Chairman’s Letter
Overview of Sales, Earnings and Financial Position
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Operational targets exceeded
2007: A very successful year for Bayer
- Sales grow 11.8 percent to €32.4 billion
- EBITDA before special items advances 21.4 percent to €6.8 billion
- EBIT before special items climbs 23.2 percent to €4.3 billion
- Divestments boost net income to €4.7 billion
- Dividend to be raised to €1.35
- Further earnings increase expected for 2008
Overview of Sales, Earnings and Financial Position
Full year 2007
The Bayer Group had a very successful year in 2007. We again achieved a year-on-year improvement in the key indicators of operating performance and exceeded our earnings targets.
Sales gained 11.8 percent to €32,385 million (2006: €28,956 million). In the previous year the acquired business of Schering AG, Berlin, Germany, was only included on a pro-rated basis from June 23, 2006. Adjusted for currency and portfolio effects, Group sales rose by 6.1 percent, with HealthCare up 7.3 percent, CropScience 5.6 percent and MaterialScience 6.2 percent from the prior year.
The Bayer Group had a very successful year in 2007. We again achieved a year-on-year improvement in the key indicators of operating performance and exceeded our earnings targets.
Sales gained 11.8 percent to €32,385 million (2006: €28,956 million). In the previous year the acquired business of Schering AG, Berlin, Germany, was only included on a pro-rated basis from June 23, 2006. Adjusted for currency and portfolio effects, Group sales rose by 6.1 percent, with HealthCare up 7.3 percent, CropScience 5.6 percent and MaterialScience 6.2 percent from the prior year.
| Change in sales | 2006 | 2007 |
| % | ||
| Volume | +4.6 | +5.6 |
| Price | +0.5 | +0.5 |
| Currency | -0.2 | -3.6 |
| Portfolio | +12.3 | +9.3 |
EBITDA before special items climbed by 21.4 percent to an all-time high of €6,777 million (2006: €5,584 million). We thus achieved an underlying EBITDA margin of 20.9 percent, exceeding our target margin for 2007. HealthCare saw EBITDA before special items climb by 45.1 percent to €3,792 million (2006: €2,613 million). This was attributable to the gratifying business performance of all divisions, the inclusion of the Schering business for the full year 2007 and the synergies already realized from its integration. CropScience posted underlying EBITDA of €1,324 million (2006: €1,204 million). This growth in earnings was mainly due to higher volumes and cost savings, which more than offset the impact of adverse currency shifts on margins. EBITDA before special items of Bayer MaterialScience amounted to €1,606 million, which was below the prior-year level of €1,677 million. Here, significant price increases for petrochemical raw materials and energies were largely offset by higher volumes and selling prices.
Bayer Group EBIT before special items also reached a record level, advancing 23.2 percent from the prior year to €4,287 million (2006: €3,479 million). EBIT in 2007 was diminished by net special charges of €1,133 million, against €717 million in the previous year. Of the 2007 figure, HealthCare accounted for €928 million, CropScience for €130 million and MaterialScience for €75 million. Special charges of €683 million (2006: €273 million) related to the integration of Schering AG, €172 million (2006: €224 million) to our ongoing restructuring, €152 million (2006: €60 million) to impairments of intangible assets and €139 million (2006: €172 million) to litigation. Bayer Group EBIT moved ahead 14.2 percent to €3,154 million (2006: €2,762 million).
After a non-operating result of minus €920 million (2006: minus €782 million), income before income taxes came in at €2,234 million (2006: €1,980 million). The non-operating result contained net interest expense of €701 million (2006: €728 million) and a €69 million loss (2006: €207 million income) from investments in affiliated companies. Included in the prior year figure is a €236 million gain from the sale of our interest in GE Bayer Silicones.
After a non-operating result of minus €920 million (2006: minus €782 million), income before income taxes came in at €2,234 million (2006: €1,980 million). The non-operating result contained net interest expense of €701 million (2006: €728 million) and a €69 million loss (2006: €207 million income) from investments in affiliated companies. Included in the prior year figure is a €236 million gain from the sale of our interest in GE Bayer Silicones.
In 2007 we recorded net tax income of €72 million after a one-time, non-cash positive tax effect of €912 million arising in connection with the corporate tax reform in Germany. Without this one-time effect, tax expense in 2007 amounted to €840 million (2006: €454 million).
Income from continuing operations after taxes rose to €2,306 million (2006: €1,526 million), while after-tax income from discontinued operations totaled €2,410 million (2006: €169 million), mainly as a result of gains from the divestitures of the diagnostics business, H.C. Starck and Wolff Walsrode.
After minority stockholders’ interest, net income of the Bayer Group improved to €4,711 million (2006: €1,683 million). Earnings per share came to €5.84 (2006: €2.22).
Income from continuing operations after taxes rose to €2,306 million (2006: €1,526 million), while after-tax income from discontinued operations totaled €2,410 million (2006: €169 million), mainly as a result of gains from the divestitures of the diagnostics business, H.C. Starck and Wolff Walsrode.
After minority stockholders’ interest, net income of the Bayer Group improved to €4,711 million (2006: €1,683 million). Earnings per share came to €5.84 (2006: €2.22).
Gross cash flow increased by €871 million to €4,784 million (2006: €3,913 million), due to the gratifying expansion of business and the full-year inclusion of Schering. Net cash flow advanced by 9.0 percent to €4,281 million (2006: €3,928 million).
Net debt of the Bayer Group as of December 31, 2007 amounted to €12.2 billion, compared with €17.5 billion at the end of 2006. This substantial reduction resulted from the improvement in operating cash flow and from the purchase price payments received in 2007 for the diagnostics business, H.C. Starck and Wolff Walsrode.
Provisions for pensions and other post-employment benefits declined by €1.0 billion compared with December 31, 2006, to €5.5 billion, mainly due to the rise in capital market interest rates.
Net debt of the Bayer Group as of December 31, 2007 amounted to €12.2 billion, compared with €17.5 billion at the end of 2006. This substantial reduction resulted from the improvement in operating cash flow and from the purchase price payments received in 2007 for the diagnostics business, H.C. Starck and Wolff Walsrode.
Provisions for pensions and other post-employment benefits declined by €1.0 billion compared with December 31, 2006, to €5.5 billion, mainly due to the rise in capital market interest rates.
Fourth quarter of 2007
The Bayer Group continued its positive performance of the first nine months in the fourth quarter of 2007. At €8,040 million, sales were up slightly from the prior-year figure of €7,970 million. On a currency- and portfolio-adjusted basis the increase came to 4.6 percent. HealthCare sales rose 4.6 percent, CropScience 4.5 percent and MaterialScience 5.8 percent over the same period of 2006.
| Key Data by Subgroup and Segment, 4th Quarter | ||||||||
| Sales | EBIT before special items* | EBITDA before special items* | EBITDA margin before special items* | |||||
| € million | 4th Quarter 2006 | 4th Quarter 2007 | 4th Quarter 2006 | 4th Quarter 2007 | 4th Quarter 2006 | 4th Quarter 2007 | 4th Quarter 2006 | 4th Quarter 2007 |
| HealthCare | 3,782 | 3,800 | 461 | 584 | 796 | 922 | 21.0% | 24.3% |
| Pharmaceuticals | 2,698 | 2,619 | 263 | 367 | 563 | 670 | 20.9% | 25.6% |
| Consumer Health | 1,084 | 1,181 | 198 | 217 | 233 | 252 | 21.5% | 21.3% |
| CropScience | 1,302 | 1,321 | 0 | 43 | 142 | 177 | 10.9% | 13.4% |
| Crop Protection | 1,090 | 1,100 | (11) | 33 | 111 | 147 | 10.2% | 13.4% |
| Environmental Science/ BioScience | 212 | 221 | 11 | 10 | 31 | 30 | 14.6% | 13.6% |
| MaterialScience | 2,532 | 2,579 | 187 | 241 | 307 | 367 | 12.1% | 14.2% |
| Materials | 749 | 778 | 18 | 1 | 62 | 42 | 8.3% | 5.4% |
| Systems | 1,783 | 1,801 | 169 | 240 | 245 | 325 | 13.7% | 18.0% |
| Reconciliation | 354 | 340 | (26) | (94) | 13 | (44) | 3.7% | (12.9%) |
| Continuing operations | 7,970 | 8,040 | 622 | 774 | 1,258 | 1,422 | 15.8% | 17.7% |
* for definition see Bayer Group Key Data
EBITDA before special items moved ahead in the fourth quarter by 13.0 percent to €1,422 million (Q4 2006: €1,258 million), with HealthCare posting a 15.8 percent increase to €922 million (Q4 2006: €796 million), CropScience a 24.6 percent advance to €177 million (Q4 2006: €142 million) and MaterialScience a 19.5 percent improvement to €367 million (Q4 2006: €307 million). EBIT before special items climbed by 24.4 percent to €774 million. Net special charges came to €389 million (Q4 2006: €416 million), with HealthCare accounting for most of these items. EBIT for the fourth quarter came in at €385 million (Q4 2006: €206 million).
The Bayer Group had net tax expense of €149 million (Q4 2006: net tax income of €130 million) in the fourth quarter of 2007. This result was diminished by one-time non-cash tax effects. The prior-year figure contained one-time tax income of €203 million due to the first-time recognition of deferred tax assets for loss carryforwards.
Group net income in the fourth quarter came to €67 million (Q4 2006: €311 million). Earnings per share for the quarter were €0.11 (Q4 2006: €0.41). Gross cash flow improved to €1,021 million (Q4 2006: €761 million), while net cash flow dropped by 1.7 percent to €1,467 million (Q4 2006: €1,493 million).
The Bayer Group had net tax expense of €149 million (Q4 2006: net tax income of €130 million) in the fourth quarter of 2007. This result was diminished by one-time non-cash tax effects. The prior-year figure contained one-time tax income of €203 million due to the first-time recognition of deferred tax assets for loss carryforwards.
Group net income in the fourth quarter came to €67 million (Q4 2006: €311 million). Earnings per share for the quarter were €0.11 (Q4 2006: €0.41). Gross cash flow improved to €1,021 million (Q4 2006: €761 million), while net cash flow dropped by 1.7 percent to €1,467 million (Q4 2006: €1,493 million).
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