Bayer Aktiengesellschaft (BAYN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on September 30, 2020. [Operator Instructions] I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations of Bayer AG. Please go ahead, sir.

Thank you very much, Anna. Good afternoon, good evening, and thanks, everybody, for joining us on such short notice for a call on our just announced accelerated transformation program, followed by a short Q&A session. With me on the call right now is Werner Baumann, our CEO; and Wolfgang Nickl, our CFO. As it is late, I will cut it short and start right away by drawing your attention to the cautionary language that is included in our safe harbor statement that is included in the press release and other materials that we just issued, I think, about an hour ago. And with that, I will hand it over to you, Werner.

Yes, Oliver, and good afternoon and good evening to all on the call. Following the news that we shared earlier, I would like to start by giving you some background on our decision to accelerate our transformation and generate additional operational savings to address a challenging market environment, enable additional growth investments at the same time. I'm stating the obvious when I say that this year is extraordinary in many regards, impacted by an unprecedented pandemic that is far from over. And while COVID-19 has demonstrated the systemic relevance of our businesses, we also see substantial pressures in our key markets, which are hampering our growth. Let me first share our view on 2020. Like most companies, we see continued headwinds from the pandemic in 2020 that pressure our top line in the Crop Science and Pharmaceuticals division. However, with relentless focus on strict cost containment measures and the acceleration of existing efficiency programs, we can confirm the outlook for 2020 we communicated during our Q2 investor call in August. We continue to expect our core earnings per share to be at EUR 6.40 to EUR 6.60, including exchange rates at June spot rates for the second half of the year and EUR 6.70 to EUR 6.90 with exchange rates at prior year level. This is always against the background of the more detailed discussion we had in the Q2 call when it comes to the contributing effects to stabilizing our results for 2020, despite a fairly significant loss of top line growth in the year. Looking beyond 2020, we reviewed the midterm business situation as a part of our annual strategic planning processes. Clearly, from a macroeconomic perspective, the world has changed since we communicated our midterm targets in November 2018, and we do find ourselves in a new and more challenging operating environment. So I'd like to illustrate that division by division. We expect the COVID-19 situation to particularly weigh on our Crop Science business in the second half of 2020 and then throughout fiscal 2021, with diminished bioethanol and cotton demand in the U.S. has the potential to reduce acres planted in the coming season. We now expect a low-growth environment in the agricultural market in the near term, spurred by higher stock-to-use ratios in our key crops and competitive dynamics in the U.S. soybean market. Sales and earnings are also burdened by the tremendous currency developments, which impact our absolute earnings. For example, in the second quarter of this year, we saw a devaluation of 36% for the Brazilian real compared with previous year average. The negative currency development in Brazil will particularly weigh on the second half of 2020, as the majority of sales from Brazil is generated in these months to come. We expect these dynamics to weigh on the growth performance of our Crop Science business with corresponding downward pressure on earnings and cash flows. Against that background, we expect to take noncash impairment charges in the mid- to high single-digit billion euros range on assets in the agricultural business in our Q3 results. Let me emphasize that our company remains in the best position to shape the future of the agriculture industry. Our portfolio of crop protection, seeds and trades and digital capabilities remains unmatched. With game-changing technologies like Short Stature Corn and next-generation herbicide tolerance in soybeans on the horizon, combined with a leading digital agriculture platform, we remain very excited for the mid- to long term. Let's now move to our Pharmaceuticals division. While the COVID impact on our Pharmaceuticals business was most pronounced in the second quarter, the situation is expected to sequentially improve for the remainder of the year, and we anticipate that the business returns to growth in 2021. To ensure long-term growth, free cash flows will increasingly be invested in external research and development and in-licensing and also bolt-on acquisitions in order to further strengthen the pharmaceuticals pipeline and build a next-generation innovation platform. Lastly, the Consumer Health business is expected to sustain its good growth trajectory, and we expect that it will outpace peer growth in the coming years. Taking all of this in consideration, we now anticipate growth and cash flows in 2021 to be lower than planned and expected. We now do expect revenues for 2021 to be at 2020 levels, while core earnings per share for the group for 2021 will be slightly below 2020 levels, all based on constant exchange rates. As a consequence, we have decided to enhance and accelerate our transformation program announced in 2018. Measures will be defined to maintain our competitive profile, generate margin improvements, and free up resources for needed investments into innovation and growth as well as debt reduction. The annual savings from these additional measures are expected to be more than EUR 1.5 billion as of 2024 and may include additional job reductions. We will also look at selective divestments of certain brands and businesses below the divisional level and further optimize our working capital and also capital expenditures. Let me underline that just as in the past, we will implement the planned measures in a fair and responsible manner and after discussions with relevant internal bodies, including our employee representatives. In terms of capital allocation, deleveraging our balance sheet remains a key priority. Also our dividend policy, which targets a distribution of 30% to 40% of core earnings per share to share -- stockholders each year will remain in place. However, payouts in the coming years will be at the lower end of this corridor as compared to being at the upper end or even exceeding this corridor in previous years. Lastly, let me reiterate our commitment to investments in bolt-on acquisitions and in-licensing opportunities, predominantly in pharma, to build a next-generation innovation platform and bolster our pipeline. For Consumer Health, we will also selectively invest in external growth. We will provide our specific guidance for the upcoming year in the end of February 2021 when we publish our full year results for 2020 and also provide an updated midterm outlook at our Capital Markets Day thereafter. Despite the challenges we are facing, our company's potential for long-term growth and profitability remains intact as the need for innovative health care and agricultural solutions has never been more evident than now. Our Life Science business hold leading positions in markets poised for long-term growth, and we are well equipped to lead and transform our industries and help society take the major challenges. Over decades, we have demonstrated great resilience and the ability to evolve. And just as in the past, we will adapt to this new reality, act swiftly, secure future growth opportunities and contribute to our vision, Health For All and Hunger for None. With that, I will pass it back to Oliver to open the Q&A session.

Okay. Great. Thank you so much, Werner. Let us move to the Q&A, Anna, straight away. I think you can open up the lines for questions now.

[Operator Instructions] The first question comes from Mr. Leuchten.

It's Michael Leuchten from UBS. Three questions, please. One, just the timing, sort of the -- whether you could give some color on why now after the update you gave us for Q2. Second question is on the synergy targets, the updated synergy targets, the time line here for 2024. The -- so run rates -- runway to 2024, why have you picked that as a landing zone for the EUR 1.5 billion? And then a question for Wolfgang. On foreign exchange, your commentary for 2021 is on current exchange -- is on constant FX, where we stand today. Can you help us with what the FX impacts are for 2021, so we can try to work out what the reported number might look like?

Thanks, Michael. So on timing, this is, let's say, a situation where we much rather have you informed as part of our regular disclosure. But as things go, once we have seen that we have a situation that requires us to be right out there with you to tell you what we are seeing, we have chosen to do that tonight because we do have, #1, a -- not insignificant earnings challenge for the -- for the 2020 -- 1 year, and we reviewed the midterm outlook for our businesses as part of the planning process that has come to an end today and that has triggered the communication tonight. The outcome has been quite significant for 2021, while at the same time, we remain very, very confident and positive for the following years to come. And that has been the main trigger. And on top of that, with the lower growth environment in Crop Science, it of course has also led to the directional reassessment of our balance sheet values and a fairly educated perspective right now that is part of firming it up now in our quarter 3 closing. We will see that impairment in the mid- to high single-digits billion area. The synergy targets, the running programs are well advanced, all of them actually, and they have actually contributed more than expected also towards mitigating the situation in 2020. Just remember that we expected, you'll -- let's say, solid growth of about 4% plus this year, which show on our top line of EUR 40 billion plus means somewhere in the area of about EUR 1.8 billion to EUR 2 billion on a like-for-like basis, and we just don't have the growth due to the effects that have already been described. So making ends meet means contingencies and acceleration of existing programs. And then, of course, also things like your variable pay will be way down, yes. So that accrues back into the bottom line for 2020. And that has helped the situation in 2020. Now since our programs are accelerating, we are now sitting in 2020, looking at the next 3 years to come, which I think is a good time frame to seize the opportunity for further savings and adjust our infrastructure further to a lower growth environment actually across the entire value chain, yes? So there is no metric behind the 2024 number. It is just that 3-year perspective, yes, as it has served us well in framing the prior programs. And now we enhance, accelerates, yes, and also go into your further contribution pools with that EUR 1.5 billion target. And now, over to Wolfgang.

Yes. Let me, Mike, give you a little bit of color on the currencies. That's obviously, as Werner pointed out, highly, highly volatile. I'll tell you a little bit about this year and then an approach that you could use for next year. First of all, the EUR 6.40 to EUR 6.60 that we have reconfirmed today, I just want to reiterate that, again, that was on June spot rates. And if you go back to the investor deck back then, Page 13, for your reference, you'll see in the footnote that we assumed $1.12 for the U.S. dollar and BRL 6.09 for the Brazilian real. Those are the 2 major impact currencies. We have, of course, questions on Mexican peso, on Russian ruble, Turkish lira and so forth, but those are the 2 major impact currencies. So since then, we have seen these currencies go up and down. The U.S. dollar right now, as you know, is in the $1.17 range and highly dependent on what the U.S. election will do probably. The real has gone all the way to BRL 6.60, then it went back down to BRL 6.20. And now, I guess, it's at BRL 6.59 as of yesterday or something like that. So I -- we all need to be clear on that as we look at this year. What we have done in our statement where we looked at this year versus next year, our core EPS, and that led us to the statement that it will be slightly below our 2020 level in 2021. We used the -- our forward rates. That's the best way how you can predict what you have next year. Well, at the time, we use the 12-month forward, but you can also use the 8 months, and we will continue to give complete transparency as we go on that.

The next question comes from the line of Ms. Vosser.

A couple of questions, please. First of all, maybe a follow-up on that FX impact. I mean, just to help us, we can, of course, do some of the math, but that EUR 6.40 to EUR 6.60 is therefore lower than -- given where the U.S. dollar is, I would assume. So just your thoughts on that, maybe give us the absolute impact in euro millions or EPS points would be helpful. And then just a question on the Crop Science growth environment. Maybe thinking about volume and pricing, you call out price pressure on soybeans. But just -- you highlighted the acreage impacts, but your guidance of flat top line revenues at [ CER ] with Pharma and Consumer growing next year, it seems, would suggest that Crop Science is down. So could you talk about the magnitude, if you can, of the decline in volume through acreage of your major crops and how you see that picture in '21? And maybe thinking about beyond that, you said the growth would be improved. How should we think about that? And how -- what gives you the confidence, I suppose, '22 could be still a depressed level of impact? Hopefully not because of vaccines, but just your thoughts there. And then just one question on Pharma growth. Clearly, just to give us a bit of a dimension on that Pharma growth. Clearly, this year is depressed because of the impacts of COVID. So we're anticipating, I think, the market saw quite a big bounce back in pharma. Is that the sort of picture that you're seeing of significant sort of mid-single digit growth in pharma? Or any color there in Pharma would be useful, too.

Yes. So let [indiscernible] to Wolfgang and then I'll take your other 2 questions, Rich.

Yes. Rich, thanks for your question, and I hope you appreciate because it's changing every day that I can't link it to a specific number, but I want to help you with what we always say. If you look at our currency basket, a 1% change to the euro leads to about a EUR 350 million impact on revenue and about EUR 100 million impact on EBITDA. So you can see that there are quite significant move possible. And I want to -- on the flip side of that, of course, mention if we look at the U.S. dollar. When the U.S. dollar moves while it's -- when U.S. dollar weakens, it's a problem for us on the P&L. But of course, on the balance sheet where we have a lot of our debt in U.S. dollars, it actually helps us and they have the sensitivities. A 1% move is about EUR 200 million in debt level. I -- that's as precise as I can get today, but I hope it helps you, Rich. And over to you, Werner.

Yes. So first of all, on the overall growth. We have framed directionally so that you have some orientation of what to expect next year. Don't nail me on EUR 100 million or EUR 200 million on the top line, of course, this is, let's say, fairly preliminary and will be confirmed and then firmed up with much more specificity as part of our full year disclosure at the end of February 2021. Now when it comes to the growth environment, let me start with crop. I think if I recall the discussion during Q2, Liam already went into some of the drivers that we expect to have an impact, not only on the second half of the year, but also beyond. One of the things that he talked about was that we simply see less demand due to the COVID crisis. And the one specific example that was mentioned was the significant reduction on bioethanol production since there's a substantial reduction in mileage that is being driven. And that has done 2 things, and we see that to burden 2021 as well. Lower mileage, ethanol capacities are down, stock-to-use ratios are going up, price pressure on commodities, which will overall dampen the sentiment or in the agriculture market going into 2021. And we think that, that is going to be a transitional effect in that year before all of that washes out again. And hopefully, we'll get back to a more normal environment in 2022 and beyond, yes? So our clear perspective, also with the new launches that are coming, yes, Short Stature Corn, for example, is that we will resume growth in 2022 with a changed environment where that immediate COVID effect is -- has then vanished. So in terms of acreage and the specifics by crop, Liam can certainly shed some light, early-on perspective, quarter 3, certainly for the Southern Hemisphere. But overall acreage for full year fiscal 2021 would be shared as part of our annual earnings release and the guidance for 2021 in February. Now let me quickly come to pharma. Pharma was actually impacted, and we talked about it already in April, yes, and then confirmed that at the end of quarter 2 with a significant reduction of elective treatments, yes, that neared close to double-digit erosion of our top line in quarter 2. Now against that backdrop, we said that we expect our full year top line to be close to a level with 2019, maybe slightly below. But for that to happen, we have to see sequential return to growth over the remainder of the year. And that is exactly with the first -- we are not at the point of discussing quarter 3, yes? But you should assume that with the confirmation of our guidance today for the year that, that is one of the major contributing factors that. As a matter of fact, we do see that. Now going into 2021, we expect to, let's say, resume growth, yes. So that would be a typical V-shape recovery in that business. And then last but not least, just for completion's sake, of course, our Consumer Health business has quite a bit of tailwind, not across the entire product portfolio, but certainly in nutritionals, that has contributed to significant absolute growth, but quite frankly, also, a remarkably strong performance relative to where our peers are in 2020, and that will carry on in '21 as well.

The next question is from the line of Mr. Parekh.

It's Keyur Parekh from Goldman Sachs. Three questions, please, if I may. The first one is, clearly, what you are guiding to today or alluding to for 2021 represents roughly 14% to 15% delta versus where consensus is for next year. So I would be interested in your thoughts on where the difference between consensus and your planning assumption lies on a divisional basis? So that's question #1. Question #2 is, at the time of the Monsanto acquisition, you had guided to double-digit EPS accretion in the third full year. I was wondering in the context of what you are announcing today, if you can give us an update on where you think that accretion would actually end up being. And then lastly, as you look beyond 2021, if we look at the period from '21 to '24, in the context of your long-term plans today, how widely off the mark do you think consensus is? Do you think that underappreciates the V-shape recovery that you were just talking about? Or do you think consensus across the board is too high?

Thanks, Keyur. So first of all, it's, let's say, our perspective of our own plans that we have announced today, we know where consensus is. I would guess that the 14% to 15% that you're mentioning is -- it's about 10%, I guess, is what the number is. And of course, it's a combination of things. Growth expectations that underlie the consensus are different in 2021 compared to what we see. That is certainly a major contributing factor. We don't know which currency expectations and assumptions are baked into the consensus. So there's a little bit of tea leaf reading. Yes. I would assume that the major contributing factor, without going into each and every business, quite frankly, is that your net-net, will see a very different growth trajectory in 2021 compared to the one that is underlying the consensus. On the individual businesses, I think I've already covered that for 2021, that the V-shape recovery, I just want to make sure that, that is well understood, relates to our Pharmaceuticals business, yes? That's where we see that. Yes. So Consumer Health was not impacted. It continues this growth trajectory. It's actually a little bit better than we expected at the beginning of the year. And the market environment that really weighs on us and with it on the top line for the company going into 2021 is what I described for the Crop business. Maybe with the additional topic that I mentioned -- or I forgot to mention, there's, of course, the fiercely competitive environment in the soy market that contributes on top of that, which is not a reflection of COVID, quite frankly, but more the competitive environment with the dicamba and the strong Enlist platform that we compete against. Now in terms of the double-digit EPS accretion that we had guided for as part of our midterm aspirational plans in 2018, it's totally clear that, that is out of the question with a flat year 2020, yes. You just have to look at 2020 being a lost year, where the top line-related margin does not accrue to our bottom line. And with that, that is also going to be missing going forward, yes. And then the knock-on effect on the overall situation that I described, in particular for crop, will hold back our growth for 2021 as well. Now I'm not sitting here telling you that we can't do anything. We are very, very clear that we are addressing our cost structure in order to make sure that the lack of growth in 2020 and '21 does not drop down into our margin profile, yes, but that we do something to restore it, yes, and then move on further in improving it. The details for how that is going to pan out over 2021 through 2023 and '24 is what we would be sharing with you as part of the midterm guidance that we give once the work has been done, which means at the end of February with full year 2020 disclosure. Yes. And last but not least, maybe just to add that, as I mentioned, one of the reasons for being on the call today is that with the mid-term planning that we have concluded today, we see that your gap between where we think we are going to be in 2021 and where the market is, but that gap, you should expect, would close over the next years to come because that's also one of the reasons why we put all these measures in place.

Sorry, Werner. Just -- so just to clarify that last comment you made. Do you think the gap versus where your planning assumptions are versus consensus narrows beyond 2021? Does it actually close by the time you get to 2024 or do you still see a gap?

So what I can say, and maybe to help you a little bit, is that the gap we have in 2021 the -- narrow down, yes, and become a substantially smaller gap year. Maybe it can be even eliminated. I can't tell you right now, but you should assume that what we start with as a gap, 2 consensus in 2021, again, driven by a no-growth or very, very low growth environment that we see for our business in 2021. They will not carry through the entire period of our mid-term planning, but there will be measures in place to close that gap. And on top of that, beyond the cost measures and the structural measures, there will of course be growth contributions beyond 2021.

Growth [indiscernible] in 2021.

Yes.

The next question comes from the line of Mr. Favre.

Laurent Favre from Exane BNPP. Two questions, please. The first one, when we look at all the moving parts since Q2, I guess, on the ag side, if anything, we've seen a lot of good news on soft commodities, both on corn and soy. So I was just wondering if you could tell us a little bit more about some of the newer information you've had over the past couple of months, and in particular, around soy pricing. Are you able to share a rough idea of what you are doing with your price count for 2021? And the second question on the dividends. When you talk about being at the lower end of the range on the payout, does that apply as well for the 2020 dividend? So am I right that you are flagging that the dividend could be closer to EUR 2 than EUR 2.80?

Maybe on the first question, Laurent. Liam just stepped in, yes. Maybe Liam can address your question on the commodity price. And I would then ask Wolfgang to briefly talk about your dividend.

Yes, sure. Thanks a lot, Laurent. So maybe first, in general, because you started out as well, rightly so with second quarter results and leading now into the second half. And we pointed out in the second half -- in the second quarter that the biggest impact in the second half is actually the currency decline that we see of the Brazilian real, which has actually even gotten worse compared to the situation that we had in Q2. So that's the single biggest negative impact we have in the second half of the year, which also carries over into '21. I think that's really important. And the second one is simply, we have, of course, now all the true-ups from the third quarter. So we can see what's happened with corn and cotton, where there was first impact, let's say, lower -- clearly lower acreage than was originally expected. So that's come -- let's say, that's become a clear -- clearly apparent right now. And as we look forward to next year, given the overall bioethanol demand situation, it's hard to imagine that demand is going to pick up. So from an acreage point of view, we don't really see any expansion possibility there. And the third element that I think is really important to remember and Werner referred to it, we have this highly competitive situation in soybeans. And we're very confident that we will get our approval for XtendiMax in the fourth quarter. But reality is, we don't have it now. And as long as we don't have it, we can't sell product, and so we're already in selling season. So these all impact us and carry over into '21. And that's just the overall situation.

Yes and let me...

So, Liam, if I may just jump in. So when we hear that the guidance for the second half at group level is maintained and at earnings level, am I right that then from a divisional standpoint, it's a bit tougher on Crop Science compared to what you guided to in -- at Q2 level?