Bayer AG

XETRA:BAYN

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on the First Quarter 2019 Results. [Operator Instructions] And I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations of Bayer. Please go ahead, sir.

[O. Maier, Head of Investor Relations]

Emma, thank you very much. Good afternoon, and thanks, everybody, for joining us today. I'd like to welcome all of you for the first quarter 2019 conference call. With me on the call today are our CEO, Werner Baumann; and our CFO, Wolfgang Nickl. And the businesses are represented by the responsible Management Board members, as we have Stefan Oelrich for Pharma; Heiko Schipper for Consumer Health; and Liam Condon for Crop Science. Werner will begin today's call with an overview of the key developments and performance of the divisions. Wolfgang will then cover the financials for Q1 2019 and the outlook as well as the key focus areas for 2019 before we open up for the Q&A session. [Operator Instructions] I'd like to start the call today by drawing your attention to the cautionary language that is included, our safe harbor statement as well as in all the materials that we've distributed today. And with that, I'd like to hand it over to you, Werner. The floor is yours.

[Werner Baumann, Chairman of the Board of Management & CEO]

All right. So thanks, Oliver, and good afternoon also from my side, ladies and gentlemen. It's my pleasure to welcome you to our conference call today. With that, I'd like to discuss our performance in quarter 1 2019. We have had a strong start to the year. Sales grew by 42% to EUR 13 billion, mainly driven by the acquisition, and EBITDA before special items increased by 45% to EUR 4.2 billion. Our core EPS reached EUR 2.55, up 14%. And finally, our free cash flow generation was strong and almost doubled to more than EUR 500 million in the quarter. With these results as a backdrop, I'd now like to give you an update on our 2019 focus areas. Let's begin with target delivery. Given the strong start to the year, we are on track to deliver our guidance for the full year 2019. In Crop Science, I can also assure you that the integration is well underway. We have secured business momentum and continuity as demonstrated by the earnings development in a truly challenging quarter 1 environment. In addition, we are on track with the functional IT and country platform integration. And on top of that, market feedback on our organization and customer-facing activities continues to be very positive. Our Pharmaceuticals business has continued its profitable growth path, and we have completed the FDA inspection in March. In Consumer Health, we are seeing the first positive results from the Fit To Win efficiency measures and confirm the guidance we have given for the full year 2019. At the end of November last year, we announced a comprehensive set of efficiency and structural measures from which we expect annual contributions of EUR 2.6 billion as of 2022. By now, we have defined further details of the implementation and we are on track to deliver the contributions we have guided for. The goal of the Bayer 2022 platform program is to reduce annual costs for our corporate functions, business services and country platforms by EUR 1.4 billion. Clarified accountability and reduced complexity allow for leaner structures. We expect that the program will affect approximately 7,000 positions globally, leading to total cost reductions of around 25% in these platform functions. Finally, I'm pleased to confirm that we are on track with the portfolio measures we communicated also at the end of last year. With regard to the timing of the potential disposals, the current status is as follows. The divestiture process for Currenta is the most advanced and we expect news in the current quarter. With regard to the sale of Coppertone and Dr. Scholl's, we anticipate one announcement in this quarter and one in the second half of 2019. Finally, as we promised, for the planned exit of Animal Health, our primary focus is on a sale while we continue to consider all value-maximizing options going forward. The separation, carve-out and preparation work is ongoing, and we target the signing of this transaction towards the end of this year. Let me now come to our divisions. In Crop Science, we achieved a significant year-over-year improvement in both reported sales and EBITDA, of course, also driven by the acquisition. Around half of the 6% sales increase after adjusting for currency and portfolio changes was related to service agreements with BASF on divested businesses, positively affecting our turnover in Latin and North America. In the EMEA region, sales increased slightly, with Insecticides registering double-digit growth, partly due to favorable weather conditions and product launches. On a pro forma basis, despite a challenging ag environment, for example, with the floodings in the U.S., sales of the combined Crop Science business were essentially flat. Good growth across Herbicides, Insecticides, Environmental Science and other, which was mostly cotton driven, was offset by a decline in soybean seeds and trait sales. The decline in soybean sales was primarily driven by the previously mentioned phasing to previous quarters in Latin America as well anticipated lower planted acres and competitive dynamics in the U.S. Corn Seed & Traits sales were essentially flat, with sales growth volume from anticipated higher planted acres in the U.S. and EMEA being offset by weather-related phasing into quarter 4 for Brazil and unfavorable trait mix in the U.S. as well as some flooding-related shifts to the second quarter. We are also pleased to share that we remain on track for the 60 million planted acres of our Xtend technology across soybean and cotton and 90 million paid acres of our climate view -- FieldView in 2019. In addition, we have plans in place for growers to experience XtendFlex soybeans this summer through approximately 40 XtendFlex Ground Breaker locations, show plot locations, learning centers and various field days. We continue to target a 2020 launch date, pending regulatory approvals, for this next generation of herbicide-tolerant technology in soybeans. From an earnings perspective, Crop Science more than doubled its EBITDA before special items to EUR 2.3 billion, mostly as a result of the acquired business and inclusive of negative FX effect of EUR 67 million on the legacy Bayer business. Finally, we also have good news on synergies as we remain on track to deliver on around 25% of the targeted EUR 870 million of cost synergies for 2019.Lastly, let me briefly update you on the glyphosate litigation, a topic that, of course, continues to be top of our minds and probably also for many of you. First of all, we are and continue to be convinced of the safety profile of glyphosate. Overall, there are now served lawsuits from 13,400 plaintiffs as of April 11. While this is an increase since our last reporting, it is by no means a reflection of the merits of the litigation. With regards to the Johnson trial, we have filed our first brief in the appeals process, and we are also preparing for post-trial motions for Hardeman. So what is ahead? The Pilliod case is ongoing in Alameda County and should conclude in early May. We currently expect another 4 trials in 2019, starting in the second half of August. Note, however, that the number of trials and the respective dates are always subject to change.We believe that we will ultimately prevail in this litigation on the strength of sound science and remain committed to vigorously defending ourselves for the benefit of our customers, employees and of course, our shareholders. For more details, don't hesitate to access our website that we continue to update with all relevant information.Moving on to Pharma. Sales of Pharmaceuticals rose by 5% to EUR 4.4 billion in Q1 2019. Our best-selling products, Xarelto and Eylea, have continued their strong performance as well as our business in China, the latter being up by 24%. Xarelto, our oral anticoagulant, grew by 15%, driven by higher volumes in China and Japan as well as in Europe. Our license revenues, recognized as sales in the U.S., increased by 4% to EUR 87 million. Eylea also posted considerable growth of 15%, mainly as a result of volume increases in all regions. The business developed particularly well in EMEA, China, Asia Pacific and Latin America. Going forward, we expect both products to continue their growth paths. And in 2019, we continue to expect for Xarelto, an increase in the low-teens percentage range and for Eylea, an improvement in the high single-digit percentage range. In Q1 2019, there was also some encouraging product news. Following a strong efficacy and safety data set for darolutamide, which significantly extends metastasis-free survival in patients with non-metastatic castration-resistant prostate cancer, while at the same time, demonstrating a very favorable safety profile, we have submitted applications for marketing authorizations in the U.S., Europe and also in Japan. For Vitrakvi, a highly effective and innovative cancer medication, and LOXO-195, we have secured now full global rights upon contractual change following change of control at Loxo Oncology. Finally, due to the strong sales growth and lower cost of goods sold, EBITDA before special items was up by 7% to EUR 1.5 billion despite a negative FX impact of EUR 44 million.Let's now move to Consumer Health next to close out the divisional update. The performance of Consumer Health in quarter 1 was in line with our expectations for 2019. When we reported full year 2018 numbers about 2 months ago, we mentioned the growth in 2019 would be back-end loaded. We anticipate the coming quarters to gradually strengthen and confirm our full year guidance. We have seen a positive development in Asia Pacific and Latin America, particularly in Asia, where sales grew by more than 14%, but continued intense competition in North America and supply disruptions in the EMEA region prevented a better performance. EBITDA before special items was down due to lower volumes, higher cost of goods sold and the missing contribution from the divested U.S. prescription dermatology business. In contrast, the Fit To Win efficiency measures have positively contributed to earnings. And with that, let me now hand it over to you, Wolfgang.

[Wolfgang U. Nickl, CFO & Member of Management Board]

Thank you, Werner. Ladies and gentlemen, also a warm welcome from my side. I will now walk you through some more financial details for Q1 and then address our guidance for the fiscal year. Our Q1 results have been positively impacted by the acquisition. Reported sales increased by 42% to EUR 13 billion, including a substantial contribution from our newly acquired business. The underlying business performance was good. When adjusting for currency and portfolio effects, we achieved a volume-driven organic sales growth at the group level of about 4%. EBITDA before special items for the group came in at EUR 4.2 billion, up 45% year-on-year, also including a meaningful contribution from the acquired business. Our EBITDA margin increased by 50 basis points to 32.2%. Foreign exchange effects on the legacy Bayer business had a positive year-on-year impact on sales of about EUR 108 million and a negative year-on-year impact on EBITDA of about EUR 110 million. The negative impact on earnings results from the year-over-year hedging balance. In the first quarter of last year, we had a gain of about EUR 60 million from hedges against a loss of approximately EUR 50 million in this year's Q1. Core earnings per share in the first quarter were up 14% year-on-year to EUR 2.55 despite significantly increased interest expenses related to the debt financing of the acquisition and the share count, which increased from 886 million to 980 million year-on-year, due to the 2 equity measures taken in 2018.Finally, we have added free cash flow to this chart as it is a very important KPI for us. Compared to the prior year, free cash flow almost doubled to EUR 508 million despite a significant working capital need of our much larger Crop Science business, which was more than offset by strong cash flows in Pharma and Consumer Health. Last year's acquisition and the comprehensive Bayer 2022 program come with a number of extraordinary effects which had a significant impact on our reported earnings. In order to continue giving you full transparency, we have again added a bridge in our presentation to show you how our core EPS of EUR 2.55 translates back into the reported EPS of EUR 1.27. The first column that's describing changes shows minus EUR 0.17 per share, which summarizes the acquisition-related amortization of intangible assets. On the special items side, the 2 main adjustments are related to the step-up of acquired inventories to fair value in the PPA and Bayer 2022-related restructuring costs. The positive impact on special items in the financial result is mainly driven by the changes in the market value of the Covestro shares we are holding. And finally, the last column shows the positive offsetting tax effect on some of the items I just explained.Let's move next to a discussion of debt and financing. Our net financial debt of EUR 36.7 billion is around EUR 1 billion higher than at year-end 2018. This increase is almost entirely related to IFRS 16, as already communicated to you at the Capital Markets Day back in December. As a reminder, operating leases are now reported as right-of-use assets with respective lease liabilities. The latter have increased the net debt position by around EUR 1 billion. During Q1, we repaid EUR 715 million against our bridge loan facility. For the remainder of 2019, we have 3 bond maturities: EUR 100 million in May, EUR 400 million in July and EUR 1.8 billion in October. We intend to redeem these bonds by a combination of cash on hand and future free cash flow generation. We continue to expect our net financial debt to be around EUR 36 billion by the end of December 2019. This estimate is based on constant 2018 FX rates. Please keep in mind that at quarter end, almost 60% of our financial debt was denominated in U.S. dollar. The impact of exchange rate changes to our net financial debt is quite significant, as every percentage point appreciation of the U.S. dollar against the euro would increase our net financial debt by about EUR 200 million and vice versa.Let's move on and look at our guidance for the year. Following the strong start in 2019, we confirm our group guidance for the full fiscal year, which is based on constant currencies and a going concern, meaning it does not include effects of the announced portfolio measures. We expect Bayer Group sales of around EUR 46 billion, an increase of around 16% year-on-year, of which about 12% are attributable to portfolio effects. We anticipate EBITDA to increase by almost 30% to around EUR 12.2 billion, while core earnings per share are estimated to come in at around EUR 6.80, up 14% on the prior year figure, reflecting higher interest payment and an increased share count. Core financial results for the year are included at an extent of approximately EUR 1.8 billion. And for our core tax rate, we continue to model about 23%. Finally, we expect free cash flow to be in the range of between EUR 3 billion and EUR 4 billion. The decline compared to 2018 is a result of expected restructuring-related cash-outs as well as the historically negative free cash flow in the first half of the year from the acquired business. As a reminder, going forward, foreign currency fluctuations, including the newly acquired business, are expected to affect our business as follows: a 1% change of the euro against our currency basket is expected to impact our revenue by about EUR 340 million and our earnings by about EUR 100 million.Before we start the Q&A, let me wrap up with our focus areas for the year. First and foremost, we plan to deliver on our operational targets as reiterated today. Second, we are focused on the smooth integration of the acquired business in order to shape the future of the agriculture industry, and for sure, we will continue to vigorously defend glyphosate. Third, we expect to further strengthen our internal pipeline in Pharma and intensify the external sourcing of innovation. Fourth, we will strive on improvement of the operational performance of our Consumer Health business. We plan to grow by about 1% and expand the EBITDA margin by 1 percentage point as well. Fifth, we plan to deliver against our targets for the Bayer 2022 program, both related to synergy realization and efficiency improvements. This is foundational for delivering on the 2022 target which we outlined at our Capital Markets Day in December. And lastly, we're in the process of executing on all announced portfolio measures to further sharpen our business focus. And with that, I'll hand the call back over to Oliver to open the Q&A.

[O. Maier, Head of Investor Relations]

Great. Thank you, Wolfgang, thank you, Werner, for your comments. And I think, Emma, with that, we can open up for the Q&A session.

[Operator]

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

[Vincent Stephen Andrews, Managing Director]

Vincent Andrews from Morgan Stanley. Liam, I'm wondering if you could just elaborate on the soybean pressure -- or competitive pressure that was discussed in the release in North America. As I recall, last year, there was one particular competitor. Is it more pervasive this year across the competitive set? And is it related to a competitor's new trait launch?

[Liam Condon]

So thanks a lot, Vincent. I appreciate the question. So on soybeans, maybe just in general to frame the performance, in the -- as you've seen from the pro forma numbers, we have a pretty significant decline. More than half of that decline is related to a phasing issue or a shifting issue, and this was actually sales of soybeans in Latin America -- or traits in Latin America in the third quarter of 2018. And this was specifically related to a change in accounting and because of IFRS. So they were sales that would have normally come in the first quarter, and that's the biggest part of that decline that you're seeing in the first quarter sales of soybeans. The second part of that decline is -- as you point out, is related to North America and specifically the U.S. And here, the issue is a mix of, I would say, anticipated lower acreage, plus, clearly, this competitive discounting, pricing. A part of that is related to germination issues, which is throughout -- basically throughout the entire industry. Because of the wet season that we've had, there is a small amount of discounting going on there. The other part is simply related to competitive pricing. So that's the way I'd frame it. The largest part of the decline so far has been the Latin America simply change of accounting, IFRS in Q3. And in U.S., there is -- we are seeing a continuation of competitive pricing going into the year.

[Vincent Stephen Andrews, Managing Director]

Okay. And as a follow-up, any issue with crop chemical raw material cost out of China, given environmental issues and plant problems more recently?

[Liam Condon]

Yes, so we have been seeing, and this already started last year due to the kind of go-green initiative of the Chinese government. We have been seeing an increase in material -- raw materials coming out of China. We actually view this as a positive move because it helps clean up the overall industry. In China, as you know, there's an awful lot of generic players, a lot of them with very different standards than what we work towards. So we have been seeing an increase so far in our COGS, and we've been able to compensate this through very diligent, I'd say, cost-reduction measures. But clearly, there is a pressure on raw material cost coming out of China right now.

[Operator]

Next question comes from the line of Mr. Kapadia.

[Wimal Kapadia, Research Analyst]

Wimal Kapadia from Bernstein. Just a couple, please. So could you just provide a little bit of color on how you got to the decision that a sale is the best outcome for Animal Health business versus a spin? So any color on how discussions with potential suitors went and will it be a competitive bidding process? And then my second question is just on pipeline catalysts. So internally, I would love to hear which assets or which data points over the next 12 months you see that could drive upside from a pipeline perspective. Or do we actually have to wait longer term to see pipeline catalysts that can move the needle for the company?

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Wimal, let me answer the first question. We have been -- as we communicated in November, we have been analyzing the best route of exit for the Animal Health business. And with that, also already announced at that time, we have communicated that by quarter 1, we would update you on the preferred route of exit. We see, given the attractiveness of the business and the attractiveness of the earnings growth profile, the stability of that industry, very high interest, very broad interest, I also have to say, for that business. And that is what we take forward for our decision to go for, let's say, a process that is led by the sale of that business. We are in the middle of the preparations of separating that business and carving it out. And as I mentioned in my introductory remarks, we see a potential signing of a transaction, should we go to a sale, as announced, probably by the end of the year. And with that, I turn it over to Stefan for the second question.

[Stefan Oelrich]

So thanks for the question on pipeline. First, maybe as a general remark, no full update on the pipeline compared to what we have stated before at the Capital Markets Day and towards year-end. But maybe, to be more specific, some of the things that we believe are somewhat material this year, we have the EU launch coming up for Vitrakvi after the introduction in the U.S. this year. We have darolutamide, which, as I think Werner was saying earlier, has been filed around the globe. We expect U.S. launch by end of this year. We have some data that will come out of the LOXO-195, NTRK fusion inhibitor, that we will see some Phase I, Phase II data, with primary completion expected in August of this year. Then on Xarelto, we have a Phase III trial that will inform on peripheral artery disease, the VOYAGER PAD program. And last but not least, also for this year, we hope to get primary completion and data on -- and that's important, on vericiguat, Phase II data on chronic heart failure in HFpEF patients. So a lot of things happening that will continue to enhance our pipeline, but many of these things, I think, we have informed of or about in detail before.

[Operator]

Next question comes from the line of Mr. Zekauskas.

[Jeffrey John Zekauskas, Senior Analyst]

Jeff Zekauskas from JPMorgan. In 2018, how many acres of Intacta did you sell in South America? And how many acres do you expect to sell in 2019? And likewise for Xtend in the United States, how many acres did you sell in 2018? How many acres do you expect to sell in 2019?

[Liam Condon]

Okay. Thanks, Jeff. So for Intacta, we had in the region of 65 million acres in Latin America, primarily in Brazil, of course, and we're working towards 70 million for this year. And for Xtend, we had 50 million acres in the U.S. for cotton -- or primarily soybeans, but soybeans and cotton. And this year, we're working toward 60 million, 6-0.

[Jeffrey John Zekauskas, Senior Analyst]

Okay, great. And then secondly, in your commentary, you talked about an unfavorable mix in corn in the United States. Is that farmers switching from triples to doubles or triples to singles? Or is it that they want to stay with an older trait package instead of a newer trait package? Can you describe what you mean by the unfavorable mix shift?

[Liam Condon]

Yes. So this was a very specific issue related to corn rootworm pressure of farms. We play around the fringe with corn rootworm pressure. And as you know, last year was -- on average, it was a weaker year. Every season is a little bit different. Every field is a little bit different. But on average, last season was a weaker corn rootworm season. And what we've noticed is that some of the farmers that were on the fringes that had less corn rootworm pressure were trading down in their decisions on genetics. Still choosing premium products from us, but instead of SmartStax, for example, they're moving down 1 notch. So this is the effect that we were referring to there. Very specifically, it's corn rootworm-related.

[Operator]

Next question comes from the line of Mr. Jain.

[Sachin Jain, Managing Director]

Sachin Jain from Bank of America. Two questions and one clarification, please. On glyphosate, just wondered if you could update us on your thoughts around settlement. Background of the question is my understanding of prior commentary was that settlement was unlikely until well into next year, but I wonder if you can put that in the context of the judge's requesting MDL to push remediation. Second question is on the Pharma manufacturing FDA inspection. When do you expect official feedback from the FDA? And any early positive signs on that? And then just a clarification question on Animal Health. On the broad high interest, was that your expectation or actual receipt of broad high interest?

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, yes. Thanks, Sachin. First, on glyphosate, yes, there was a judge-induced ask for the start of settlement discussions. We are responding to, of course, that request. But at the same time, I have to say, and that is very much in line with what we've said all along, that we have only 2 first instance verdicts. We are rigorously defending ourselves against those with the appeal process that is ongoing. And with that, there's actually not much more color I can give to it at this point in time, other than the fact that we wait for an additional 4 trials to be tried this year. Based on where we are, way too early, quite frankly. If you look at where we stand, we have to have a certain level of comfort in terms of the base of any further discussion and that's where we are. Secondly, Pharma manufacturing feedback, we have actually filed our responses to the FDA audit report with the 483s we received. It was over 6 we received. And we are now waiting for the official answer by the FDA. But as we mentioned, the inspection, based on everything we can assess, has gone reasonably well or quite well overall. On Animal Health, the interest is, again, very, very high and also very broad. And there's not much more I can say relative to the Animal Health process, because it is a highly competitive process that is running.

[Operator]

Next question comes from the line of Ms. Hector.

[Luisa Caroline Hector, Pharma Research Analyst]

Just a couple more questions on crop, please. I wonder if you can tell us the Monsanto sales and EBITDA in the first quarter of last year and then also the Monsanto EBITDA contribution this quarter. I think you said effectively that in Q1 '19, the doubling of the Crop EBITDA is represented by the acquisition. If you could just confirm that, please. And was there a contribution, significant contribution of synergies to Crop in the quarter, are you able to quantify that? And maybe just, again, still on Crop. The Herbicides sales, if we compare Bayer legacy to the pro forma Herbicides, it looks as though glyphosate, the Monsanto contribution, is down double digits. Can you confirm that, that is the case and that is all connected to price for generics and weather and not -- nothing there linked to any safety concerns?

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Liam?

[Liam Condon]

Okay, thanks a lot, Luisa. So we're not reporting legacy Monsanto anymore. I think we've got so many numbers out there right now, very honestly, we don't want to confuse things by adding another new set, because we've got the nominal reporting numbers, we've got the cpa numbers, we've got pro forma numbers. And if we start breaking out Monsanto again, I think, honestly, we'd get very confused. What I can say, and I think that's the gist of your question, if you were to look at legacy Monsanto sales and EBITDA this quarter versus previous quarter, ballpark, it's very slightly down. And that's primarily related to soybeans. And as I mentioned, a big part of that is actually this phasing, the IFRS phasing in Q3 in 2018. So that's just to give you a gist of where that is relative to each other. Synergies for the quarter, we're not breaking this out by quarter now from a reporting point of view. But clearly, we are on track with our synergies so far. So we had a target of cost synergies of 5% last year. I mean we only started bringing the companies together end of August, and we achieved 6% at the end of the year. So of course, that carries over. Our target this year is cumulatively 25% of cost synergies, and we're very much on track to reach that. And we also expect to be achieving our first sale synergies also in that region, in that ballpark this year, and that will primarily come from LatAm towards the end of the year. On Herbicides, you saw in the pro forma numbers that overall, there is an increase, 2%. Very different around the world, what's happening. So Europe and LatAm was up significantly. And LatAm was specifically glyphosate, up with pricing and volume. And North America, this was -- there was a decline. This is purely related to a mixture of basically generics in the channel right now. There's a lot of product in the channel, simply because the season is delayed, so there's simply an effect in there. What we can say, or what we have seen on the plus side in North America is that our lawn and garden business or consumer-facing business for Roundup has had a strong start to the year. And we don't see any litigation-related impact whatsoever on demand, so I can be very clear about that. And demand on the ag side is driven simply by weather and the field situation that growers are facing. And as I said, on the consumer side, we had a good start to the year.

[Operator]

Next question comes from the line of Mr. Papadakis.We move on to the next question, which is from Mr. Vosser.

[Richard Vosser, Senior Analyst]

It's Richard Vosser here from JPMorgan. Perhaps we could go back to Crop. And just if I look at the Crop growth, the reported number versus the pro forma number, I think it's about 1% growth in terms of CER. So how should we think about the growth in Q2 and beyond that, to sort of get back to the 4% CER growth that is the guidance for Crop for the year? Secondly, if you could just maybe quantify, just related to that maybe, impact of any delayed shipments in Q1. Were there any? What was the impact? And then finally, just looking -- for Pharma, just looking on the products like Adalat and AVELOX, they were very strong. Was there any sort of resupply into the market following the manufacturing issues? Perhaps you could talk about any stocking in those numbers, underlying demand and where you are in terms of the manufacturing in terms of actual supply side.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. So Liam, you start.

[Liam Condon]

Yes, thanks, Richard. So for the start of the year, as you say, we are differentiating these numbers a lot, but we believe the most valid number to look at is really the pro forma, because it gives a sense of what the organic business is doing. So there, we are flat. We do expect some shifting, particularly of corn into Q2, simply because of the weather situation in the Midwest, where there was very heavy flooding -- I mean it was a very cold winter, anyway, then there was very heavy flooding from middle of March, so that the entire planting season is delayed. So there will be some delays, or there will be some phasing into Q2 there. On the other side, clearly, what we're expecting is a decline in acreage for soybeans so that there will be a negative effect coming out of that. So overall, for the Northern Hemisphere in the first half of the year, we're only expecting moderate growth. We're actually expecting much stronger growth in the second half of the year, primarily then, of course, driven by LatAm, a lot of that primarily Brazil, but also from APAC. And that's basically, on the back of that, we confirm our guidance to continue with 4% growth for the year.

[Werner Baumann, Chairman of the Board of Management & CEO]

Stefan?

[Stefan Oelrich]

Yes, thanks on the established products question, Richard, so mainly, this is all a China effect, and it's actually demand-driven. So we continue to enjoy a strong demand growth both on Adalat orals and on AVELOX in China and that is reflected in the numbers. All other geographies are really negligible at this point.

[Operator]

Next question comes from the line of Mr. Cespedes.

[Florent Cespedes, Senior Equity Analyst]

Florent Cespedes from Societe Generale. Two quick questions for Stefan on Pharma. First, on Eylea, could you share with us what supported the performance of this product, which was quite robust this quarter? Your competitor also reported yesterday quite strong growth as well. So are you benefiting from the expansion of the market? Or any color on this would be helpful. Second question, China and emerging markets, we understand is a meaningful growth driver for the Pharma division. Could you elaborate on your strategy there? What could be improved further to even be more successful in these territories? Or in other words, have you already maximized the value of your existing portfolio in these territories? Any color on that front would be very helpful.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. So Stefan?

[Stefan Oelrich]

Florent, so on Eylea, we were also very, very pleased with the result in the first quarter, because first quarter beats a little bit the overall guidance that we maintain for the rest of the year. So we've seen continued market expansion that, to your point, everyone is enjoying right now, but we as market leaders, obviously more. Moving forward for the rest of the year, we're a little bit more cautious in terms of the price-volume mix for the marketplace, and this is why we retain our guidance in the high single-digit growth rate. When it comes to China, of course, we're extremely pleased with China. And you may remember at the Capital Markets Day, I dedicated a section of my talk on China. So we're striving to go towards sales of EUR 3 billion by 2022 in China. We realize this is not going to be a walk in the park, even though we're enjoying very strong growth rates. You know that there is also going to be some headwinds that are going to come in our direction with the value-based pricing model that the Chinese government is launching. Our strategy so far has been a mix of: a, getting onto reimbursement lists fast, which exacerbates further volume growth. And we're seeing this very nicely materialize on products such as Xarelto, which is starting still from a relatively small base in China. And if you just take the quarter, we basically doubled our sales on Xarelto in China over the quarter, so -- and that's clearly linked to our reimbursement status. And similarly, we're seeing some of our oncological products. And moving forward, we need to continue to push on innovation, because I think that China is more and more converting into a more innovation play, like we're seeing in more mature markets. And I now struggle to call China as a part of the emerging markets. I think it has emerged. And at the same time, we're looking strategically, obviously, at what to do with our more established products business in the long haul.

[Operator]

Next question comes from the line of Mr. Verdult .

[Peter Verdult, Director]

Pete Verdult, Citi. Just a couple of questions and a clarification. Liam, thanks for the detail on Q1 dynamics. Just in terms of pro forma growth for the soybean and Corn Seed & Traits businesses in 2019, putting all your comments through the conference call together, is it right that we should think of corn as being up in terms of pro forma growth and soybean negative? And then for Stefan, again, you've touched upon it, just about China and giving your targets and talking about doubling Xarelto, just some numbers for the baseline. Could you just remind us Q1 sales or 2018 sales, how big is the Pharma business currently in China? And what was Xarelto sales? I realize you're not -- or you're now only reporting global franchise sales for the Pharma products, but just some granularity on Xarelto in China would be helpful. And then just a clarification question. Did you say that the VICTORIA vericiguat study was due in Q4? And just to confirm, that's a Phase III study? I think you said Phase II in -- earlier in the call.

[Liam Condon]

Okay, thanks, Peter. So on corn, what's happening on -- because we've commented on soybeans, so corn, what's happening in the first quarter. It's actually flat. And the reason behind that, if we break it out kind of by region, what we can see is there was a decline in LatAm. And the decline in LatAm is simply related to the fact that there was an early soybean harvest in Q4. And that allowed safrinha, so the second crop, the corn crop then, to be planted early in December. So normally, we would have had those sales in Q1, and this year, we had -- or last -- we had them technically then simply last year. So that was the effect in LatAm. That's why there's a decline in corn for us in LatAm. That was basically equaled out by a corresponding increase in EMEA on the European side. So basically, we ended up flat if you balance those out. And then North America is simply flat, and that flat is related to the weather situation, again, particularly Midwest flooding and delayed planting. So that's overall the situation, corn overall flat with very different regional pattern.

[Peter Verdult, Director]

Liam, for 2019 -- sorry, for 2019, is the message it's up for corn and it's down for soybean? Is that the message from the -- that you are giving?

[Liam Condon]

Yes, I think that's fair, yes.

[Stefan Oelrich]

Pete, on -- so to clarify on China Xarelto, so yes, it's basically the NDRL listing that helps us to basically double our sales. It's pretty much 100% growth year-on-year for the quarter. And our base for the first quarter in China is EUR 75 million.

[Peter Verdult, Director]

That's for Xarelto? And what about your total Pharma business?

[Stefan Oelrich]

That's Xarelto.

[Peter Verdult, Director]

Yes. And your total Pharma business in China currently?

[Stefan Oelrich]

For the first quarter, let me just look at the number. I'm looking at my numbers.

[Peter Verdult, Director]

Sorry to put you on the spot.

[Stefan Oelrich]

EUR 776 million. What was the last question on the study on vericiguat? Can you repeat that one? We didn't get that one. Oh, he's gone, okay.

[Operator]

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

[Jo Walton, Managing Director]

The original question was is the vericiguat a Phase II or a Phase III study. You said Phase II, but we were expecting it to be a Phase III, and is it in 4Q? And my questions would be on the ag side. Liam, you told us that you were expecting only moderate growth in the second quarter. And to get to your 4% growth for the full year, you'd obviously be expecting very strong growth in the ag business in Latin America in the second half of the year. I wonder if you could just tell us what your assumptions are and why you are so confident about that, particularly given that in 2018, you had that early sale of corn. Assuming that, that doesn't happen again this year, you have a more regular period, that would actually make the comparison in the second half of the year a bit more difficult rather than easier. And then if I could just return to the glyphosate side of things. I wonder if you could tell us when you think your best estimate of when you would have had a couple of second-level decisions. If, as I read you correctly, you would be looking for second-level decisions, some form of appeal decisions, before you would consider settling.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. So Liam, could you start?

[Liam Condon]

Okay, thanks, Jo. So the moderate growth that we imply now for the first half of the year in the Northern Hemisphere is, of course, different by crop. As we kind of mentioned, it's more corn we would expect to be up. Soybeans, we would expect to be down. This is for us, of course, a more positive development because we have a much better profitability profile on corn overall as a crop than soybeans. Going forward into the second half of the year, we have seen very robust growth in LatAm. As you know, we have a very strong position now in Latin America, particularly in Brazil. And by far, the biggest market is, of course, soybeans. And we expect a further increase in acreage, smaller increase in acreage, but there will be an increase in acreage in soybeans in Brazil. We're also expecting an increase in acreage both in soybeans and cotton in Argentina, which we think could be quite significant. And on top of that, we're launching what we think has potential to be a blockbuster, a new fungicide, Fox Xpro, in the market in Brazil. And given the very extensive footprint we now have, particularly with our seeds and traits business, we have great potential here for additional sales synergies. So that's why we're quite bullish on the second half of the year. And if we have a normal year as we're expecting on cotton -- you'll recall that last year was basically a complete washout in Australia because of drought. If that comes back, that also has significant upside potential.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, thanks, Liam. So Jo, then to your question on the litigation. I think, of course, we will look at the appeals process for the Johnson case. That's one. We at least know when our hearings are scheduled. And then thereafter, it's going to be somewhere in the area of, let's say, towards the end of the year probably that we see the result of that first appeals case. But again, this is something that we are not in full control of, and that's why it's very difficult to be affirmative from my end. Secondly, the Hardeman appeal could easily take 2 years. We don't know, but it could easily take 2 years. And we will continue to litigate the cases that are on hand. And then it's a combination of influencing factors that will lead to an assessment, if and when, how, we try to put close to this overall litigation. But again, understand that we are -- I think everybody on the call has a keen interest in getting more color, but unfortunately, we are not in a position to provide that color, given the status of the litigation overall.

[Jo Walton, Managing Director]

And the prior question on vericiguat?

[Werner Baumann, Chairman of the Board of Management & CEO]

Yes, Stefan is coming.

[Stefan Oelrich]

Answer coming here, Jo. I'm sorry if I created some confusion first, because I was answering to the question about 2019 and what was happening with our pipeline. So the vericiguat study I was referring to is indeed a Phase II in HFpEF. And the one that you're referring to is the VICTORIA study in HFrEF, which we expect to inform in -- it's a Phase III that we expect to inform early next year. Our date, estimated date is January 2020, where we would have the result. So everything that you had was right, and I guess what I had was right, too, which makes it a wonderful thing.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay.

[Operator]

Next question comes from the line of Mr. Parekh.

[Keyur Parekh, Equity Analyst]

It's Keyur Parekh from Goldman Sachs. Three questions, please. First one on darolutamide. If you can give us a sense for your early communication with physicians, with key opinion leaders, and how do you see this asset kind of making its role in the treatment paradigm. Where do you think this will get used? The second one, to Liam, on the Crop numbers. Liam, I appreciate that there's a bunch of numbers out there, but all of us are struggling with what is the right base, where is the growth or lack thereof coming from. So if you can simplistically tell us, because our understanding is that the 5.5% growth you're talking about belongs to the legacy Bayer business, and overall, it's minus 0.2%. So if you can just simplistically tell us what was the growth for the Bayer legacy business and for the Monsanto legacy business, that would be very helpful. And thirdly, to Werner, kind of we appreciate that there are a few things that you can say on the ongoing litigation, but as we think about the next 4 cases that you've kind of flagged, is there anything different about those cases and the way you're approaching those cases that we should keep in mind that might lead to a more positive outcome for Bayer?

[Werner Baumann, Chairman of the Board of Management & CEO]

So on darolutamide, Stefan?

[Stefan Oelrich]

Yes, so first of all, we're really excited with darolutamide and with the data that we have. We believe that this novel compound goes well and adds to the evidence that has already been brought to by -- in that class by the trials done with enzalutamide and apalutamide, PROSPER and SPARTAN, which really have validated the overall role of novel anti-androgen therapies in non-metastatic prostate cancer. And what we think that our product is clearly differentiated in is because it is structurally unique in its binding properties and in the lower blood/brain barrier penetration that we've seen in preclinical models and that we believe have translated into a very favorable safety profile of the product. Given that those patients, for the most part, still lead a very normal life, this type of adverse reaction that you see from other therapies, we believe, represents a significant impediment to quality of life to those patients. And we've measured in our pivotal trial, the significant impact that we have positively on quality of life with darolutamide. So that's on top of a very strong efficacy that we've seen in our trial that makes the product from an efficacy standpoint pretty much comparable to what we're seeing in class, even though there is no head-to-head comparison to this point, makes the overall package, we believe, very attractive and makes the product also quite differentiated. So we are now looking forward to get this underway.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Thanks, Stefan. Liam, on the numbers again?

[Liam Condon]

Yes, so thanks for the question. I think we'll all be happy after Q2, once we get that kind of 7th of June date out of the way from the original acquisition, because then we'll just have one set of numbers going forward and we don't need to produce all these different sets of numbers. Again, the only reason we were producing the pro forma numbers was to give you a sense of what the actual underlying business is doing. So to break it out again, the current cpa growth of 5.5%, this is purely the Bayer legacy business. And of that, about half is the transitional service agreement with BASF. So that's half of the growth that is in there. So you could say the underlying growth for Bayer without that transitional service agreement is in the ballpark of 2% to 3%. If you were to look at legacy Monsanto as a standalone, as I said earlier, very slightly down. And with that, you come to the overall pro forma growth of basically flat. That's where we end up. And I guess from a modeling point of view going forward, I mean we've -- we're always surprised where consensus is. This time, we actually feel consensus is very close to where we see things going. So that's -- we're sticking to our guidance, and we think consensus is reflecting that accurately right now.

[Werner Baumann, Chairman of the Board of Management & CEO]

For full year.

[Liam Condon]

For the full year.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, so then on the litigation question. So I have to come back and ask for your understanding that beyond some very general comments, I cannot go into further detail because it doesn't make too much sense to fully lay out our defense strategy here, because "we are not alone," so -- but having said that, we have tried 2 cases. There have been quite a bit of commentaries out there of things that appeared to have worked versus the ones that may have not worked. We continue to evolve in our thinking on how to best defend these cases. And having said that, each of these cases, on the merits of the case, each of the jurisdictions is going to be different now. So we have had 3 cases, including Pilliod. That is going to come to an end probably somewhere in the second week of May, I would guess, with a jury verdict. We have had 3 in California. And the next ones that are coming, 3 out of the 4 I mentioned before, are going to be in St. Louis, either St. Louis City or St. Louis County, yes? So different jurisdiction, different rules that are going to be applied in these jurisdictions, and that is what we are preparing for, both with our internal counsel, with our external counsel, specific counsel that we have for each of the jurisdictions. And rest assured, that the board is intimately involved in working with our legal team in evolving and then also monitoring the development of these cases.

[Operator]

Next question comes from the line of Mr. Byrne.

[Steve Byrne, Director of Equity Research]

Steve Byrne, Bank of America. U.S. farmers now have increased access to price transparency data, particularly for seeds. Just wondering whether that's contributing to the shift down in traits that you saw in corn and whether it's having any impact on net selling prices.

[Liam Condon]

Yes, thanks, Steve. So maybe, upfront, I think our -- Bayer, basically with the Climate Corp., is actually the single biggest purveyor of transparency in the market. I think we're around 60 million acres, paid acres so far with our digital ag platform. And this cuts across all companies or farmers using it, they are using multiple products. And we're actually working towards 90 million acres this year. So we generate more transparency in the market than anybody else. And the reason we feel particularly good about that is because we've got very high yielding products that then our customers like to buy. So we're not relating -- we don't see the current, or let's say, any kind of down-trading related to additional price transparency. The issue that I specifically mentioned to earlier on the mix was really related to corn rootworm pressure, so this switch from -- a partial switch from SmartStax to the double -- our VT Double product. And that's still staying within the premium line. So that's all we've noticed so far, and our goal is to continue to try and increase transparency in the market anyway because we believe it actually helps us more than anybody else with our product portfolio.

[Steve Byrne, Director of Equity Research]

And just one more for you, Liam. Is there anything coming out of your biologics pipeline that could potentially be disruptive, such as a rootworm insecticide or maybe a nitrogen-fixing bacterium?

[Liam Condon]

Yes, quite a lot. I'd actually have to do a bit of advertising for our event at end of July that we're going to have. We're going to do a deep dive on the pipeline. We do have some disruptive assets, both in the areas -- both of the areas that you have mentioned. One of them is actually a joint venture with Ginkgo Bioworks, Joyn, where we're -- we think this is really a disruptive approach in the market. And the other one is a pure in-house development. And we're going to be showcasing that in -- at the end of July in St. Louis or beginning of August. So we think we can follow up with the details around that.

[Operator]

Next question comes from the line of Mr. Leuchten. The next question then comes from the line of Ms. Miemietz.We will move on to Mr. Lockey.

[Joseph W Lockey, Equity Analyst]

This is Joe Lockey from Morgan Stanley. First on Xarelto litigation. Your quarterly report states that your share of the litigation settlement is partially offset by liability insurance. Can you quantify that offset, even in rough terms? And then second, Stefan, I wanted to pick up on your comment on the call for established products in Pharma and strategic options in the long term. Can you expand on what some of those strategic options could be? Is a sale of some established assets a possibility?

[Werner Baumann, Chairman of the Board of Management & CEO]

Yes, so let me take your first question, Joe. On Xarelto litigation, we don't break out what the insurance coverage is, partially for the reason that we are still in discussions. And we have 3-party discussions. So it's us, our insurer and its reinsurers and of course, Johnson & Johnson as an involved party here. So that's why we cannot comment on that in detail. So second question then.

[Liam Condon]

Joe, thanks for the question. Interesting question. I hope you understand that this is probably not the best forum to discuss an established products strategy for the Pharmaceuticals business. But you can be assured that that's something that's obviously top of mind for us, not just for China but also for other regions. But nothing more that I could, at this point, make further comments about future strategies.

[Operator]

There are no further questions at this time. Please continue with any other points you wish to raise. Mr. Maier, please proceed.

[O. Maier, Head of Investor Relations]

Okay, great. Thank you very much, everybody. Really appreciate you participating and talking to you soon. Thank you so much. Take care. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes the First Quarter 2019 Results Investor and Analyst Conference Call of Bayer. Thank you for participating. You may now disconnect.