Bayer performance yields success

21 March 2005 00:01  [Source: ICB]

Bayer turned in an improved performance in 2004, driven largely by its MaterialScience and CropScience businesses, with earnings above last year’s figure and ahead of budget.

Commenting on the results last week, Bayer chairman Werner Wenning said: ‘The comprehensive transformation process of the past three years has yielded considerable success… we have made good progress towards our primary goal of improving our financial and operating performance.’

Sales were 4.2% higher at €29.8bn, with particular strength in polyurethanes and polycarbonates, both of which were ‘sold out’ during 2004.

Adjusting for currency and portfolio effects, the increase was 9.1%. Earnings before interest and tax (Ebit) were €2.24bn, up 53%, but, after charging for special items of €436m, this figure falls to €1.81bn – still a significant turnaround from 2003’s Ebit loss of €1.12bn.

Wenning said the performance was due to tangible recovery in business and price increases, as well as cost savings of €1bn – €100m more than originally targeted.

He is targeting further improvements for 2005, with sales expected to be up 5% (to €25bn, adjusted for the absence of Lanxess and other disposals), and underlying Ebit to increase 20%, to around €2.44bn on the same adjusted basis. He also expects Bayer to make further progress towards its goal of a 19% Ebitda margin; in 2004 the figure stood at 13.9%.

However, Bayer’s important HealthCare division saw sales slide 4.4% to €8.49bn, due largely to a €574m loss of sales from Cipro anti-infective, now off-patent in the US. Ebit was up 134% to €859m, and Ebitda margin came in at 16%.

Bayer CropScience saw sales increase 3.2% to €5.95bn and Ebit advance 43.9% to €492m, with an Ebitda margin of 21%. MaterialScience achieved sales of €8.60bn, up 15.3%, with Ebit of €641m, a reversal of a €397m loss in 2003. Ebitda margin was 14%.

Wenning claims Bayer is now the leading crop science business worldwide, having just overtaken Syngenta. He has just launched another efficiency-improvement programme in the CropScience division that will result in a further €200m of savings by 2007.

The extra cuts are part of the ongoing integration of Aventis CropScience, which Bayer bought in 2003, and has already yielded savings of €320m. Wenning declined to give specific details of the programme.

Wenning also confirmed that Bayer expects to close the sale of its €660m-turnover blood plasma business to NPS Bio Therapeutics, controlled by Cerberus Capital Management and Ampersand Ventures.

The company expects to get $590m for the business, almost all in cash, but admitted the figure is below the €621m book value of the assets. Losses on the transaction are included in the €171m of portfolio-adjustment special items reported by Bayer for 2004. Part of Bayer HealthCare’s biological products business unit, the blood plasma activities, made an Ebit loss last year of €56m.

The blood plasma sale is the latest, and possibly last, disposal in Bayer’s portfolio optimisation programme initiated in 2002. This has seen disposals worth €7.1bn and €10.4bn of acquisitions, including the spinning off of commodity chemicals and polymers business Lanxess.

 

Strong results fail to impress

Most journalists who heard Bayer chairman Werner Wenning’s upbeat report on 2004 passed on the good news of a 53% rise in Ebit before special items.

Yet financial markets were unimpressed. In subsequent Frankfurt trading, Bayer’s share price lost more than 3%. After Wenning presented the same results to analysts a day later, the share inched slowly upward again.

Was the initial reaction simply a backlash? Some financial gurus saw little upward potential for the stock, which had gained 34% since the Lanxess spin-off on 31 January.

The real message is: it takes time to read the tea leaves. Or, as one analyst put it, ‘Bayer’s results need some explanation.’

Traditionally, the financial world has had a hard time with the group’s four-pronged, now three-pronged, structure. After the chemicals business was spun off, some analysts seemed to treat Bayer as a pharmaceutical stock. This may be the wrong peer group.

Almost in passing, Wenning mentioned that around two-thirds of sales are now in life sciences. With the role of pharma diminishing, the real heavyweight in this sector is now CropScience. Bayer last year squeezed past Syngenta to posting dollar-denominated sales of $7.7bn against the Swiss rival’s $7.3bn.

Bayer MaterialScience (BMS) is even heavier at €8.6bn, but it is usually less visible to analysts. This time, some took notice. It was hard not to be impressed with the strong recovery of chemicals and polymers that also helped Lanxess lift sales 5% to €6bn.

BMS profited from brisk demand for polycarbonate and polyurethanes, both of which were sold out – thanks especially to the Asian boom that allowed a large chunk of the higher feedstock bill to be passed on to customers.

As both feedstocks and polymer demand are expected to remain buoyant this year, Wenning believes even more price hikes could be pushed through.

This could mean fairly smooth sailing for Bayer, if potential threats such as inadequate insurance coverage for drug-related suits or cartel fines do not bowl management a bouncer.

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