The Bayer Group have announced their intention to increase both their operating result before depreciation and amortization (EBITDA) and their operating result (EBIT) before special items by more than 10% in 2004. This was announced by Bayer Management Board Chairman Werner Wenning at the company’s Spring Financial News Conference on Thursday March 18 in Leverkusen. ‘We have also redefined our target returns in the context of our realignment. We plan to achieve an EBITDA margin of approximately 19% for the Bayer Group as a whole by 2006’, Wenning said. This corresponds to an increase of nearly 60% over the 12% EBITDA margin in 2003.
‘Our goals are ambitious. We plan to achieve them through the announced portfolio changes, sales growth especially from new products in our life-science businesses, and considerable efficiency improvements in all subgroups.’
Wenning added that there are signs of a gradual economic recovery, driven mainly by the United States and Asia. Despite sustained pressure on prices, currency- and portfolio-adjusted sales grew by 5% in the first two months of 2004. The EBIT figures also show an encouraging trend, said the Bayer ceo, explaining that this is true for the life-science businesses Bayer HealthCare and Bayer CropScience, but especially for the industrial businesses, including the activities placed in the independent company named "Lanxess" that is scheduled to be listed on the stock market by early 2005. Overall Wenning displayed cautious optimism about the company’s performance for the rest of the year.
In 2003, Bayer improved their operating performance and increased EBIT before special items by 67%, to €1.4 billion – despite difficult economic conditions and negative currency effects. Although Group sales declined by 3.6% €28.6 billion, sales in local currencies advanced by 5%.
Nonetheless, Wenning was clearly unsatisfied with Bayer’s performance in 2003 in view of the company’s net loss of €1.4 billion after net income of €1.1 billion in 2002. The loss was largely due to €1.9 billion in impairment losses and valuation adjustments that had been announced at the end of 2003 in connection with the strategic realignment of Bayer’s portfolio. The company also took a total of €0.5 billion in other asset write-downs and restructuring charges, which related chiefly to site consolidations. Bayer recorded special income of €0.5 billion from portfolio measures, principally the divestment of the household insecticides business. The main items contributing to the remaining net special charges of €0.6 billion were expenses for achieving staff reductions and accounting measures taken in connection with the cholesterol-lowering drug Lipobay/Baycol, which was withdrawn from the market in 2001. Including a non-operating result of minus €0.8 billion and net tax income of €0.6 billion due to deferred taxes, the Bayer Group posted a net loss of €1.4 billion in 2003.
Positive aspects listed by the Bayer CEO included the improvement of the company’s operating performance and the 5% increase in the gross cash flow to €3.2 billion. According to Wenning, this documents Bayer’s solid financial strength which has not been diminished by the impairment charges. The efficiency-improvement programs, with which Bayer expects to realise savings of more than €2.5 billion between 2002 and 2005, enabled the company to cut costs by around €730 million in 2003. Net debt was reduced by €2.9 billion to below €6 billion. Said Wenning: ‘We significantly exceeded our stated goal of reducing net debt to €7 billion.’
Despite Bayer’s net loss for the year, the company have nonetheless decided to pay a dividend. Wenning explained the reasons for this decision: ‘We have a strong cash flow and are convinced of the future profitability of the Bayer Group. With our proposed dividend of 50 cents, we want to take into account our stockholders’ interests with an appropriate dividend yield, even in this special situation.’
The company’s business performed well, although the reported figures are down in some areas. This positive performance becomes evident when adjustments are made for the effects of exchange rate fluctuations and portfolio changes. Thus, sales in the HealthCare subgroup declined by 5.3% to €8.9 billion, yet expanded by 9.2% when adjusted for portfolio and currency effects. Due to write-downs for the plasma business, which is earmarked for divestment, and to high restructuring charges, EBIT fell by 43% to €334 million. Before special items, however, EBIT improved by 22% to €876 million.
In the Polymers and Chemicals businesses, the weak economy, increasing competitive pressures, rising raw material and energy costs and the unfavourable exchange rate situation created extremely difficult market conditions. Sales of Polymers receded by 5% to €9.9 billion; underlying sales of this subgroup increased by 3.8%. On the other hand, high impairment charges and other special items led to a decline in EBIT to minus €1.2 billion. EBIT before special items fell by 51% to €198 million (2002: €407 million). Sales of the Bayer Chemicals subgroup decreased by 21.3% to €3.4 billion; underlying sales were up by 0.8%. Here too, high impairment charges and other special items reduced EBIT to minus €499 million (2002: €1.1 billion). Before these special items, EBIT declined by 79% to €42 million.
According to the Bayer CEO, the focus of the company’s efforts in 2004 will be to further improve their performance. Bayer will also work to implement their strategic decision to place the chemicals business – with the exception of H.C. Starck and Wolff Walsrode – and about one third of their polymers business into an independent company called Lanxess that is scheduled to be listed on the stock market by early 2005 at the latest. The reorganisation process is all but completed, which means the activities concerned will be placed in a virtual organisation by July 1, 2004, allowing Lanxess to largely operate as an independent unit.
Wenning expressed confidence that – with their large number of cyclical businesses – Lanxess would benefit significantly from the economic recovery after suffering particularly from the general weakness of the market last year and additionally having to absorb many special charges. The Bayer ceo explained that additional earnings contributions from the cost-containment projects and lower depreciation should also have a positive effect. ‘We therefore believe that there will be a strong increase in EBIT of Lanxess before special items and expect it to post positive net earnings for the year from a stand-alone perspective.’
Wenning said that the improvement of earning power will remain the primary focus for the activities remaining with Bayer. The company will therefore systematically pursue their efficiency-improvement programs, from which they expect net savings of more than €900 million in 2004. The Bayer chairman also believes the company are well-equipped to deal with developments in the medium- and long-term: ‘Here we will rely above all on our company’s innovative potential.’ He explained that Bayer plan to continue setting trends in research-intensive fields and therefore intend to spend €2.3 billion for research and development this year. The innovative life-science businesses together account for 85% of this total. Bayer plan to spend €1.8 billion for property, plant, equipment and intangible assets.
