Earnings Performance

Bayer Group Summary Income Statements	2006	2007	Change
	€ million	€ million	in %
Net sales	28,956	32,385	+11.8
Cost of goods sold	(15,275)	(16,352)	+7.1
Selling expenses	(6,534)	(7,782)	+19.1
Research and development expenses	(2,297)	(2,578)	+12.2
General administration expenses	(1,599)	(1,772)	+10.8
Other operating income and expenses – net	(489)	(747)	+52.8
EBIT (operating result)	2,762	3,154	+14.2
Non-operating result	(782)	(920)	+17.6
Income before income taxes	1,980	2,234	+12.8
Income taxes	(454)	72	•
Income from discontinued operations after taxes	169	2,410	•
Income after taxes	1,695	4,716	•
of which attributable to minority interest	12	5	•
of which attributable to Bayer AG stockholders (net income)	1,683	4,711	•

Net sales of the Bayer Group increased by 11.8 percent, or €3,429 million, from the previous year to €32,385 million. Adjusted for currency and portfolio effects, sales rose by 6.1 percent.

The cost of goods sold increased by 7.1 percent to €16.4 billion, mainly due to the full-year inclusion of the business of Schering AG, Berlin, Germany, but also because of the growth in business and higher raw material costs. The ratio of the cost of goods sold to total net sales was 50.5 percent (2006: 52.8 percent). With Schering AG included for the full year, selling expenses rose by a total of 19.1 percent to €7.8 billion. The ratio of selling expenses to sales thus rose to 24.0 percent, from 22.6 percent in 2006. Our research and development expenses also increased as a result of the inclusion of the Schering business for the full year, climbing by 12.2 percent to €2.6 billion; the ratio of R&D expenses to net sales was 8.0 percent (2006: 7.9 percent). General administration expenses came to €1.8 billion. The negative balance of other operating income and expenses resulted from costs related to the integration of Schering AG, restructuring, litigation and valuation write-downs.

EBIT for 2007 came in at €3,154 million. Before net special charges of €1,133 million (2006: €717 million), EBIT climbed by 23.2 percent to €4,287 million.

The non-operating result dropped by €138 million to minus €920 million. There was a net €69 million loss from investments in affiliated companies (2006: €207 million income), while net interest expense edged down €27 million to €701 million. Income from investments in affiliated companies in the previous year included the €236 million divestment gain from the sale of our interest in GE Bayer Silicones.

In 2007 we recorded net tax income of €72 million after one-time non-cash tax income of €912 million arising in connection with the corporate tax reform in Germany. This tax effect resulted mainly from the remeasurement of the deferred tax liabilities accrued in connection with the Schering acquisition, particularly in order to reflect the lower nominal rates of corporate income tax that apply in Germany from 2008. Before this one-time effect, we had tax expense in 2007 of €840 million (2006: €454 million).

Including the result of discontinued operations, which contains the proceeds from the divestments of H.C. Starck and Wolff Walsrode and part of the divestiture proceeds from the diagnostics business, and after minority interests, Group net income in 2007 rose by €3,028 million to €4,711 million (2006: €1,683 million).