INSIGHT: Bayer wants to spend to grow - not divest

01 March 2011 17:55  [Source: ICIS news]

By Franco Capaldo

LEVERKUSEN, Germany (ICIS)--Bayer is expecting slightly slower growth in 2011 as fiscal stimulus programmes run down - but growth nevertheless. And the company’s new chairman has outlined some ambitious spending plans that will see research and capital investment boosted.

Bayer said on Monday that it expects sales to increase by 4-6% in 2011, or to between €35.0bn ($48.6bn) and €36.0bn, and achieve earnings before interest, tax, depreciation and amortisation (EBITDA) before special items of €7.50bn.

The company sales for the whole of 2010 rose 12.6% year on year to €35.09bn, and it posted an EBITDA before special items of €7.10bn, up 9.7% from 2009.

“It remains to be seen how the global economy will develop once the stimulus programmes expire in numerous countries” said board chairman Marijn Dekkers. “In any case, we are confident for this year.”

The company is planning on high-single-digit growth for the products it sells into the electronics markets, and further recovery for its products for automotive. Construction products will see mid-single-digit growth driven by continued economic recovery, Bayer says.

At the group’s annual financial news conference Dekkers said that Bayer was planning capital expenditures of €1.50bn in 2011 - that is more than 4% of sales. “We expect our research and development (R&D) spending to be in line with the record level of 2010. This investment will enable us to seize the opportunities we have for the future,” he said.

Here is a company that recognises that it has to spend to win, whether that means capturing high-level growth in pharmaceuticals and in agriculture through R&D, or growth in emerging and even in more mature materials markets through investment in plant, property and equipment.

In 2012, Bayer expects sales to grow by approximately 5% from 2011 on an adjusted basis, and plans to achieve EBITDA before special items of around €8.0bn.

Dekkers' plans for Bayer are quite something. For the period up to and including 2013 some €15.0bn will be invested in the company, with R&D accounting for about two-thirds of this.

In addition, as initially announced in November last year, the group said it would free up funds by reallocating resources with the aim of achieving cost savings of about €800m per year by 2013, with around half of the planned savings - €400m - being reinvested.

“It is important for our future development that we invest more heavily and more rigorously in Bayer’s growth and innovation capability,” Dekkers said.

The reinvested money would go into R&D, including marketing, particularly in the HealthCare and CropScience segments, but also into expanding the group’s activities in emerging markets. “The remaining funds will go toward strengthening our CropScience and HealthCare businesses for the long term and further reducing debt,” Dekkers added.

For 2011, MaterialScience will take the lion’s share of the capital spending budget - 44% or €600m. Its share of research spending will be a more modest 8%, or €200m.

Bayer expects the business environment from MaterialScience to continue to recover. It forecast a mid-single-digit sales increase for 2011 but a higher relative rise in sub-group EBITDA.

The MaterialScience business, although cyclical, has stood Bayer in good stead coming out of the downturn and provided a healthy boost to sales and profits. And, of course, it gives the company opportunities to expand in a meaningful way in the world’s most important growth market, China.

But the new man at the helm - Dekkers took up his post in October last year - could well yet look again at the fit between materials, pharmaceuticals and agriculture

Bayer would only sell its MaterialScience business in an “extreme” scenario in which it had no other way of raising a significant amount to finance a big acquisition within its two other sub-groups, the executive board chairman said on Monday. And he added that no large acquisitions are on the cards.

“For Bayer, all of our three sub-groups are strategically very important,” Dekkers said, pointing to the significant investments made in the three sub-groups over the past five to 10 years.

“If an opportunity to do an acquisition came along that was so big that we couldn’t finance it any different way… Only in that context, in that hypothetical, theoretical situation, then the answer is yes, as an extreme option we could potentially divest MaterialScience,” Dekkers said. “I have to use the words 'extreme option', but we are not planning [to sell MaterialScience or make any large acquisitions],” he added.

Dekkers said, however, that the company was always looking at possible bolt-on acquisitions that could strengthen the position of any of its three sub-groups.

In a strong 2010, Bayer cut its net debt by €1.8bn to €7.9bn as net cash flow improved.

“The lower net debt increased our financial headroom as regards external growth in the form of acquisitions and partnerships,” said Dekkers.

Nigel Davis contributed to this article

($1 = €0.72)

For more on Bayer visit ICIS company intelligence

By: Franco Capaldo
+44 (0)20 8652 3214

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