Significant improvement in its high-tech materials business fueled strong second-quarter gains in earnings and sales by The Bayer Group, prompting its chairman to declare. “MaterialScience has left the crisis behind…”
The second quarter of 2010 “saw business expand more strongly than expected,” Management Board Chairman Werner Wenning said, in releasing the report on Thursday. “Volumes have returned to the pre-crisis level.”
He added: “We can confirm the 2010 Group outlook we raised in April.” Wenning announced that the company would increase its investment for the future more substantially than planned. “We now expect research and development expenses for the full year to come in at a record level of some EUR 3.1 billion.”
Sales of the Bayer Group rose by 14.6 percent in the second quarter, to EUR 9,179 million (Q2 2009: EUR 8,009 million). Adjusted for currency and portfolio effects, business grew by 9.2 percent. Earnings before interest, taxes, depreciation and amortization (EBITDA) before special items improved by 8.6 percent to EUR 1,917 million (Q2 2009: EUR 1,765 million).
Bayer Group officials attributed the gain “primarily to the gratifying business trends at MaterialScience and Consumer Health, as well as to positive currency effects.”
The operating result (EBIT) before special items advanced by 14.4 percent to EUR 1,260 million (Q2 2009: EUR 1,101 million). Research and development expenses rose by 12.7 percent to EUR 747 million (Q2 2009: EUR 663 million).
MaterialScience: Volumes, Sales Up
The significant improvement in the high-tech materials business continued, the company said, with MaterialScience posting sales of EUR 2,689 million (Q2 2009: EUR 1,830 million) in the second quarter of 2010. The subgroup thus improved sales by 46.9 percent (Fx adj. 40.5 percent) against the prior-year quarter, which was impacted by the global financial and economic crisis.
“This very gratifying improvement was due especially to the considerable increase in demand in our primary customer industries,” Wenning said. Volumes rose significantly in all product groups and regions. MaterialScience also expanded sales by a substantial 21.3 percent (Fx adj. 15.9 percent), compared to the first quarter of 2010.
Business with raw materials for foams (Polyurethanes) improved by a currency-adjusted 37.1 percent year on year, thanks to a marked expansion of volumes, Bayer said. Furthermore, selling prices increased in Asia/Pacific and Europe, enabling the subgroup to more than offset price declines in North and Latin America.
Growth in the Polycarbonates business was even stronger, with sales of these high-performance plastics climbing by a currency-adjusted 59.4 percent. Here, MaterialScience managed to raise selling prices substantially overall, as well as significantly grow volumes in all regions. Business with raw materials for coatings, adhesives and specialties also trended successfully, with sales up by a currency-adjusted 37.3 percent.
The subgroup more than tripled its year-on-year earnings in the second quarter, due to the improved business situation, the company said. EBITDA before special items advanced to EUR 371 million (Q2 2009: EUR 121 million). This success was based on the substantial expansion of volumes and the associated clear improvement in capacity utilization, as well as on higher selling prices and efficiency improvements. By contrast, earnings of MaterialScience were diminished by higher purchase prices on the raw material markets as a result of the global economic recovery.
Core Earnings Per Share Rise
Earnings in the second quarter were diminished by special charges of EUR 255 million (Q2 2009: net special charges of EUR 80 million). Of these special charges, EUR 123 million related to litigations at HealthCare and CropScience and EUR 132 million to the partial write-down for the cancer drug Zevalin. After special items, the operating result (EBIT) fell by 1.6 percent to EUR 1,005 million (Q2 2009: EUR 1,021 million). Net income came in level year-on-year at EUR 525 million (Q2 2009: EUR 532 million). Core earnings per share rose by 9.5 percent to EUR 1.15 (Q2 2009: EUR 1.05).
Gross cash flow increased by 3.0 percent to EUR 1,286 million (Q2 2009: EUR 1,248 million), due especially to the upward business trend at MaterialScience. Net cash flow improved by 10.4 percent to EUR 1,545 million (Q2 2009: EUR 1,399 million), thanks in part to measures to further optimize working capital management, the company said.
Net financial debt of the Bayer Group increased from EUR 9.7 billion on March 31 to EUR 10.7 billion on June 30. This increase, which is typical for the second quarter, was mainly due to the dividend payment of EUR 1.2 billion, to annual payments of variable compensation to Bayer’s employees, and to the expected high interest payments resulting from the fact that the interest payment dates for the company’s bonds occur mainly in the second quarter. Negative currency effects of EUR 0.6 billion were an additional factor.
First-Half Sales and Earnings
Sales and earnings of the Bayer Group increased significantly in the first half of 2010, thanks above all to the recovery at MaterialScience. Sales climbed by 10.0 percent (Fx & portfolio adj. 7.7 percent) to EUR 17,495 million (H1 2009: EUR 15,904 million). EBITDA before special items rose by 10.8 percent to EUR 3,835 million (H1 2009: EUR 3,460 million), while EBIT before special items improved by 19.6 percent to EUR 2,534 million (H1 2009: EUR 2,118 million). EBIT grew by 10.4 percent to EUR 2,202 million (H1 2009: EUR 1,994 million). Net income was up by 27.3 percent to EUR 1,218 million (H1 2009: EUR 957 million), while core earnings per share advanced 19.9 percent to EUR 2.35 (H1 2009: EUR 1.96).
Outlook Remains Optimistic
For the full year, Bayer anticipates a further recovery in the global economy, although the pace of growth is expected to slow as the year progresses. “We remain optimistic for 2010,” Wenning emphasized.
The strong recovery at MaterialScience is compensating for the below-forecast business performance at HealthCare and CropScience.
MaterialScience remains optimistic for the second half, and expects business to continue trending positively. From today’s viewpoint, the subgroup now considers as conservative the previous targets of increasing full-year sales by approximately 20 percent and more than doubling EBITDA before special items. MaterialScience expects to exceed these forecasts. In the third quarter, the subgroup anticipates that sales and EBITDA before special items will be in line with those of the previous quarter.