Bayer Aktiengesellschaft (BAYN) Earnings Call Transcript & Summary

Thanks very much, everyone, for joining us. I'm delighted that we have Bayer Consumer Health joining us at this conference for, I think, the very first time, but we very much hope that they will be regular visitors going forward. So joining me on stage, we have Bayer Consumer Health President, Julio Triana. We've got CFO, Magnus Schellnock. And we've got a Head of North America, Dave Tomasi. So look, thank you so much for joining us.

For those in the audience who are new to Bayer Consumer Health, can you tell us a little bit about your portfolio? What are the key brands? What categories do you participate in?

Yes. Thank you so much. And thank you so much for the invitation. Actually for us, it's been a pleasure. We know we're one of the -- this is the first time actually they were in this conference, and it's actually been very rewarding. We've met with a few of you, I can see some of the faces. And also, we recognize that there is a lot of let's say, that we need to be better known with some of you. So yes, so we have a business that's about EUR 6 billion. So we are on the top 5 in terms of revenue in the industry of consumer health. It's also a business that has been running pretty well in the last few years. So we have a -- we've had a CAGR since 2018 into 2023 of about 6%. And it's a business that's actually been running at a pretty good profitability. We've increased the profitability by about 330 basis points in that same period of time. And how do we manage to get there is we have a pretty good portfolio, which we believe is very balanced in terms of the different categories in which we play in. So you need to think about 1/4 of that business is dermatology, another 1/4 of that business is VMS or nutritionals. And we're also in allergy, cough and cold, pain, digestive health, and that makes the rest of the portfolio. That is from a category perspective. From a geographical perspective, we have the largest part of the business is in North America, specifically in the U.S., it's about 40%. That is one of the reasons why Dave is here with us as well to answer any questions that you may have about our operations here. We also have a very large presence in Europe, in Europe and Middle East and Africa, that's about 38% of the business, and it's growing very well, actually. And there, our growth is coming mostly from dermatology as well as nutritionals. And then the other 2 parts of the business, the remaining is very evenly balanced between Latin America, where we have a very strong brand recognition as a company Bayer and also a lot of our products, and Asia Pacific, which is about 13%. So that's more or less the lay of the land in terms of the business. As you guys probably know, we have guided for this year to be somewhere between 3% to 6% in terms of top line growth and the profitability to be somewhere around 23% to 24%.

Thanks very much. And Julio, you took over as CEO of Bayer Consumer Health earlier in the year. Can you talk a little bit about your skill set, what you bring to the business, and what impressions you have of it since arriving?

Yes. So you could say, I have been a Bayer person for most of my professional life. So I've been with the company for 22 years. I actually started in Bayer. My first division was the Consumer Health division. So for me, it's coming back to the division. I spent the rest of the time I spent in Pharmaceuticals. I was my last job in Pharmaceuticals, I was responsible for Region International, which is basically the specifically the entire world with the exception of the U.S. and China. So everything else was within that region. It was about 50% of the business, driving the majority of the profitability actually of the pharmaceutical business. So when the opportunity came up and I jumped on it, for me, as I said, is coming back to the business where I started. So what I bring to the table is I've been managing businesses across the world. I have lived and worked in 4 continents, started in Latin America, also worked here in the U.S. The last couple of years have been in Asia Pacific and about 15 to 17 years in Europe.

And what do you make of it thus far?

It's great. As I said, what I found, it's a business. It's great, actually, to come back and be able to taste your products. So these are products that -- you cannot taste the pharmaceutical products or, God forbid, that you have to do that. But no, it's -- we have very good products. So we still have -- it is incredible the resilience of these products. You have brands like Claritin, Aleve, Aspirin, One A Day. Those are the ones that you have here. Berocca, Supradyn, in all these categories, just to name a few. For those of you Europeans, Bepanthen and Canesten, which are very strong in other parts of the world. So I found those products continue to grow, as I mentioned in the last few years. I also found, and this is one of the strengths that we have, my predecessor did a pretty good job at attracting some really good talent coming from CPG. So we have people that have come from those companies. So we -- even though we are a consumer health business within a conglomerate and sort of having this pharma legacy, we have a very strong expertise in consumer health. And I would even venture to say that maybe compared to one of our other competitors out there, we're probably the purest consumer health business, even though we are part of a conglomerate. So we have people like, for example, Dave, who joined us. Maybe, Dave, you can say something about yourself and your background.

Yes. Hello, everyone. So yes, so my background is I've got 27 years in CPG, the last 14 of which in OTC industry and the last 5 of which at Bayer. So I was part of the group that came in early 2019 when in the prior years, the business was not performing well, we needed to turn around the business and deliver that 6% CAGR that you've talked about up until now. And it really comes back to -- we keep talking brands, the brands to brands. And it really does come back to that. The portfolio of Bayer brands is extremely strong. And when you think about the growth potential of these and the categories in which we compete through the retail partnerships that we have, we really have really just a great asset to work with when you think about our portfolio. So you can bring the fundamentals of CPG to OTC medicine for brand building to our supply chain to our retail partnerships, and that's what it's going to take to grow the brands now and in the future.

Yes. So thank you, Dave. And so that -- so the products, the people, and in terms of the future, it's a business that we continue to invest in innovation. So we have probably when you take a look at how much we invest in R&D is probably at the higher end of companies compared to ours. And where do we invest that? So we have been known for doing Rx-to-OTC switches. When you take a look at the majority of our portfolio has been Rx-to-OTC. Dave will talk a little bit more later about the latest one that we launched here in the U.S. So we continue to do that. We scan the market continuously to see what is out there that we can switch because we're well positioned. We have the capabilities to do so. And we are continuing to invest in our core business, in our core brands and our core products. We know that even though they have very strong brand equity, we need to continue to keep them interesting, that we need to continue to deliver benefits through to our consumers. So that level of investment will fuel the future. We have a couple of opportunities as well. So we believe that we're under-indexed in terms of the opportunity, for example, in Asia Pacific. We've taken steps with that. So we used to run our business in India, for example, was run by a third party. We took that over. And last year, we grew around 50% of the business, and we expect that we continue to grow maybe not at 50%, but definitely like this year, around 25%. We have a strong presence in China, and we have a very healthy business that will continue to grow. We believe that in this year and maybe the years to come, if everything goes well, we should be at around high -- mid- to high single digits. So the, let's say, the actuals and everything that's happening is good, very strong fundamentals. It's a good base to grow the business. And I think we have a very good future in front of us.

And just thinking about that growth trajectory of the business, how fast do you think end markets grow in a normal year? How fast do you expect to grow medium-term? Where should we expect to see margins trending in the future?

Yes. So I'm not giving an official guidance now for the...

Off record. No one is listening.

No one is listening. No. So this year, we said in our guidance out there for the business is that we would be somewhere between 3% to 6% growth. As you know, the market projections have slowed down. And right now, the market is looking more like towards 4% growth in average. But our aspiration is not only this year but continuing to be -- at least be able to grow with the market. So that would be our aspiration in terms of top line. I mentioned that the business has done a significant expansion on the bottom line, 330 basis points in -- since 2018. We don't expect that, that continues to be the trend. And the reason for that is we want to continue to reinvest in the business. One of the things that we see that are fundamental when you're building brands and keeping the brands up to date, you need to invest. You need to be able to generate demand. That is important not only for us, but it's also important for our retail partners. In doing so, you also need to invest in R&D to be able to keep the products interesting and bringing benefits to consumers. So that would require some investment. We will continue to expand our profitability but not as significant as we've had in the last couple of years, I would say, somewhere around 20 to 30 basis points per year.

And perhaps talking specifically about North America given that we've got Dave with us, can you share some thoughts on how the market is developing here, how the consumer is holding up, how do you expect your business to do? How did it do in H1? How do you expect to do for the full year? If you have any conviction on '25, it's probably a little bit early, but if you have thoughts, we'd love to hear them.

Yes. So, so far this year, we've been outpacing the market when you look at total omni, total results all in. And the consumer has been pretty resilient but we've seen the pricing that the market has taken have an impact. And so we are stepping back to really understand what is the value of our brands, what are -- how do you -- what are the benefits we provide with the price that we charge and really making sure we have a good handle on that across our portfolio. We also expect that in the back half of the year, we're going to see our volume sales pick up, right, as we have more innovation that has recently launched in categories like Digestive Health with Iberogast. We've gone into new forms in cold and fluid, another Alka-Seltzer digestive health brand. We've gotten into new benefit spaces with One A Day and we're getting into new forms of liquid allergy with Claritin. So all of those have launched over the last several months, and we expect that we're going to continue to see the benefits of those through the end of the year. And so we expected our volume sales are going to pick up as we move through the year. As we go into 2025, we've got to keep building on this innovation. We're launching into new spaces in nutritionals. We expect to expand that further. And then the initiatives that we've launched so far, we're going to continue to invest behind them, things like Iberogast and Astepro, which is a switch that Julio spoke about. It's important that we land these very well in the market, establish them as credible parts of our portfolio going forward. And so we're going to continue to invest in those through the back half of this year and into 2025.

And just looking elsewhere in the world, where are emerging markets at for your business and categories. You mentioned the 50% growth in India last year. I suppose our general sense is that emerging market penetration in consumer health is well below other categories and that really putting consumer health -- global consumer health brands into markets like China and India is just getting started, but I'm not sure how far you feel that is.

We shared with you. It's a huge opportunity. And it is one that in our projections, we also need to balance. We need to make sure that is our aspiration as a company, Bayer. You guys probably have heard, we have a vision that we want health for all, hunger for none. And that really means all and not only the people that can pay for our products, but really everyone that can access our products. And we're trying to do that as much as we can. You probably have heard, we currently -- so the world has 8 billion people. Right now, we measure how many consumers we get just from consumer health. That's not counting the Rx business. It's about 650 million people that are buying our products. A couple of years ago, and that is public, we said we have the ambition to reach another 100 by 2030. We recently said, okay, is that enough of an ambition? And what can we do to expedite that? And so then we recently said, okay, we want to reach billions of people. And we want to do it as quickly as possible. And what that would require is that we make our products accessible in parts of the world that have low income. And we would need to price our products accordingly to be able to drive this penetration in those markets. Interestingly enough, and this is the question that you always have, would that have a significant impact on the margins? Actually, we have not seen that. The margins in those markets are very competitive to what we see in some of other parts of the world. So we don't see that, that's going to be a significant impact, and we're going to continue to drive that. So we talked about India. And we -- this 50%, of course, is from a very low base, but the opportunity is huge. And what we also have in India, we have very, very strong brands. I don't know if anyone is very familiar with the business here -- with the business in India, but we have a brand like Saridon, which is a little bit like where Bayer is here in the U.S. or what Aspirin is in a place like Latin America, very, very strong. And it's a brand that actually we can leverage to bring other technologies and formulations and so on and sort of expand that. So India, we continue to be very bullish about. There are markets that we call ASEAN, markets like Indonesia that has a very, very large population. It's, I think, the third largest population in the world, if I'm not mistaken. And we have markets like Vietnam, where we're also growing significant. So emerging markets is it's a huge opportunity. I don't know if we can call China an emerging market. I gave you -- I shared the numbers of -- for China. But then we also have some other markets in Latin America. In Latin America, as I said, it's a stronghold, markets like Mexico, the Andean region, perhaps where -- Argentina is a huge opportunity for us. In Argentina, we have the brand recognition that we have in Argentina, which we had in many other parts of the world. The consumption of Aspirin in Argentina, I think, is the largest per head, per inhabitant of any part in the world. So the opportunity is huge. If anything, an opportunity for us will be Brazil where it's a market that's very competitive. There are lots of local players where we can do a better job, and it's an opportunity for us. But yes, emerging markets for us is huge. I'm sorry, let me just finalize that. We have presence in all of these markets. And that is one of the things about being part of the group, being part of Bayer. We have operations in about 170 markets across the world. So at any point in time, if there is an opportunity, if we come across a local pearl or a brand that we want to acquire, it's very easy for us to move because chances are our pharmaceutical business or Crop Science business is already there. So it's a huge opportunity for us.

And just looking at it through a category lens, where do you see the most compelling growth opportunities medium term? And what -- looking at your kind of global business, is it VMS that you think is the most exciting? Or is it derma? Or what are you really driving for medium term? What are the levers you can pull to make that happen?

Yes. And it's interesting because we drive a global business. But we see -- it depends, basically, that would be the answer. It depends on the portfolio. So for example, if you ask me specifically for Europe, derm is a significant growth for us. And we have been growing double digits this year in Europe, and we will continue to do that. VMS is as well a very good opportunity, as well as digestive health. When you talk about, for example, Latin America, we're driving significant growth in pain and cardio in Latin America. It's probably one of the strongest places where we have significant growth. Dave will talk -- and maybe, Dave, if you can say a couple of the growth areas in Latin -- in North America, and then I'll move to Asia.

Yes. In North America, some of the categories that are growing the fastest for us is digestive health. Our MiraLAX brand, our Alka-Seltzer original brand does extremely well. VMS with our One A Day brand continues to grow very strongly, as does cough, cold, flu as we think about Alka-Seltzer Plus and the innovation that we've just brought. But then a brand like AFRIN, which is growing at double digits as consumers move into the sinus space within cough, cold, flu, sinus, those are all the ones that are really growing our business, not to mention allergy as we complement Claritin with Astepro.

Yes. So as I mentioned at the beginning, we have a very balanced portfolio in the different categories. But the ones where we see this growth is, for example, Digestive Health. Digestive Health is something that's working really well here in North America but in also other parts of the world. So Digestive Health, pretty much without exception across the world, there is a need for that. So there's this move or the strength of people managing their health and being more cautious about what they eat and so on and we're playing into that as well. And that is the Digestive Health. But there are other areas like, for example, sleep, stress that we believe are becoming more and more important. So these are some of the areas that we're looking into.

I suppose -- Yes, I guess I'd be interested just is Digestive Health the sort of GLP-1 beneficiary from consumer behavior? And then just more generally, when you talk about people managing their health, that to me suggests vitamins, minerals, supplements, like kind of VMS category. I think one of the big debates within the consumer health space at the moment is, is VMS actually a good category or not. And like some would say there's kind of endless [indiscernible] drive penetration and you don't have the regulatory constraints of OTC. And others say that there's just a lot of competition clogging up the shelves with claiming who knows what. And does the consumer really differentiate between those OTC multivitamins? And I'm just fascinated to hear your take on it.

Dave, if you want to.

Yes. I guess I come back to -- there are a lot of brands in that category. It's extremely competitive. And it seems like each month, you look up and there's another brand that's entering the category. But as many have come into the category, a lot of them have left. And to me, what really remains are brands with strong equity. And so that's why we look at a brand like One A Day as a brand that can move into other benefits spaces because of the equity that it has with consumers. So that's how we look at it. So we actually are looking at the nutritionals category as one we want to continue to grow, we want to continue to innovate. You talk some of the benefit spaces that consumers are gravitating towards, things like stress, aging well, sleep. These are all areas that we think like a brand like One A Day can stretch into in the future.

Yes. And to your question on Digestive Health in the GLP-1s. We're seeing a trend developing there. And it does have an increase, especially in markets where GLP-1s are having penetration, especially namely the U.S. Yes.

And just to move around a little bit. I mean e-commerce has traditionally been a channel that consumer health companies have really struggled with, but this seems -- I think this is somewhere where you're doing reasonably well, especially in VMS. Can you talk a little bit about what you're doing in e-com, what you're doing with digital?

Yes. So I'll start off. But then Dave is really the master of that success in e-commerce because primarily it's coming out of the U.S. But I mentioned it in our rounds, yes, you're right. So we have been very successful in e-commerce. We're also trying to shape the other markets other than the U.S. in terms of e-commerce and into these sort of first movers and also support our partners, commercial partners, there as well in places like Europe and even Asia, Asia without China. China actually is a little bit further ahead than the rest of the world in terms of e-commerce. And a lot of learnings also we take from China in terms of how that is working. But Dave, maybe you can expand in terms of what we've done here.

Yes. What's exciting about e-commerce for us is about 3 years ago, we made this a deliberate strategy for our business. we saw that the consumer was going online more often than they were in the past as delivery times went from 2 days to 1 day to 1 hour. Now it's 30 minutes, right? So a lot of treatment brands, some of which we have, now become considered -- are in the consideration set for consumers through e-commerce. So we really focus on that to make it a strategy that we would win with going forward. And it's beginning to pay off. So to date, this fiscal year, our e-commerce business is up 52% when in the industry, it's up about 20%. And that doesn't just speak to Amazon. It also goes to our retailer.com partners. And it's really come through several strategies. Number one is top-to-top engagement with all of these key players. We want to make sure that we understood their strategies for growth, which is really moving very fast and how do we connect our strategies. Second, we need to have the right portfolio. If you look at our portfolio 4 years ago versus what it is today, we've actually shrunk the portfolio online because we got rid of those products that really didn't matter and just were clogging up space and getting to the products that truly matter that would drive the biggest velocity on e-commerce. And then we had to get our logistics strategy correct. So making sure that the way we deliver products, how we are packaging products to make them more efficient as they move through their systems, how we build interconnected supply chains. This was another area that we really focused on. So we -- it's that and much more, but we see e-commerce as a strategy for us that we don't intend to let up on. The consumer is moving there, and she's going to continue to move there. And we've got -- we want to be there and win there. And so far, it's working well.

Cool. And look, just in terms of the strategic position for Bayer Consumer Health, you're here at a consumer conference. I guess parent Bayer is a little bit different. So can you perhaps remind us where things are out there. I know that parent Bayer did a sort of strategic review earlier in the year and ruled out immediate separation, but perhaps left the door open down the road. Is that a kind of fair summation? And how should we be thinking in terms of time frames?

Yes, it's fair. Actually, in our rounds today, the first question that came up was are you guys here because you're selling or you're putting the business up for sale? And...

Well, are you?

That was exactly what we said. Don't read in between the lines. It's not -- that's not happening. And you're right. So when Bill Anderson came in, he owed it to our shareholders to take a look at the composition of the business. And there is this sense of you have a good business at hand, you have significant debt, are you thinking about disposing of the business? And after doing a very thorough analysis with third parties and you name it, we said no, and not now. But we also said, it doesn't mean that not never. And we, at Bayer, we're always looking at making sure that we are the best owner for the business we have and the businesses we have. And we continue to believe that Bayer is the right owner. I was explaining to some of you during our conversations that we have all the freedom that we need to be able to operate. We are really a truly consumer health business operated by people that have the right capabilities to run a consumer health business. We do not have any barriers or -- that you would have associated with having a pharma legacy. And in fact, I explained to many of you, we're hypersensitive to make sure that, that doesn't get in the way of us being agile, us being able to bring what the consumers need when they need them and as fast as possible. And then that also gives us the opportunity as well to be bold, take risk because we are part of a company that has bigger pockets. So we're not here to sell the business. We are here also to contribute to the knowledge that is being created about this consumer health industry that is shaping and also to learn from what is being discussed by our competitors.

And Julio, we also got the question about capital allocation whether it's sufficient or not. We can confirm it's sufficient. If you look at the categories of M&A bolt-on, could we do it in the last 2 years? Yes, we could. If you look at CapEx levels, they're absolutely sufficient in the range of net sales. If you screen through our P&L, the way we invest in [indiscernible], however you call it, but also R&D, as you mentioned, it's absolutely competitive.

And just thinking of that...

I hope that answers the question.

Yes, absolutely. I mean just thinking about that broader strategic landscape, I guess consumer health looks very fragmented versus other consumer staples categories. Do you see scope for further consolidation medium term? Would you potentially have appetite to play a part in that medium and longer term?

Yes, definitely. We also see it in that way. So as I mentioned, since we're running a consumer health business, we're also scanning the market and figuring out are there opportunities, opportunities in terms of are there areas, geographic areas that we can get into and where you have local pearls that maybe can complement our portfolio. Are there products or companies, smaller companies, that are in one of those areas that we talked about where we see that there is increase in demand and where consumers still need some help and there are unmet needs. So we continue to scan for those. Now if you -- we're not looking at the big ones, we're looking more smaller sort of like bolt-on acquisitions and so on that we can bring into our portfolio. We've done a couple of them. Maybe, Magnus, if you want to talk about those in terms of...

We did invest in Europe in GloryFeel, an e-commerce business that is very scalable and has also leading positions in Amazon. A bit back because you talked about it, Iberogast, we bought from Steigerwald. We did Maty's acquisition in U.S. for naturals. So a series of smaller bolt-ons, but that presenting a very nice addition to the portfolio.

Yes. So we will continue to take a look at those. Don't expect us to get something huge or -- but the smaller ones, we are definitely interested on.

Well, I'm conscious we've just got a couple of minutes left. So I don't know if there's anything we should have talked about that didn't or perhaps if we've got a roving mic somewhere, perhaps we can take a couple of questions from the room, if there are any from the room. Or if you've got any -- you're here at a consumer conference, have you got any questions to consumer investors?

I don't know, are there any...

Any questions from the room?

Yes. There seems to be one there.

Thank you. The consumer is increasingly worried about the components even of OTC medicines, like you have all these red dyes and you don't have this in Europe, whereas we do have it in U.S., but like Free From is a trend of some pain medications or products. And there's innovation that's happening, like a brand like Genexa, which is very strong. It's -- and you're getting like a premium for Aspirin or getting premium for Tylenol like 4x because it's basically Free From. Are you doing any innovation in that space to basically take growth essentially or take advantage of growth of consumers who are not really that keen to have things, additive, in their OTC medicines?

Yes. So we're always very careful in making sure that whatever we put into our products is something that is safe and that is efficacious, be it what it may be. So let's say as a blanket answer, it would be yes. This is something that we consider all of the time. Nothing really specific in terms of the areas that you mentioned. But yes, this is something that we consider all of the time. I don't know if you want to follow up.

And I think increasingly consumers are not trusting the regulators like the FDA, in a sense, that basically people are taking their health in their own hands. You mentioned that there are certain trends for that, whether it's for food or whether it's basically for OTC medicines. And they're looking into these trends of longevity, biohacking, these are all really big sort of trends that are just starting out. And I don't really see that many companies are really taking advantage of that. And again, maybe it's considered safe by the FDA, but it's not considered safe, for example, for me to give to my kids if it has like red dye or all the junk that shouldn't be in there. And it drives me crazy when I go to Europe and I look at the same product on the shelf, and it's clean. And in the U.S., it's not.

Yes. So one thing I would build on to this in innovation, you're absolutely right. And so, yes, we are working on several innovations. And you touched on something which is important that it's right to do for all consumers, but for parents of children, that's where it probably is most pronounced. I can't go into the innovation that we're bringing in the future, but you can expect that kind of the free of idea that you've raised is something we have definitely been watching, and we know that innovating in that space, especially when it comes to children, makes the most sense.

And if I can add, so we're always very respectful of the regulatory bodies in the different countries where we operate. And you're right, there are -- some markets have more restrictions than others. But we internally, we always want to have science-backed claims and products that we can really defend scientifically. And so maybe I'll just leave it at that. We put our own filter and we make sure that this -- that everything we bring to the market is scientifically proven, that we can make the claims that we're making and that we have the data scientific data to be able to back those. And if, let's say, a product makes it into one market and another one not is because we're very respectful of the regulatory authorities in the different markets.

All right. I have one more. When you think about -- you talked about e-commerce in the U.S., what about e-commerce in Europe? We have -- it's launched. It's really actually, especially the big market like Germany, now you'll be able to do eRX. But OTC has been there for a while, but this eRX could actually accelerate the basket sizes and the penetration of European consumers in like Central Europe. Are you doing anything to take advantage of that?

Yes. Magnus, do you want to expand?

Yes. The acquisition we also did is actually geared towards the German market with GloryFeel, which in the e-commerce and the nutritional and dietary supplement area with a strong focus in Amazon. And therefore, yes, we are also strategically interested to expand this further there. And yes, there are always certain market specifics. We have e-commerce success in U.S. We start now expanding this strongly in Germany. But also China, for example, is a big, big e-commerce market.

Yes. So that's what I mentioned earlier, that because Europe is such a stronghold for us, it's our home market, we're also shaping the market because you're completely right. It's a bit behind in terms of e-commerce. And for us, this is a significant growth opportunity. That is what we're doing in terms of bringing these bolt-ons, but also, as Magnus mentioned, the learnings from China and the U.S., which are the markets that are more advanced. So significant opportunity, one that we're leveraging.

Any more questions in the room? Cool. Okay. Well, thanks so much, everyone, for joining us. And thanks, Bayer, for joining.

Thank you. Thank you very much. Thank you for inviting us.

Thank you.