INSIGHT: Bayer pins growth hopes on agro, pharma

12 March 2014 16:51 Source:ICIS News

By Tom Brown

LONDON (ICIS)--Bayer is targeting strong growth over the next two years. After improved results for the fourth quarter of 2013 that failed to live up to analyst expectations, and a 2014 growth forecast that also underwhelmed, the company came out swinging this week, predicting sales and margins improvements through to 2016.

The announcement follows news that the company is to invest an additional €500m to ramp haemophilia A drug treatment capacities at its Wuppertal and Leverkusen sites in Germany as part of a drive to increase HealthCare sales by an average of 6% per year through to 2016.

The company is also looking to scale up its CropScience business, underlined by a spate of deals this month. The company announced on 6 March that it is to acquire Buenos Aires-based soy bean seed treatment specialist Biagro Group, following its acquisition of fellow Argentinian soybean producer FN Semillas in December 2013.

Bayer also agreed a joint venture with US-based biotech Greenlight Biosciences on 1 March to work on applications to increase the potential productivity of the manufacturing of crop products.

CEO Marijn Dekkers declared he was “particularly confident” about healthcare growth and predicted that Bayer CropScience would grow faster than the market in the next two years. However, “cautiously optimistic” was as upbeat as he could get about the company’s MaterialScience chemicals division.

Along with currency exchange issues, MaterialScience was the key drag on Bayer’s fourth-quarter results, with division operating profits falling 17.7% year on year to €70m. Operating profit for the division was also down 25.1% for the year as a whole at €435m, due to overcapacity in several markets hampering the ability to adjust prices to reflect the extent of cost increases.

The inability to pass on the full impact of an estimated €250m year-on-year increase in operating costs in 2013 was the key driver of earnings falling in the face of broadly steady sales and strong markets for methyl di-p phenylene isocyanate (MDI) and toluene di-isocyanate (TDI) , according to the company.

Soft demand for some markets, particularly polycarbonates, led to average capacity utilisation of 80% across the business, Dekkers added.

A strong performance for MDI and TDI operations was achieved in part by capacity investments to maintain its competitive advantage in the face of increasingly-intense competition, according to Dekkers.

“Significant increases in capacity have been added by competitors but also by us,” he said at the company’s full-year conference in late February. “We have spent a significant amount of money [and are] still in the top tier of producers and intend to stay that way. Critical mass is very important.”

However, investment in MaterialScience is likely to lag behind the other divisions between 2014 and 2016, with €600m of research and development (R&D) and €1.9bn of capital expenditure earmarked for the division over that period.

Bayer forecasts that it will invest €7.4bn for R&D and €2.6bn in capital expenditure for HealthCare, and €3bn for R&D and €2.1bn in capital expenditure for CropScience over the same period.  

The key laggard for Bayer’s petrochemicals operations in 2013 was polycarbonates, but demand for the materials was flat rather than declining, with strong demand growth in some sectors and geographies.

“Polycarbonate [demand] was flat last year globally. [But] if you look at [sector growth], it grew in automotive, it was flat in construction and it shrank in electronics,” said Bayer MaterialScience chief Patrick Thomas, on the sidelines of Bayer’s annual conference in Leverkusen.

“There was actually a very slow electrical appliance industry segment - people just don’t buy big boxes with computers in anymore,” he added.

Growth in the automotive market is likely to drive polycarbonates demand, Thomas said, and China’s economic slowdown failed to prevent an 18% jump in car sales in the country during February, according to the China Association of Automobile Manufacturers.

“The big industry [for polycarbonates] is automotive – the automotive industry has grown tremendously for polycarbonates,” Thomas said.

“Financing is still there [in China], and foreign brands are growing faster in automotive than domestic, which is extraordinary,” he added.

Strong MDI and TDI demand is going to continue to increase on the back of growing end markets such as mattresses for TDI, according to Thomas.

“Through 2014, MDI is going to start to get tight again, and through 2015 is going to be very tight... [the ] TDI growth rate is so much higher than it’s been ever,” he said, noting that the company had been forced to declare force majeure on TDI last year just on the back of putting a unit in turnaround due to strength of demand growth in the region.

“In China the TDI plant is flat out, we just sold the plant out completely way ahead of what we [expected]. So now prices start going in the right direction on these rather tighter markets I think there is much more prosperity to be seen,” he added.

Despite reduced profit levels, and sluggish polycarbonates performance, the financial figures may not fully indicate the underlying strength of the MaterialScience division, according to Thomas.

“This is a really good business, we delivered last year over €400m of free operating cashflow. We’ve never had a negative free operating cashflow in the last 20 years, and over the last decade we’ve generated €3.5bn of cash,” he said.

“You have to be more efficient every year... if you look at last year we saved something like €40m after we’d [covered] inflation and that’s still not enough to compensate for the cost of raw materials going up by a quarter of a billion,” he added.

Dekkers predicted demand should slowly tick up over the next few years, easing margin pressure, but his lukewarm outlook about the division’s growth prospects this year indicate that the road to increased demand for some products may be a long one.

“Despite the difficult market environment for MaterialScience in 2013, we are cautiously optimistic about the future. The expected increase in capacity utilisation in our industry in the coming years should relieve the pressure on prices,” he said.

By Tom Brown