Bayer’s net income declined, while core earnings per share beat expectations as the company successfully completed the largest acquisition in its history in 2018.
“We have set the right course for the future,” said Werner Baumann, Chairman of the Board of Management, on Feb. 27 at the Financial News Conference in Leverkusen. Group sales and earnings increased in 2018. Adjusted for currency and portfolio effects, the Crop Science and Pharmaceuticals divisions registered higher sales year on year, while sales of Consumer Health were level with the prior year. Bayer has confirmed its outlook for 2019 and the targets for 2022.
“Over recent years we have systematically developed into a focused life science company, clearly aligned to the megatrends in health and agriculture and united under the strong umbrella brand Bayer,” Baumann said. “The acquisition in agriculture has lifted us to the number one position in this market. The integration of the two companies has gotten off to an excellent start.”
Another important step taken last year was the decision, announced in late November, to strengthen the company through a series of portfolio, efficiency and structural measures. “These will make us more focused, more effective, more agile and more competitive,” said Baumann. The portfolio measures include in particular the decision to exit the Animal Health business unit and the Consumer Health brands Coppertone and Dr. Scholl’s. Bayer also plans to sell its 60% interest in German site services provider Currenta.
Financials
“In 2018, we were again able to increase sales and earnings, despite encountering a challenging market and currency environment,” Baumann said. Group sales increased by 4.5% to 39.586 billion euros. On a reported basis, sales were up by 13.1%. EBITDA before special items rose by 2.8% to 9.547 billion euros, although negative currency effects diminished earnings of the pre-acquisition Bayer businesses by 457 million euros. EBIT decreased by 33.7% to 3.914 billion euros after special charges of 2.566 billion euros (2017: 1.227 billion euros). These mainly resulted from impairment losses (around 3.3 billion euros) or from special charges in connection with the acquired business (around 2.0 billion euros). These charges were partly offset by a one-time special gain from divestments of around 4.1 billion euros.
Net income declined by 76.9% to 1.695 billion euros, due in part to the prior-year figure including a gain in connection with the deconsolidation of Covestro. Core earnings per share from continuing operations were above expectations, at 5.94 euros (minus 10.5%). The year-on-year decrease was due to portfolio changes and financing activities, with the financing costs for the Monsanto acquisition standing against the earnings contribution from the acquired business, which was lower for seasonal reasons. In addition, the number of Bayer shares increased substantially as a result of the equity measures implemented in the second quarter of 2018.
Free cash flow increased by 17.4% to 4.652 billion euros. Net financial debt rose by around 32 billion euros year on year to 35.679 billion euros as of Dec. 31, 2018.
“Following the increase due to the Monsanto acquisition, we are pleased to have already reduced our debt faster than anticipated,” said Chief Financial Officer Wolfgang Nickl.
Crop Science
Bayer registered sales of 14.266 billion euros in agricultural business. The acquired business accounted for around 5.3 billion euros of this figure, while the businesses divested to BASF contributed 1.5 billion euros prior to the closing of the respective transactions in August 2018. The 6.1% increase on a currency- and portfolio-adjusted basis largely resulted from the normalization of crop protection inventories in Brazil, where business in the prior year had been impacted by the required measures in this context. Sales were also up in the Asia/Pacific and North America regions. Bayer also benefited from service agreements – especially product supply and distribution agreements – with BASF in connection with the divested businesses. In Europe, sales were down due to unfavorable weather conditions and regulatory changes affecting certain SeedGrowth products in France.
On a pro-forma basis, with sales presented as if the acquisition of Monsanto and the associated divestments had already taken place as of Jan. 1, 2017, sales of Crop Science increased by 3.1%, thanks to growth at Herbicides, Fungicides, Insecticides and Corn Seed & Traits, while business at Soybean Seed & Traits matched the prior-year level. By contrast, sales decreased at Environmental Science, mainly due to the planned lower product deliveries to the acquirer of the consumer business divested in 2016.
EBITDA before special items of Crop Science advanced by 29.8% to 2.651 billion euros. This increase is partly attributable to the earnings contribution from the newly acquired business (705 million euros) and the recognition in the second quarter of 2017 of significantly higher provisions for product returns in Brazil. This stood against the prior-year prorated earnings contribution from the businesses divested to BASF. Earnings were also held back by a decrease in volumes in Europe and a negative currency effect of 101 million euros for the pre-acquisition Bayer businesses.
As of Jan. 28, 2019, lawsuits from approximately 11,200 plaintiffs had been served in the United States in connection with the crop protection product glyphosate. “We disagree with the ruling by a court of first instance in the Johnson case and have therefore filed an appeal,” Baumann said. Also in respect of further proceedings, seven of which are currently scheduled for this year, he added: “We have the science on our side and will continue to vigorously defend this important and safe herbicide for modern and sustainable farming.”
Animal Health
Sales of Animal Health came in at 1.501 billion euros in 2018, matching the prior-year level. Business expanded in all regions except Europe/Middle East/Africa. Sales of the Seresto flea and tick collar increased by a substantial 28.5%, while business with the Advantage family of flea, tick and worm control products was down by 9.3% year on year. EBITDA before special items declined by 6.0% to 358 million euros. However, adjusted for currency effects, earnings matched the prior-year level (plus 0.8%). An increase in the cost of goods sold and a negative impact on sales and earnings from the application of new financial reporting standards were offset by lower selling expenses and other factors.
Growth targets
Bayer has confirmed the forecasts for 2019 and the medium-term targets for 2022 that it provided in conjunction with its Capital Markets Day on Dec. 5, 2018. For 2019, the company expects sales to amount to around 46 billion euros. This corresponds to an increase of approximately 4%.. Bayer aims to increase EBITDA before special items to approximately 12.2 billion euros, while core earnings per share are seen rising to approximately 6.80 euros. These targets do not take into account changes in exchange rates or the plans to exit the Animal Health business unit, divest the Consumer Health brands Coppertone and Dr. Scholl’s, and sell the 60% interest in German site services provider Currenta.
For Crop Science, Bayer sees 2019 sales rising by around 4% and anticipates an EBITDA margin before special items of approximately 25%. For Animal Health, Bayer also expects sales to increase by around 4% and aims to achieve an EBITDA margin before special items of approximately 24%.