business developed well in the other regions, with substantial local-currency
sales growth in some cases. Our companies in North America saw sales rise 16.7
percent in the second quarter despite the sluggishness of the U.S. economy in
the wake of its -surprisingly rapid expansion at the beginning of the year.
Confidence was dampened by higher raw material costs and the price of natural
gas, which was more than twice that of the previous year. Industry remained
reluctant to invest despite a marked improvement in corporate earnings.
Translated into euros, sales dipped 1.5 percent to Euro2,317 million. EBIT rose
strongly to Euro130 million thanks to higher earnings in HealthCare.
Business of our companies in the Asia/Pacific region increased by 4.8 percent in
local currencies, even though the previous year's sales still included the
household insecticides business and despite the slower growth in most Asian
economies throughout the first half of 2003. After translation, sales fell by
10.6 percent to Euro965 million. Our growth driver in the Far East continues to be
China, where we achieved double-digit growth rates in local currencies in the
first half of 2003 after adjusting for the divestment of the household
insecticides. Second-quarter EBIT in Asia/Pacific improved by 9.3 percent to Euro94
million.
In the Latin America/Africa/Middle East region, too, economic development has so
far fallen short of expectations. However, second-quarter sales of our companies
in the region advanced by 19.0 percent in local currencies. Measured in euros,
sales moved back 4.7 percent to Euro531 million. EBIT rose by Euro104 million to Euro135
million.
Liquidity and Capital Resources
The consolidated financial statements for the first half of 2003 have been
prepared as for the year 2002 according to the rules issued by the International
Accounting Standards Board (IASB), London. Reference should be made as
appropriate to the notes to the 2002 statements.
Gross cash flow increased by Euro328 million, or 43.1 percent, in the second
quarter of 2003 compared to the same period of the previous year, due mainly to
the Euro202 million growth in EBIT. The Euro126 million decline in net cash flow to
Euro967 million resulted largely from an increase in working capital and from
disbursements of Euro231 million following the settlement reached with U.S.
authorities in the context of an investigation into pharmaceutical product
prices. Provisions for these payments had been established in 2002.
Net cash used in investing activities came to only Euro40 million. Here, cash
outflows of Euro324 million were largely offset by inflows from sales of property,
plant, equipment and investments in affiliated companies. The latter included,
in particular, the divestiture of PolymerLatex (Euro107 million). Interest and
other financial receipts amounted to Euro177 million.
Financing activities resulted in net cash outflows of Euro1,349 million, including
Euro664 million in dividend payments, Euro250 million in net loan repayments and Euro435
million in interest paid after taxes. The Euro69 million, or 18.9 percent, increase
in interest expense was chiefly attributable to the financing of the Aventis
CropScience acquisition.
Cash and cash equivalents decreased in the second quarter by Euro437 million to
Euro1,728 million. Including marketable securities and other instruments, the Group
had liquid assets of Euro1,758 million on June 30, 2003.
Earnings Performance
EBIT increased by 80.2 percent in the second quarter to Euro454 million, or by 30.1
percent if special items are disregarded. The special items in the second
quarter of 2003 mainly comprise Euro122 million in gains from the sale of further
parts of the household insecticides business and a Euro30 million gain from the
divestiture of PolymerLatex, along with Euro135 million in non-recurring charges,
primarily for restructuring. EBIT for the same period of 2002 contained Euro76
million in gains from the sale of the generics business.
The non-operating result declined by Euro44 million in the second quarter to minus
Euro176 million, mainly because the previous year's figure contained a Euro269 million
gain from the sale of our interest in Agfa-Gevaert N.V. Income tax expense for
the second -quarter of 2003 amounted to Euro149 million, causing net income to fall
by 56.3 percent to Euro128 million. The effective tax rate, at 54 percent, was well
above the theoretical Group tax rate of 39 percent, mainly due to one-time
taxation effects.
Asset and Capital Structure
Total assets decreased by Euro1.1 billion compared with December 31, 2002, to Euro40.6
billion.
Intangible assets shrank by Euro0.5 billion to Euro8.4 billion. Property, plant and
equipment decreased by Euro1.0 billion overall, with Euro0.6 billion in capital
spending offset by Euro0.8 billion in depreciation and Euro0.2 billion in retirements.
Negative currency effects diminished noncurrent assets by Euro0.4 billion.
Current assets rose by Euro0.4 billion, or 2.1 percent, from the beginning of the
year, to Euro18.6 billion. Inventories grew by 3.0 percent to Euro6.5 billion, while
trade accounts receivable increased by 5.7 percent to Euro5.9 billion. The
divestitures made in connection with the acquisition of the Aventis CropScience
group led to a 21.3 percent decline in other receivables, to Euro3.3 billion, since
the assets earmarked for divestment were included in this item at the end of
2002. Liquid assets grew by Euro1.0 billion to Euro1.8 billion.
Stockholders' equity dropped by Euro0.2 billion to Euro15.1 billion. While Euro0.7
billion was allocated out of net income, stockholders' equity was diminished by
Euro0.7 billion due to payment in the second quarter of the dividend for 2002. The
reduction in stockholders' equity not recognized in net income amounted to Euro0.3
billion.
Equity coverage of total assets rose by 0.4 percentage points compared to the
end of 2002, to 37.2 percent.
Liabilities fell by Euro0.9 billion to Euro25.4 billion, chiefly due to a decline in
trade accounts payable and to the disbursements made following the settlement
reached with U.S. authorities in the context of an investigation into
pharmaceutical product prices. Gross financial liabilities dropped by Euro0.1
billion to Euro9.5 billion.
Net debt declined by Euro1.1 billion in the first half of 2003, to Euro7.8 billion.
Capital Expenditures
In the second quarter of 2003 we spent Euro324 million for intangible assets,
property, plant and equipment. This was considerably less than in the same
period of 2002, when capital expenditures totaled Euro486 million. Total capital
spending in the first half of 2003 amounted to Euro800 million, down 21.3 percent
from the first half of 2002. At 59.9 percent of our Euro1,336 million scheduled
depreciation and amortization, the level of capital expenditures was in line
with our strategic objectives. Europe accounted for capital spending of Euro517
million, 56.3 percent of which went for our sites in Germany.
The Group's capital expenditure budget for the full year 2003 is Euro2.0 billion.
Employees
On June 30, 2003, the Bayer Group had 117,500 employees, 5,100 fewer than at the
start of the year. Headcount was reduced by 2,500 in Europe, 1,000 in North
America, 1,100 in Asia/Pacific and 500 in Latin America/Africa/Middle East.
Personnel expenses in the first half of 2003 were down by Euro8 million, or 0.2
percent, compared to the same period of 2002, to Euro3,958 million.
Outlook
We do not anticipate a meaningful recovery in economic demand in the second half
of 2003. For that reason we will probably have only limited scope to increase
selling prices. At the same time, the continuing weakness of the U.S. dollar and
the high levels of raw material and energy costs - even if these have declined a
little - are likely to hold back earnings, particularly in our industrial
business. These effects should be mitigated by our programs aimed at improving
operating efficiency and long-term profitability, which are going to plan so
far.
We expect CropScience sales to weaken further in the second half, primarily for
-seasonal reasons, with earnings of this business area also being hampered by
integration-related charges. In HealthCare, earnings are likely to be restrained
by launch costs for Levitra(R) and competitive pressure from generics in the
United States. Here too, however, our efficiency programs should ease the
situation.
Provided there is no further deterioration in the economy as a whole, we
continue to expect full-year EBIT before special items to increase by a
double-digit percentage over 2002.
Bayer Group Highlights
euro million 2nd Quarter 1st Half
2002 2003 Change 2002 2003 Change
Sales 7,504 7,256 - 3.3% 14,737 14,612 - 0.8%
of which discontinuing operations 233 0 456 0
Change in sales
Volume - 2% + 4% - 2% + 4%
Price - 4% + 3% - 4% + 1%
Currency - 4% - 11% - 2% - 11%
Portfolio changes + 3% + 1% 0% + 5%
EBITDA1 1,034 1,100 + 6.4% 2,522 2,882 + 14.3%
Operating result (EBIT) 252 454 + 80.2% 1,092 1,529 + 40.0%
of which discontinuing operations 21 0 43 0
of which special items (84) 17 273 272
Return on sales 3.4% 6.3% 7.4% 10.5%
Net income 293 128 - 56.3% 816 714 - 12.5%
Earnings per share (euro) 0.40 0.18 1.12 0.98
Gross cash flow2 761 1,089 + 43.1% 1,595 2,491 + 56.2%
Gross cash flow per share (euro) 1.04 1.49 2.18 3.41
Net cash flow3 1,093 967 - 11.5% 1,333 1,130 - 15.2%
Capital expenditures 486 324 - 33.3% 1,016 800 - 21.3%
Depreciation and amortization 782 646 - 17.4% 1,430 1,353 - 5.4%
Number of employees (as of June 30) 127,800 117,500 - 8.1%
Personnel expenses 2,018 2,033 + 0.7% 3,966 3,958 - 0.2%
1 EBITDA = operating result (EBIT) plus depreciation and amortization
2 2 Gross cash flow = operating result (EBIT) plus depreciation and amortization, less gains on retirements of
noncurrent assets, less income taxes, and adjusted for changes in long-term provisions
3 Net cash flow = cash flow from operating activities according to IAS 7
Balance Sheet Structure
euro million June 30, 2002 June 30, 2003 Dec. 31, 2002
Noncurrent assets 25,728 22,064 23,513
Current assets 18,969 18,564 18,179
Stockholders' equity 15,648 15,123 15,335
Minority stockholders' interest 149 129 120
Liabilities 28,900 25,376 26,237
Total assets 44,697 40,628 41,692
Bayer Group Consolidated Statements of Changes in Stockholders' Equity (Summary)
euro million Capital stock Retained Net Currency Miscel- Total
and reserves earnings income translation laneous
adjustment items
December 31, 2001 4,812 9,841 965 759 545 16,922
Dividend payment (657) (657)
Allocation to retained earnings 310 (308) 2
Exchange differences (965) (965)
Other changes in stockholders' equity (470) (470)
Net income 816 816
June 30, 2002 4,812 10,151 816 (206) 75 15,648
December 31, 2002 4,812 10,076 1,060 (593) (20) 15,335
Dividend payment (657) (657)
Allocation to retained earnings 404 (403) 1
Exchange differences (388) (388)
Other changes in stockholders' equity 118 118
Net income 714 714
June 30, 2003 4,812 10,480 714 (981) 98 15,123
Bayer Group Consolidated Balance Sheets (Summary)
euro million June 30, June 30, Dec. 31,
2002 2003 2002
Assets
Noncurrent assets
Intangible assets 10,514 8,366 8,879
Property, plant and equipment 13,068 11,437 12,436
Investments 2,146 2,261 2,198
25,728 22,064 23,513
Current assets
Inventories 6,727 6,534 6,342
Receivables and other assets
Trade accounts receivable 7,008 5,860 5,542
Other receivables and other assets 3,100 3,313 4,210
10,108 9,173 9,752
Liquid assets 872 1,758 796
17,707 17,465 16,890
Deferred taxes 907 742 967
Deferred charges 355 357 322
44,697 40,628 41,692
of which discontinuing operations 778 0 0
Stockholders' Equity and Liabilities
Stockholders' equity
Capital stock and reserves 4,812 4,812 4,812
Retained earnings 10,151 10,480 10,076
Net income 816 714 1,060
Other comprehensive income
Currency translation adjustment (206) (981) (593)
Miscellaneous items 75 98 (20)
15,648 15,123 15,335
Minority stockholders' interest 149 129 120
Liabilities
Long-term liabilities
Long-term financial liabilities 7,176 7,044 7,318
Miscellaneous long-term liabilities 139 83 92
Provisions for pensions and other post-employment benefits 4,693 4,992 4,925
Other long-term provisions 1,324 1,249 1,215
13,332 13,368 13,550
Short-term liabilities
Short-term financial liabilities 6,166 2,992 2,841
Trade accounts payable 2,477 1,983 2,534
Miscellaneous short-term liabilities 2,168 1,950 2,138
Short-term provisions 1,643 2,424 2,257
12,454 9,349 9,770
25,786 22,717 23,320
of which discontinuing operations 224 0 0
Deferred taxes 2,748 2,194 2,453
Deferred income 366 465 464
44,697 40,628 41,692
The half-year statements are unaudited.
Earnings
euro million 2nd Quarter 1st Half
2002 2003 Change 2002 2003 Change
Operating result (EBIT) 252 454 + 80.2% 1,092 1,529 + 40.0%
of which discontinuing operations 21 0 43 0
of which special items (84) 17 273 272
Non-operating result 44 (176) * (113) (348) *
Income before income taxes 296 278 - 6.1% 979 1,181 + 20.6%
Net income 293 128 - 56.3% 816 714 - 12.5%
Bayer Group Consolidated Statements of Income (Summary)
euro million 2nd Quarter 1st Half
2002 2003 2002 2003
Net sales 7,504 7,256 14,737 14,612
of which discontinuing operations 233 0 456 0
Cost of goods sold (4,418) (4,151) (8,584) (8,130)
Gross profit 3,086 3,105 6,153 6,482
Selling expenses (1,663) (1,626) (3,291) (3,191)
Research and development expenses (633) (607) (1,202) (1,127)
General administration expenses (374) (389) (672) (770)
Other operating income 168 296 738 717
Other operating expenses (332) (325) (634) (582)
Operating result (EBIT) 252 454 1,092 1,529
of which discontinuing operations 21 0 43 0
Non-operating result 44 (176) (113) (348)
Income before income taxes 296 278 979 1,181
Income taxes 0 (149) (159) (459)
Income after taxes 296 129 820 722
Minority stockholders' interest (3) (1) (4) (8)
Net income 293 128 816 714
Earnings per share (euro) 0.40 0.18 1.12 0.98
Bayer Group Summary Cash Flow Statements
euro million 2nd Quarter 1st Half
2002 2003 2002 2003
Gross operating cash flow 761 1,089 1,595 2,491
Changes in working capital 332 (122) (262) (1,361)
Net cash provided by operating activities 1,093 967 1,333 1,130
of which discontinuing operations 16 0 38 0
Net cash provided by (used in) investing activities (4,289) (40) (4,406) 949
of which discontinuing operations (6) 0 (34) 0
Net cash provided by (used in) financing activities 2,955 (1,349) 3,204 (1,102)
of which discontinuing operations 0 0 5 0
Changes in cash and cash equivalents
due to business activities (241) (422) 131 977
Cash and cash equivalents at beginning of period 1,092 2,165 719 767
Change due to exchange rate movements
and to changes in scope of consolidation (11) (15) (10) (16)
Cash and cash equivalents at end of first half 840 1,728 840 1,728
Marketable securities and other instruments 32 30 32 30
Liquid assets as per balance sheets 872 1,758 872 1,758
This information is provided by RNS
The company news service from the London Stock Exchange
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