Bayer AG (

BAYRY.PK

)

Q2 2011 Earnings Call

July 28, 2011 7:00 AM ET

Executives

Alexander Rosar – Head, IR

Marijn Dekkers – Chairman and CEO

Jörg Reinhardt – CEO, Bayer MaterialScience

Werner Baumann – Head, Finance

Sandra Peterson – Chairman, Bayer CropScience

Analysts

Matthew Weston – Credit Suisse Securities Ltd.

Richard Vosser – JPMorgan Securities Ltd.

Tim Race – Deutsche Bank AG

Craig Maxwell – UniCredit Bank AG

Jeremy Redenius – Sanford C. Bernstein Ltd.

Martin Flückiger – Helvea SA

Andrew Benson – Citigroup Global Markets Ltd.

Matt Giveny – Robert Baird

Andreas Heine – Unicredit Bank AG

Florent Cespedes – Exane BNP Paribas SA

Ronald Köhler – MainFirst Bank AG

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to Bayer’s Investor and Analyst Conference Call on the Second Quarter 2011 Results. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Alexander Rosar, Head of Investor Relations of Bayer AG. Please go ahead, sir.

Alexander Rosar

Thank you, Cleo. Ladies and gentlemen, welcome, also on behalf of my colleagues, to our conference call during which we will review our second quarter figures with you.

With me on the call are Marijn Dekkers, our CEO; and Werner Baumann, our CFO. Our sub-groups are represented by their respective CEOs as well, HealthCare by Jörg Reinhardt; CropScience by Sandra Peterson; and MaterialScience by Patrick Thomas.

Marijn will start off with a brief summary of the developments in the second quarter. We assume you have all received and reviewed our corporate newsletter, the briefing documents and the slides, so we just run you through the main points.

Before handing over to Marijn, I’d also like to draw your attention to the Safe Harbor statement. Thank you. Marijn?

Marijn Dekkers

Thank you, Alexander. Ladies and gentlemen, good afternoon. Let me start my introduction by summarizing the main points. Overall, we are pleased with the performance this quarter. It was the highest second quarter in terms of sales during the last five years. We delivered 5% adjusted year-on-year sales growth and 41% higher net income. Core earnings per share were up 11%. CropSciences continued its strong year-on-year improvement. And we are encouraged by the progress of our innovation pipeline as we continue to build the foundation for future growth. Our group-wide efficiency improvement initiatives are well underway. We are able to confirm our €800 million savings target. Based on the achievements thus far and our expectations for the remainder of the year, we reiterate our 2011 group financial outlook.

So, let me start by elaborating on some key figures for the second quarter. In my comments, as always, I will concentrate on the sales data adjusted for portfolio and currency effect. As already mentioned, group sales for the quarter grew by 5% to €9.3 billion with volumes contributing 3% and higher selling price is 2% to this increase.

Adjusted EBITDA for the group improved by 6% to a little over €2 billion. These improvements were attributable especially to a good season in the Northern Hemisphere for CropScience and a slight business expansion at HealthCare. MaterialScience came in as last year’s level. Reported EBIT increased by a substantial 26% to almost €1.3 billion. Earnings were diminished by net special charges of around €144 million. Restructuring, particularly at CropSciences and HealthCare, accounted for €179 million. By contrast, valuation adjustments for our pension provisions in the United Kingdom resulted in a one-time gain of €35 million.

Net income in the second quarter came to €747 million, up 41% compared with the previous year. Earnings per share were €0.90 and core earnings per share declined by 11% to €1.29.

From a regional perspective, we again expanded our business in the emerging markets. Sales improved there by 7% if adjusted for currency changes. We lost some momentum compared to previous quarters particularly in China. CropSciences suffered from unfavorable weather conditions in China and this has declined by 11%.

At MaterialScience, business receded 8%. In addition to tougher comparison with a very strong prior year quarter, we assumed that destocking by our customers in anticipation of lower prices played a role in the decline in MaterialScience in China. HealthCare continued its strong positive momentum and so business expands by 23%.

In Western Europe overall, Bayer gained 6% and in the United States, sales were up by 4%.

Gross cash flow in the second quarter increased by 19% to €1.5 billion, mainly as a result of the improved operating performance. Cash tied up in working capital was nearly unchanged in the second quarter. By contrast, liquid assets were freed up from working capital in the prior year quarter. Net cash flow was level year-on-year at €1.5 billion. Net financial debt climbed only slightly by €0.3 billion to €7.4 billion despite the high outflows for the dividend variable compensation and interest payments that are typical for the second quarter.

Let’s now move on to the performance of our subgroups. Sales of the HealthCare subgroup rose slightly by 2% to €4.2 billion in the second quarter. This improvement was mainly driven by the positive development of the Consumer Health segment. Sales in the Pharmaceutical segment improved by 0.5% in the second quarter. The business expansion in the emerging markets, particularly China, was able to offset the weak performance in North America and Western Europe. The ongoing genericization of Yaz in the United States as well as the adverse effects of the health system reforms in various countries were the main reason for this development.

The performance of our key Pharmaceutical products was mixed in the second quarter. Kogenate, Mirena and Aspirin Cardio advanced strongly, up 15%, 26%, and 10% respectively. Nexavar lost 4% versus a high base. Betaferon sales declined by 5%. Yaz sales were down 7%, mainly due to the generic competition in the U.S. as I already mentioned. Outside the U.S., the Yaz family of products advanced by 8%

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