Bayer: Operational business held back by currency effects; Major progress with Monsanto acquisition

Bayer’s operational business was hit by currency effects in the first quarter of 2018. Adjusted for currency and portfolio effects (Fx & portfolio adj.), the company generated an increase in sales in the first three months of the year. “We posted growth at Pharmaceuticals and in the Animal Health business,” said Werner Baumann, Chairman of the Board of Management, when he presented the interim report on Thursday. EBITDA before special items matched the level of the prior-year quarter on a currency-adjusted basis (Fx adj.). Baumann confirmed the currency-adjusted Group outlook for 2018.

 

“We have made good headway strategically and have made major progress with the proposed acquisition of Monsanto,” he said. The European Commission and other regulators, including those in Brazil, China and Russia, have approved the transaction this year. This means that Bayer has now obtained two-thirds of the around 30 anti-trust approvals it seeks. The conditions imposed by the European Commission and other regulators include in particular the divestment by Bayer of various Crop Science businesses. The company reached agreements to this effect with BASF in October 2017 and April 2018. The Monsanto acquisition remains subject to customary closing conditions, including receipt of required regulatory approvals. Bayer is working closely with the authorities around the world with the goal of closing the transaction in the second quarter of 2018.

 

In April 2018, investment company Temasek subscribed to 31 million new shares of Bayer, corresponding to around 3.6 percent of the increased capital stock, for total gross proceeds of 3 billion euros. The proceeds from this placement will be taken into account when determining the size of the share capital increase through a rights offering with subscription rights to existing shareholders to finance the acquisition of Monsanto.

 

 

Group sales in the first quarter of 2018 rose by 2.0 percent (Fx & portfolio adj., reported: minus 5.6 percent) to 9.138 billion euros. EBITDA before special items was down by 5.2 percent, at 2.896 billion euros. Negative currency effects held back earnings by around 160 million euros. Adjusted for these effects, earnings were level year on year. EBIT declined by 4.8 percent to 2.310 billion euros, after special charges of 78 million euros (Q1 2017: 102 million euros) primarily in connection with the planned acquisition of Monsanto. Net income decreased by 6.2 percent to 1.954 billion euros, while core earnings per share from continuing operations came in marginally lower, falling 1.3 percent to 2.28 euros.

 

Net cash provided by operating activities in continuing operations rose by 19.4 percent to 658 million euros due mainly to lower additions to cash tied up in working capital. Net financial debt decreased by more than half between December 31, 2017, and March 31, 2018, to 1.650 billion euros, due mainly to cash inflows from the sale of further Covestro shares.

 

Sales of the agricultural business (Crop Science) came in at 2.861 billion euros, which was level with the strong prior-year quarter on a currency- and portfolio-adjusted basis. “We grew in three out of four regions on a currency-adjusted basis, and this performance almost offset the decline in Europe/Middle East/Africa,” Baumann said. Growth was particularly strong in Asia/Pacific, where sales increased 10.4 percent (Fx adj.). Sales in Latin America advanced by 4.8 percent (Fx adj.), buoyed by stronger demand for fungicides and insecticides in Brazil and the continued normalization of inventories there.

Insecticides and Other (Seeds & Traits) delivered positive performance, registering growth of 8.0 percent (Fx & portfolio adj.) and 12.9 percent (Fx & portfolio adj.), respectively. By contrast, sales declined by 14.3 percent (Fx & portfolio adj.) at Environmental Science due to lower product deliveries to the purchaser of the consumer business. Adjusted for currency and portfolio effects, sales were also down at SeedGrowth (8.4 percent), Herbicides (6.6 percent), Vegetable Seeds (6.2 percent) and Fungicides (2.0 percent).

EBITDA before special items decreased by 6.5 percent 1.042 billion euros, and by 2.6 percent on a currency-adjusted basis. A decline in other operating income and a higher cost of goods sold were among factors that held back earnings. Lower expenses for research and development and for general administration had an opposing effect.

Sales by region 
 

Sales in the Europe / Middle East / Africa region fell by 8.8% (Fx adj.) to €1,294 million. The company recorded lower sales at Fungicides, Herbicides and Vegetable Seeds, mainly due to the weather conditions in Europe. At Fungicides, business was also held back by a substantial market decline in France. Sales at SeedGrowth were also down year on year. In contrast, sales increased at Insecticides, but this growth was insufficient to offset the declines elsewhere. 
 

Sales in North America advanced by 4.5% (Fx adj.) to €969 million. The canola seed business in Canada performed very well due to increased acreages. Higher demand in Canada resulted in sales gains at Herbicides. On the other hand, there was a significant decline at Environmental Science due to lower product deliveries to the purchaser of consumer business and at Insecticides due to lower pest pressure in the United States.  
 

In the Asia / Pacific region, sales increased by 10.4% (Fx adj.) to €368 million. The encouraging growth at Fungicides and Insecticides was attributable especially to advance sales in China and to high pest pressure in India. By contrast, sales were down at Herbicides.  
 

In Latin America, sales advanced by 4.8% (Fx adj.) to €230 million. The company posted double-digit percentage growth at Fungicides after a weak prior-year quarter. In Brazil, demand for fungicides and insecticides increased, while inventories continued to normalize. However, sales at Herbicides declined, especially in Argentina. 

 

 

Bayer has confirmed the currency-adjusted forecasts published in February for operating performance. The company continues to expect 2018 sales to increase by a low- to mid-single-digit percentage on a currency- and portfolio-adjusted basis. As before, it aims to increase EBITDA before special items and core earnings per share by a mid-single-digit percentage on a currency-adjusted basis. Taking into account the exchange rates as at March 31, 2018, reported sales would decline in 2018 overall by a low-single-digit percentage (previously: remain at the prior-year level). In absolute terms, sales would now come in at below 35 billion euros (previously: around 35 billion euros). EBITDA before special items would decline by a low-single-digit percentage (previously: match the prior-year level). Core earnings per share would come in at the prior-year level, as previously forecast.