Bayer AG

XETRA:BAYN

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to Bayer’s Investor and Analyst Conference Call on the Second Quarter 2022 Results. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

It is my pleasure and I’d now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations of Bayer AG. Please go ahead, sir.

[Oliver Maier, Head, IR]

Thank you so much, Francy. Good afternoon, and thanks for joining us, everybody, today. I’d like to welcome all of you to our second quarter 2022 conference call.

In order to ensure very good audio quality, we currently ask you to use a speaker or land line number instead of a headset. With me on the call today are Werner Baumann, our CEO; and Wolfgang Nickl, our CFO. The businesses are represented by the responsible management board members for the Q&A session. Werner will begin today’s call with an overview of the key developments in the second quarter. Wolfgang will then cover the performance of our businesses as well as the outlook for 2022 before we open up the Q&A session.

As always, I would like to start the call today by drawing your attention to the cautionary language that is included in our safe harbor statement as well as in all the materials that we have distributed today.

With that, I hand it over to you, Werner.

[Werner Baumann, CEO]

All right. Thanks Oliver, and good afternoon to everybody. It’s my pleasure to welcome you to our conference call today.

The second quarter saw another strong operational performance, and we’ve been able to build on the good momentum of the last quarters. Double-digit growth in Crop Science with significant margin expansion, sustained growth in Consumer Health, and a solid performance in Pharma have underpinned our confidence for 2020. We raised our full year guidance despite the persistent geopolitical and energy supply uncertainties in Europe.

We are definitely in the right businesses. Bayer is technically relevant in addressing food security, public health, and also the limits of our planetary boundaries. It is great to see increasing acceptance and the more factual perspective on the value of our technologies and the potential to do good. Against that backdrop, I’m very pleased that we have also made important progress in one of the major ESG ratings MSCI ESG Research recently updated their ESG Controversies Report, and lifted the red flag related to environmental concerns over GMO crops, as well as the related allegation of a breach of the UN Global Compact Principles. Following the removal of the ISS ESC red flag related to neonic insecticides last year. This is another important improvement in our ESG rating profile.

Our ability to raise guidance in the current environment is equally proof of the resilience of our setup, and our ability to mitigate emerging risks. So, let’s briefly talk about one of the topics that is top of mind these days, and that is the gas exposure and the related mitigation measures. Actually, since the beginning of Russia’s war in Ukraine, we have worked extensively on implications and mitigation measures on a potential gas cut, both directly for our own operations and indirectly regarding our supplier network.

For our own operations, we are well-prepared to completely mitigate a potential exposure through the end of 2022. We have already achieved white technical readiness to significantly reduce natural gas dependency by switching to alternative as well as renewable energy sources. In addition, we introduced energy reduction programs and built up finished goods inventory, where possible.

From a cost perspective, our total energy and utilities costs represent around 3% or €450 million of our total cost of goods sold, with approximately 35% in Germany and 15% in the rest of Europe, all related to 2021 data. We have fixed contract prices for significant parts of our natural gas demand at low price levels. In Germany, unless government provisions supersede these agreements, 70% of the demand is contractually fixed for this year, and actually about half of the volumes are also fixed for next year.

Higher level of uncertainty stems from the indirect exposure via our supplier network. This indirect exposure remains as of course not under our full control, but we are closely collaborating with our key suppliers and contract manufacturers, building buffers for critical raw materials and packaging goods and identifying alternative sourcing, from less affected geographies. Based on the advanced preparation of our sites and our proactive risk management, we do not expect any material financial impact for the full year 2022.

Before I come to our progress on innovation, let me update you on the current litigation status. Actually, we are making good progress in putting major litigation behind us, even though combined with incremental costs in some instances. On glyphosate, we are confident in the litigation strategy reflected in our five-point plan, backed also by our recent four trial wins. We will continue to execute against that plan. And from today’s perspective, we are sufficiently provisioned to deal with the current and also with the future cases.

On the PCB water litigation, the opt out period for the class settlement recently expired, and we expect to finalize the national class action settlement in quarter four, thereby resolving the vast majority of municipal PCB litigation.

Regarding the State Attorney General cases, we will continue to defend future cases for the litigation process. Recently, the Delaware state court dismissed all of the state’s claims in a PCB related case, alleging environmental impairments. In the second quarter, we have taken an additional provision of around €700 million, mainly due to ongoing settlement negotiations with the State of Oregon. The settlement when finalized would resolve a pending environmental impairment case, involving legacy Monsanto PCB products and reside in the dismissal of this case. The Oregon venue represents a unique challenge for defendants in terms of procedural rules, as well as substantive law, which are not comparable to other states.

So to be clear, they consider -- one off case, and we don’t expect a knock-on effect on other states as actually also demonstrated by the settlements in other jurisdictions and the recent positive outcome in Delaware.

As a final remark on PCB and very importantly, Monsanto had brought identification contracts with its former PCB customers in place, which has now come to be decided to be asserted by us. We have recently filed a complaint in court to enforce our rights to recover the cost associated with the entire PCB litigation complex.

Next, as part of the Monsanto acquisition, we divested, as you may recall, several businesses to BASF in 2018 for a headline price of €7.4 billion. Post divestiture BASF initiated an arbitration proceeding related to the adequacy of our cost disclosures. As mentioned in our full year conference call, we reported the arbitration during its pendency as part of the contingent liabilities. There’s no new update today, but I do want to let you know that we expect the decision by the arbitral tribunal shortly.

Let’s now take a look at our progress on innovation. Regarding our Pharma launch products, we have received two new approvals in China. First, for Kerendia for the treatment of adults with chronic kidney disease associated with Type 2 diabetes and second for Verquvo to treat patients with chronic heart failure and reduced ejection fraction.

We also made further progress regarding our cell and gene platform. End of May, BlueRock therapeutic announced the completion of the enrollment for the Phase 1 trial in patients with Parkinson’s disease.

In June BlueRock established a hub for cell therapy innovation in Berlin with the goal to enhance and accelerate clinical studies in Europe. We also expanded our technologies in our radiology business through Calantic artificial intelligence solutions. Looking ahead, data of the Phase 2b PACIFIC-STROKE and AMI studies with Asundexian will be presented on August 28 at the upcoming Congress of the European Society of Cardiology in Barcelona.

We will take this opportunity to host an investor webinar on August 29th to discuss the study results and to also give an update on the Phase 3 development program for Asundexian. As communicated earlier, we have the Nubeqa ARASENS filing and a priority review in the U.S., and we anticipate the decision from the FDA in the very near future, not to say it’s really imminent we think.

In Consumer Health, we switched Astepro from Rx to OTC status and started selling the product on the U.S. market. The switch means that we are marketing the first and only steroid-free antihistamine nasal spray for allergies on the U.S. market that is available over the counter for adults and children aged six and above.

For Crop Science, we recently signed a definitive agreement with Ginkgo Bioworks, making them our multi-year microbial strategic partner in the development of biological solutions. This will also bring full control of Joyn Bio’s nitrogen-fixing technologies to us, successfully closing the joint venture created between Leaps by Bayer and Ginkgo back in 2017.

We also recently acquired a majority stake in one of our Leaps investments, CoverCress Inc., a sustainable, low carbon oilseed producer. CoverCress is another cover crop that fits into the existing corn and soybean rotation and will be featured in next week’s Field Technology Showcase. It combines ecosystem benefits of carbon sequestration, with the economics of a premium valued oil for biofuels and we expect the launch middle of this decade.

Wolfgang will now comment on the details of the business development and guidance raise. So, with that, over to you, Wolfgang.

[Wolfgang Nickl, CFO]

Thanks Werner and hello everybody.

Group sales increased by 10% on the currency and portfolio adjusted basis to €12.8 billion in the second quarter. Our Crop Science division continued to be the main driver. Group EBITDA before special items increased by strong 30% year-over-year to €3.3 billion. This represents an EBITDA margin before special items of 26.1% and the 240 basis points increase over the prior year quarter.

This year, our top line includes a material FX tailwind of about €900 million. The effect on EBITDA before special items was about €300 million in the second quarter. Core earnings per share came in at €1.93, which is 20% or €0.32 above the prior year numbers. This includes a negative effect from the year-over-year development of the core financial results. You may recall that in Q2 last year, the core financial results included significant extraordinary valuation gains from these investments.

Our core tax rate came in at 20.6% due to onetime benefits in the first half of this year. For the full year, we continue to expect a core tax rate of around 23% as we previously guided as well. Our free cash flow amounted to €1.1 billion, which is at the prior year level. This quarter included the short-term incentive payouts related to all strong operational performance in 2021, whereas the prior year quarter included the much lower payout for 2020.

As expected, our net financial debt increased to €36.6 billion by the end of Q2, due to dividend payments during the quarter and the strong U.S. dollar as well. For the full year, we keep our guidance of €33 billion to €34 billion at constant currencies.

Let’s now look at the results of our divisions. When I refer to sales growth, this is always on the currency and portfolio adjusted basis. Our Crop business achieved double-digit sales growth of 17% with sales of €6.5 billion, all the regions contributed to this growth. With growth of 51%, herbicides remained the single largest gross contributor. This was driven for the most part by continued favorable market dynamics of glyphosate. Corn seeds and traits increased 10%, mainly due to improved price and mix from the launch of more than 250 new hybrids globally this season. Volumes also increased except in North America, where we saw a decline in planted acres.

For soybean, sales declined 16% in Q2. When adjusting for the benefit of extra seed sales in the prior year and the discontinuation of our Argentinian business, soybean seeds and trait sales were approximately flat in the first half of 2022.

Looking at the underlying performance, we held our number one position with our Xtend trait platform in the U.S. this season and saw a slightly higher net pricing as more growers traded up to XtendFlex.

In addition, we had a very good start in Brazil with our Intacta 2 Xtend platform in the ‘21, ‘22 season and expect a significant increase in acres in the coming season due to strong demand. Fungicides sales grew 4% with price increases in all regions. Higher volumes in Latin America due to continued strong demand for Fox Xpro as well as in EMEA were offset by lower volumes in North America due to unfavorable weather conditions. Meanwhile insecticides increased by 6% with mid-single-digit price increases across all regions and higher volumes.

Our Crop Science EBITDA before special items grew by 72% to €1.7 billion. The contribution from higher top-line as well as savings from the ongoing efficiency program and positive foreign exchange effect more than offset cost inflation of around €230 million. Inflationary effects, particularly related to cost of goods sold, where we saw continued higher material prices, seed commodity prices and freight cost. The EBITDA margin before special items improved to 27.1%.

Moving on to Pharma now. Sales there grew by 2%, driven by higher volumes more than offsetting slightly declining prices. Eylea continued its strong growth trajectory with sales increasing by 12%. We saw increases across regions, led by strong volume gains in Europe. Xarelto sales saw decline of 6%, mainly impacted by volume based procurement in China that weighed on price and volumes as well as loss of exclusivity in Brazil.

Looking at our top launch products. Sales of Nubeqa more than doubled year-on-year to €105 million, driven by market share expansions across all regions in the non-metastatic castration-resistant prostate cancer setting. Also Kerendia continued its strong sales momentum after just three quarters post launch in the U.S.

On the bottom line, EBITDA before special items increased by 5% to €1.5 billion. Higher investments into the launch of Kerendia and the ongoing rollouts for Nubeqa and Verquvo as well as inflationary cost pressure were compensated by top-line contributions and lower R&D spend. The EBITDA margin before special items came in at 30.7%, which was on par with the prior year at constant currencies.

Let me close the divisional update with a look at Consumer Health. Sales increased by 7% over a strong prior year quarter, with sustained growth across regions. The allergy and cold category grew with 17% as our products helped to treat a higher number of cold incidents due to less social distancing compared to the prior year period.

After two years of remarkable growth, our Nutritional segment started to consolidate at very high levels, showing a decline of 4% in the second quarter. Our innovation capabilities in Consumer Health are showcased by the launch of Astepro for which we started the selling into the market in June ahead of its commercial launch in July.

Our Consumer Health EBITDA before special items increased by 19% to €330 million. Strong top-line grows, continuous spending discipline and the ability to pass on cost increases drove this development. However, we also noticed accelerating inflationary cost pressure, especially on freight and material cost. Compared to prior year, the Consumer Health margin expended by 50 basis points to 22.1%.

Based on the strong first half year performance and the continued positive business environment, we raised our full year guidance for Crop Science. We now expect currency and portfolio adjusted sales growth of approximately 13%, up from our previous estimate of approximately 7%. The improved growth outlook assumes a sustained favorable market environments with glyphosate price and into the second half of the year.

As a result of the improved growth outlook, our EBITDA margin before special items for Crop Science is now expected to come in at approximately 27% at constant currencies, up from a range of 25% to 26% previously.

For Consumer Health, we saw exceptionally strong growth in the first half of ‘22. For the second half of the year, we cycled over a high prior year comparable. On that basis, we raised our sales growth guidance for the full year from previously a range of 4% to 5% to now 6% to 7% on the currency and portfolio adjusted basis.

We keep the guidance for our EBITDA margin before special items in the range of 22% to 23%, also at constant currency. And for pharmaceuticals, we confirm our current full year guidance at constant rates. At June month end rates, the margin is expected to come in at approximately 31%. With the raise of gross guidance for Crop Science and Consumer Health, group sales are now expected to come in between €47 billion and €48 billion at constant currencies. This represents a currency and portfolio adjusted growth of around 8% compared to previously around 5%.

With the improved top-line outlook, we also raised our guidance on group EBITDA margin before special items from approximately 26% to a range of 26% to 27%. As outlined in Q1, we continue to expect the negative foreign exchange effect on the margin of about 40 basis points.

As Werner mentioned at the beginning of the call, at this point, we do not foresee any material negative financial impact from a reduced gas supply situation for ‘22. Based on the stronger operational contributions, we raised our core earnings per share guidance by €0.30 to approximately €7.30 at constant currencies.

Based on month end June spot rates, foreign exchange effects are expected to contribute around €0.40, which would lead to core earnings per share of €7.70. Our increased core earnings per share guidance considers an expected higher negative impact from our core financial results, as well as anticipated higher costs and reconciliation. The core financial result is now projected to come in at about minus €1.8 billion compared to previously guided minus €1.5 billion. This is mainly driven by higher interest cost, fair value adjustments for security backed assets and cost for transferring cash out of Argentina.

EBITDA before special items for reconciliation is now expected at approximately minus €700 million, up from previously minus €500 million to minus €600 million. This reflects required true-up for our long-term incentive program due to better share price performance also in contrast to the euro stocks compared to our previous planning assumptions. You’ll find an overview on our updated other group KPIs in the backup of our presentation.

On free cash flow, we expect at the upper end of our original guidance at approximately €2.5 billion compared to the previously guided €2 billion to €2.5 billion. We confirm our net financial debt guidance at €33 billion to €34 billion at constant currencies, while updating for a stronger negative foreign exchange effect of around €1.3 billion due to the strong U.S. dollar.

Please also be reminded that our guidance still includes the environmental science professional business. We expect to close this transaction in the fourth quarter.

And with that, Oliver, I hand back over to you to start off on the Q&A session.

[Oliver Maier, Head, IR]

Great. Thank you, Wolfgang. Thank you, Werner, for the overview.

Before we begin, I would like to remind you to keep your questions to about two per person so that we are able to take questions as from as many participants as possible. I also like to remind you again that to ensure good audio quality, we kindly ask you to use a speaker or landline, it makes it really much easier also on our end. And with that Francy, I think we can open up the line for questions.

[Operator]

[Operator Instructions] The first question is from James Quigley for Morgan Stanley. Please go ahead.

[James Quigley, Morgan Stanley]

One on price reform, U.S. price reform in Pharma and one on Pharma new launches. So with the U.S. price reform, your exposure is pretty low at the moment, but in terms of your portfolio, Nubeqa and Kerendia could potentially be impacted in the coming years? So, what’s your view of the potential long-term impact of the current U.S. pricing reform proposals? And to what extent could this impact your €3 billion peak sales target for Nubeqa, and the greater than €1 billion target for Kerendia? And the new launches, you briefly mentioned Kerendia. So, can you give us an idea of how that launch is progressing? The scripts we’re tracking broadly in line and -- started to take off towards the couple of weeks. So, if you could give us any sort of feedback on how the launch of Kerendia is progressing? Where it’s used? Is it being used in combination with SGLT2s yet? And then the other relevant feedback will be great. Thanks.

[Werner Baumann, CEO]

So, thanks for your question, James. So, first on the reforms in the U.S. I’m hesitant to come to any conclusions here before we see the final text and how it goes into law. So, we’ll have to wait a little bit on that one. But overall, to answer concretely your questions, we don’t see any reason for now to retain our peak sales potential neither for Nubeqa nor for KERENDIA, be reminded that both we said more than three and more than one. So, that’s still remains in place.

For KERENDIA, so what we’re seeing is we’re seeing continued progression, in terms of access that we’re seeing in terms of covered lives, and also the feedback both in the field, on the ground, but also in how it’s included in guidelines. You’ve seen maybe that ADA has updated their guidelines, including now also the FIGARO data, so that we have a broader approach, and it’s still seen as the highest level of evidence that can be brought. And we’re seeing that translate into clinical practice.

As to SGLT2s, in all of our studies, SGLT2s were baseline, were part of the baseline therapy that we would be added to. So, it takes the average of what SGLT2 has been prescribed for in the setting, which is still a minority of overall patients with renal disease in terms of quantitative numbers, also when it comes to new patients.

So, SGLT-2 is certainly a valid treatment. Some of the plans require prior off in terms of access, because SGLT-2 has a lower price point. What we are seeing is though that there is not a logic of moving patients that have not received access under Kerendia then to SGLT2. So, physicians really see a clear difference between the two. And we think that Kerendia can be a backbone for renal treatment. We have broad evidence from early onset of the disease until more complicated patient setting. So, we are seeing it progress in line with Entresto. When you look at NBRx the overall, the TRx line, I think we’re still there. It’s no surprise that this is going slow. That’s what we’ve seen with all cardiovascular launches in the last few years in the U.S. So, no surprise there, and the qualitative feedback stays strong, and we are seeing progress quarter-by-quarter.

[Operator]

The next question is from Michael Leuchten from UBS. Please go ahead.

[Michael Leuchten, UBS]

Thank you. Michael Leuchten from UBS. Two questions, please. One for Werner, to take you back to PCB, just to make this absolutely clear, because it is a topic of discussion in the market today. Why do you think that Oregon is not extrapolate -- or we shouldn’t extrapolate Oregon into other states that may have an incentive now to always come to the table. So, if you could just go through that in as much detail as you can, that would be very helpful. Thank you.

And the second question is on corn volume in the U.S. The acreage is down. I just wondering if you could speak to what you are seeing there. I think that’s slightly softer than most of us would’ve expected. Thank you.

[Werner Baumann, CEO]

Hi, Michael. And thanks for the question. So, on PCB, it’s very straightforward. When we set up our reserve and communicated in 2020 what we expected to see in the state settlements, I see with the number of states that we have settled very much within the framework of what we said earlier that the state settlements, which are of course not subject to the broader municipal settlements that those range all in the double-digit millions. So, we come to conclusions. We push it really hard, so that we get the entire litigation behind us, behind ourselves. And the PCB litigation setting in Oregon is really different, because of the specifics of Oregon state law and procedural rules. That is the difference compared to all other states. That’s why there is not a read through.

The next one is that from the remaining states that have not sued because there are only two, actually one being Maryland and the other one that is Pennsylvania that we are in litigation with. A number of states don’t have any exposure to PCB. Secondly, none of these states has similar state law compared to Oregon. So, that’s as straightforward as it could be.

And maybe last one that I forgot. We have also seen that of course we have one Delaware, the case at Delaware we are brought against was actually dismissed by the judge.

[Rodrigo Santos, Head, Crop Science]

And Michael, Rodrigo Santos here, let me come to your question about corn. So, what do we saw in U.S., due to the weather events that we saw in U.S. this year, we saw a reduction of 4 million acres of corn. And that’s basically what we mentioned here. But I think it’s a good opportunity for me just to reinforce that despite we saw these decreasing in area, we see a great performance of our corn business again. We launched SmartStax PRO in U.S. and it’s performing extremely well. We had our prices increase this season that is confirmed as well. And finally, we are expecting a market share again, when we have our brand and licensing business. So, just an opportunity to reinforce that globally we are having a great performance on corn and also in the U.S.

[Operator]

The next question is from Peter Verdult from Citigroup. Please go ahead, sir.

[Peter Verdult, Citigroup]

Two questions, please. Rodrigo, can you help us a bit more with your general crop pricing assumptions for the remainder of the year, as well as the comment on glyphosate? It feels like you’re being very prudent and painting a big step down in Q4. Not clear though to us, the Chinese generics, which step up supply. And then just separately, talking about low-double-digit seed price increases for next year. I just wanted to get the ties with you on that as we await the ESC card later this month.

Then moving to Stefan quickly just on Asundexian. I know you can’t talk to the day through ESC, but perhaps you could provide some scene-setting comments or share your level of excitement going into the presentation. And Werner commented earlier on this call that the Phase 3 program is likely to be laid out at the webinar on the 29th as well as assume that program is going to be a lot broader than atrial fibrillation, which you mentioned you will be pursuing on the Q1 call?

[Rodrigo Santos, Head, Crop Science]

So, thank you, Peter. Let me start here, Rodrigo, and then I’ll pass to Stefan, of course. On glyphosate, what we guided this year, we mentioned before that we were seeing a price higher in the first six months of the year, and we saw more normalization in the second half of the year. What we consider now that we are going to still have a good price on Q3 as well. And that’s what is considered today in our plans here.

Of course, we are monitoring that. This is a product that we price every month. So, we are very fast to react anything that we need in this product. So, we’re monitoring this very close. But that’s the assumption that we took.

On the next year campaign, we are preparing to launch in U.S. End of these months, we’re going to be ready for that. So, we are still working on that one. But I would say that our view today is that we’re going to have a low double digit percentage increase in our corn and soybean business. That is our expectation for the next season that we should be launching in August now.

[Stefan Oelrich, Head, Pharmaceuticals]

So, let me put it that way. I continue to be equally excited about Asundexian, as I have been throughout the beginning of the year as we started talking about our Phase 2. So, obviously, as we get closer to really giving out all the data points to you, the excitement starts on our end. The webinar, I think will give you clarity around what our plans are in terms of our Phase 3 settings. And I hope you will be pleased with what you will see, but I can really not -- I cannot say more before we publish at the session there at the ESC. So, stay tuned. And I look forward to many of your questions at the webinar. So, there’s three weeks left, so hold your fire.

[Operator]

The next question is from Vincent Andrews from Morgan Stanley. Please go ahead.

[Vincent Andrews, Morgan Stanley]

Thank you. Rodrigo, could you talk a little bit about the exit from Argentina? Just in terms of the entirety of your soy seed business, or is that just the germplasm and you’re still looking to be involved in traits or vice versa or what?

[Rodrigo Santos, Head, Crop Science]

No. So, the short answer for you is that we exit the germplasm and the trait business from Argentina. Just again, a good opportunity for me to mention about soybean. Again, we have a very strong performance of soybean again. So in Brazil, as both Wolfgang mentioned, we are migrating from 600,000 acres last year with Intacta 2 Xtend. And we are now expecting more than 6 million acres. As well in U.S., XtendFlex, we are moving to a 20 million acres as well. And you even saw the price that was mentioned by Wolfgang, and we are keeping the number one position in U.S.

So basically, what you see on sales report is basically the effect of the excess seed of last year, and also Argentina. But in terms of margin, you don’t have an impact, because both things, exceed seed and Argentina didn’t have a margin positive. But that’s it.

[Vincent Andrews, Morgan Stanley]

If I could follow up on the glyphosate outlook. Well understood what’s going on with pricing and your expectations there. What’s going on with your own production costs? I know you have vertical integration into phosphate. But there have been big run ups in chlorine and ethylene oxide, which I think are core ingredients. Do you have sort of tolling agreements on those or long-term contracts, or what has been happening at the cost side of your glyphosate production?

[Rodrigo Santos, Head, Crop Science]

Yes. Vincent, I think you already mentioned on your question the fact that we have a competitive advantage, the fact that we are vertical, right. So, we have from the mining to the final product that helps us in terms of managing the costs. Of course, we are also impacted by the global situation that we’re facing right now in terms of energy costs and inflation costs, also in terms of surfactants, that we have also as well. But I think that we are working a lot on managing and the fact that we have this vertical line that you mentioned, gives us this competitive advantage.

[Operator]

The next question is from Sachin Jain from Bank of America. Please go ahead.

[Sachin Jain, Bank of America]

Two questions, please. One on Crop and then one on Pharma. On Crop, if you could just clarify how much of this Xtend sales upgrade was glyphosate pricing? I’m assuming its entirety. But, if you could just clarify. And then, if you could speak to that glyphosate pricing into 2013. The question so far focused on the end of this year. Should we expect the gains that we’ve seen this year to reverse next year? And if you could put that together with your commentary on low double-digit growth for corn and soy, do you expect the underlying business growth to offset any potential reversal of glyphosate again?

Secondly, for Stefan, I’d be remiss if I didn’t ask the factual level question. So, two high-level, one within your phase program, should we expect any fast to market opportunities and initial indications that you could potentially do quickly to go to market quickly? And then she will also expect a better financial outlook on margins, one of the offsetting debates to a broad Phase 3 program is the potential cost, or do you think that can be digested within your existing outlook? Thank you.

[Rodrigo Santos, Head, Crop Science]

So, let me use this opportunity to answer your question and it’s an interesting question. Let me use that opportunity just share and reinforce the invitation that was done here by Werner. Next week we’re going have the field event in U.S. that will be really unique for us. And I think one of the key opportunities that we are going to have next week to share with you, when we combine the pipeline review that we had this year with the performance that we are seeing again in Crop Science, what I can say to you is that we believe that we have a competitive advantage, a sustainable competitive advantage in the market with all the innovation that we are bringing, all the new technologies that we are launching this year and in the coming years, that gives us the confidence of the growth plans that we have not only for this year but for the next years that we share on the Capital Markets Day.

Saying that, of course, it’s too early to say what is our -- clear plan for ‘23 growth? We mentioned a little bit already what we are doing on corn and soybean in U.S. that gives a good indication where we start next season. We are working on that one. But again, I feel that our innovation, our pipeline, and I hope that you can come to the field event next week, because you are going to see a little bit more what’s coming for not only ‘23, but ‘24 and ‘25 that we are very excited and that we will continue to feel what we consider our sustainable competitive advantage and keep growing the business.

[Stefan Oelrich, Head, Pharmaceuticals]

Stefan here. So, thanks for the question, Sachin. On Factor XI , I’ll try. I would say that the Phase 2 data set that we’re going to present are not necessarily -- got to be indicative for a shortcuts that we could take on Phase 3. So, but again, let’s talk about this in three weeks again. But it wouldn’t necessarily be in line with what we have done in the Phase 2.

And on margin, so for this year, we’re staying within our swim lanes. I mean, we are hit by currency as you can see. But operationally we are at where we said we would be. Moving forward, we’ve always said that we could digest within our guidance also a clinical development for Factor XI. That stays as is. But at the same time, we are battling inflation and currency headwinds. That goes without saying.

[Operator]

The next question is from Richard Vosser from JPMorgan. Please go ahead, sir.

[Richard Vosser, JPMorgan]

Hi. Thanks for my question. One, just building on the comments you made, Rodrigo, on the future development of the Crop business. Just thinking about short stature corn itself in particular. Could you remind us of the timelines that can get to market and how you see the potential for gaining market share there and maybe sustaining some of the higher level growth you are seeing in crop at the moment?

And then, second question, just on consumer. Firstly, I think you’ve been launching and bringing a new OTC switch PRO [ph] to the market. Could you talk about maybe how you see the potential of that? How that’s contributing to growth and how you see that contributing to growth going forward? And then, more broadly on consumer, the cost of living crisis is hitting around the world as we know. So, we have had very good exit from the pandemic of Consumer Health, people are buying lots of brands. But do you think that the growth of branded OTC market will be hit maybe in the second half, maybe in 2023, just thoughts there. Thanks very much.

[Rodrigo Santos, Head, Crop Science]

So, let me start first, and great question. So, next season, ‘23, we’re going to have trials with a short stature corn in U.S. with a breeding version. Of course, the biotech version will come by the end of the decade. But we are excited about that opportunity. By the way, again, next week doing my commercial here next week, we’re going to have the short stature corn stack of corn, combined with the [indiscernible] that we just announced, followed by [indiscernible] in soybeans. So it’s kind of an excitement opportunity to show the future. But also, I want to say that I’m very pleased with the performance of Crop Science this year as well, and that gives us the confidence of keeping the discipline on the execution that we are doing for the future years.

But your question is great because we are seeing in short stature corn the highest awareness in terms of farmers willing to plant and willing to try the technology that we’ve seen in the last 5, 10 years. It’s really great what we are seeing in terms of expectation of the farmers, and we are planning to have the trials next year.

[Heiko Schipper, Head, Consumer Health]

All right, Richard. A couple of points on Consumer Health. First on Astepro. Yes, this is an important launch for us. Allergy is a very important category. We were always good there with Claritin, but we were frankly missing a strong presence in the intranasal segment that has actually grown very good. And we were looking for something that was truly differentiated, and we found it.

This is non-steroidal, which is important for consumers. And it’s also an antihistamine, so it works actually faster, which is also very relevant for allergy sufferers. It’s a very non-pleasant situation if you can’t breathe properly. So, we feel very good about it.

It’s a U.S. only for now, so we just started selling it in. This is not the allergy season at the moment. So, this is sort of prepping it for, let’s say, the September, October window, and so it will definitely help already this year. Obviously, the bigger part of the allergy season is in the April, May period. So, this is going to make an important growth driver for us in the future, particularly because it’s so differentiated.

Then, the more general question, how do you sustain growth in a consumer business at times of inflation? Is there a risk to that store brands or private label brands start to take share? It’s obviously a very important question. It’s not something that is the first time that we deal with those situations of recession.

So, what’s important in those times? First of all, make sure you have strong brands and support them and bring innovation. You need differentiation. You need strong brands. They are much better protected than weak brands, and I think we have a very good portfolio. We’re going to need to keep innovating. And not just innovating on the high end of the market but also come with sort of more affordable propositions that don’t necessarily mean lower margins, but you can find a different price point strategy.

So, those are all things that we are working on. Obviously, the extent of the inflation is very high, probably quite -- particularly in the developed markets. So, we are tracking this. For the moment, we’re not seeing it. But rest assured, this is very high also on our agenda.

[Operator]

Mr. Vosser, are you finished with your question?

[Richard Vosser, JPMorgan]

I am indeed. That was very good. Thanks very much. Apologies for not saying thanks.

[Operator]

You’re welcome. The next question is from Tony Jones from Redburn.

[Tony Jones, Redburn]

I’ve got two left. Just wanted to circle back on Roundup. Can you help us frame what the excess EBITDA is on an annualized basis, so we can sort of think about what might end up reversing the earnings line sometime next year?

And then, a question on margin in Pharma. I think year-to-date, we’re at just over 30%. I think in the release, you talked about some non-core business income. [Technical Difficulty] And then secondly, what needs to change or what do you need to do in H2 to meet the 30% guidance?

[Stefan Oelrich, Head, Pharmaceuticals]

So, let’s then get started with the Pharma question first, on margin. So first, first quarter, obviously, we’ve been battling a couple of headwinds, and then I’m actually quite pleased to see that we’re still coming in strong on our margin targets. Yes, we had some very small divestitures. We’ve also made -- I think this was published in the press, which were accretive to the margin, but on a smaller scale.

So for the second half, structurally, where we should see improvement on profile is we’re seeing a recovery on some of the businesses that were coming slow out of COVID, like our women’s healthcare business in the United States. So, that’s slowly recovering. You’ve seen the entire market for a long-acting contraception being quite depressed coming out of COVID, so that’s slowly coming back. We’re seeing obviously a dynamic on the launch side. We’re seeing the Xarelto VBP effect in the second half mechanically going away, because we will have it annualized then. It will be upside against more VBP to come. But overall, from a margin perspective, we look technically a little better in the second half.

[Rodrigo Santos, Head, Crop Science]

So, let me go to the question on the glyphosate here. So, when we set the target last time we were together, we said that the half of the growth would come from glyphosate, half of the growth would come from the core business. What we are seeing is that a very consistent performance on the core business. Let me highlight that one because I mentioned about corn, but also fungicides and insecticides, and this is very important. This is when I talk about sustainable competitive advantages, this is our core business taking us for the next years as well.

What we did in glyphosate, of course, we are growing even more than we planned initially. So now, more than that is coming from glyphosate for the full year. We are having that impact. How much that will be next year is very hard to predict right now. I think that we are prepared for all the different scenarios that could happen with glyphosate as we mentioned. We have that competitive position that I answered to Vincent about our cost of production. But, I want to reinforce my comment about our core business. This is our core of our innovation in our technologies, the launch that we are having in the market, and we’re going to continue to drive that. And of course, managing glyphosate as we should do, and we know this. For the last 25 years working with glyphosate, we know those different cycles and we’re going to manage that one.

[Operator]

The next question is from Laurent Favre from BNPP. Please go ahead.

[Laurent Favre, BNP Paribas Exane]

I’m sorry, but I’ve got one more question on glyphosate. And Rodrigo, it’s a question about it’s what you’re hearing on the ground in China. I was wondering if you started to see a supply response and some of the generic producers actually looking for debottleneckings. That’s my first question.

The second question is for Werner. I think you’re on track to, I guess, beat your 2016 EPS records at €7.70. I was wondering if you had any early thoughts on the dividend for this year, also given that you’re making progress on the deleveraging as well. Thank you.

[Rodrigo Santos, Head, Crop Science]

Yes. So, let me share a little bit of the -- our intelligence read on China. Of course, after all the adjustments that were done in China because the environmental impact and new regulations that we have, you have fewer producers of glyphosate there, of course, in a more restrict production requirement than it was in the past. Also recently, you had some impact in terms of supply in China as well for some specific events in some of their sites that we have.

Again, this is something that we’re going to continue to monitor. There is this concern about supply of glyphosate globally. We are prepared. We have our plans in place, but we need to continue to monitor that one. And again, I feel that we are prepared for the different scenarios that we could come on glyphosate for next year.

[Werner Baumann, CEO]

All right, Laurent -- go on.

[Laurent Favre, BNP Paribas Exane]

And I was wondering, would you have any plans to actually debottleneck yourselves in the U.S?

[Rodrigo Santos, Head, Crop Science]

No, we don’t have plans today to increase our production capacity. No. We are around -- the plan that we have today, that supplies around 40% is what we’re going to continue managing probably.

[Werner Baumann, CEO]

All right. Laurent, then let me address your second question on the dividend. We have a policy that helps guide kind of the frame that informs dividend payments, and that is that we are going to be within the 30% to 40% range of our core EPS that we’d be paying out. And that’s also the perspective from today for the dividend ‘22 that’s going to be paid out ‘23. Of course, it will be finalized once the year is over, yes, but that’s the guidance that we have, and it stays in place.

[Operator]

The next question is from Keyur Parekh from Goldman Sachs. Please go ahead.

[Keyur Parekh, Goldman Sachs]

Two please, if I may. First one on Eylea, would love to hear your thoughts on how do you see the outlook for this in the light of increasing competition, especially as we go into 2023 and 2024? And then, secondly, for Werner. Werner, you mentioned the BASF litigation in your prepared remarks on the arbitration, sorry, not litigation. How should we think about kind of the potential outcomes here? How should we think about magnitude of those outcomes? And what may be the courses available to you, was the arbitration to go against Bayer?

[Stefan Oelrich, Head, Pharmaceuticals]

So, thank you, Keyur, for the questions. First of all, I think you’ve heard us, we’re really thrilled with our Eylea performance to date, another double-digit increase. We’re going to come out probably a little ahead for the year of where we said we would be in the beginning of the year. I think this is a testament to the strength of this product, and we are clearly the standard of care in back of the eye here.

Now, to the future of the market, I don’t have a crystal ball, but there will be obviously some new elements coming in. The launch of competition, on the one hand, and also generic or biosimilar Lucentis that will be coming into play, so that could put some pressure on pricing in the future. And faricimab, we will have to see. It’s early days. If I look at the trial data and do indirect comparisons, it’s hard to see superiority to us. And then let’s not forget that we will be coming out later this year with data on our high-dose 8-milligram regimen for Eylea. So, we feel confident about the future there, given all elements combined.

[Werner Baumann, CEO]

All right. So, Keyur, then let me address your question on BASF. So when we went through the process of the divestiture of our antitrust assets, it was actually a process. We had different packages, which supposedly could have gone to different acquirers, were offered. And in the end, everything was then sold to BASF. That’s where the controversy started relative to the adequacy of our cost disclosure, so that is actually at the heart of the arbitration process.

Secondly, we really don’t know what the outcome is going to be, and we cannot put a number to it because otherwise, we would have provided for it. And that is why we are the -- let’s say, the potential outcome of the arbitration process was actually not on balance sheet, but has always been captured in our contingent liability. It’s actually a fairly big part of that, depending on the outcome because then you put, let’s say, the max negative here that could eventually come out of it in the contingent liabilities. So, it is actually a major part of the contingents that we reported as part of our annual report, but we really don’t know what’s going to be the outcome of it.

Once we have the arbitration ruling, the possibilities of recall should we not like it are very limited, yes, to be clear on that also, yes. So arbitration is typically by and large binding, and unless there’s really some stupid stuff that is blatantly obvious, it is binding for both parts.

[Operator]

The next question is from Sebastian Bray from Berenberg. Please go ahead.

[Sebastian Bray, Berenberg]

Could I start with one on glyphosate, please? Could you give us an update on the total number of cases filed and the numbers settled? Was it last count, I think this was 140,000 and 105,000, respectively. Has this changed?

My second question is on costs. Is the run rate of €600 million to €700 million EBITDA in the reconciliation line a reasonable number to take for 2023?

And my third question is on the impairments of about €1.4 billion net taken to Crop Sciences. Why is now a good time to do €750 million there or thereabouts for the cotton business, given that prices are so high at the moment? Thank you.

[Werner Baumann, CEO]

All right. Sebastian, thanks for the questions. I’ll address the first one on the settlement, and then Wolfgang will take the other two.

So, we have roughly 141,000 claims, yes, that have been observed. Out of which about 108,000 have either been settled or for that reason have been -- to be in [Technical Difficulty]. And that’s the current status. So, no massive movements that we see. We see a few cases that are being added, but there is no dynamic in it.

[Wolfgang Nickl, CFO]

Sebastian. I hope you’re doing well. I’ll take the other two. Let me start on recon, I’ll just give you the complete package. You have noticed last year, we were just shy of €500 million, and we then increased the guidance to €500 million to €600 million. And the main reason there was, I think I said that with the guidance, that we are starting to invest in an update of our ERP systems. And since that is not division-specific, it’s just recorded in the initial phases in the divisions.

What we are seeing now is as it relates to our long-term incentive, which is highly depending on three items. It’s TSR, it’s ROCE and it’s sustainability. We do see with the stock price that has, albeit, we don’t like where it is in totality, but it has increased quite a bit, in particular as it relates to the euro stocks. And the improvements in the business also drive the ROCE up, which is great news. So, that drives the LTI provision that we have to take because we need to assess that every quarter up.

We have the principle, Sebastian, that we put 100% of LTI always in the divisions. And whatever is over or under we balance for recon. I think that’s a really good practice because otherwise, you have multiyear events distorting one year for the divisions. So, that’s the reason. I can’t give you guidance today for recon for next year. I don’t know what the stock price is doing. But operationally, I think we are fully in line. There are no significant changes there.

As it relates to the impairments, let me -- I’m sure you understand this as well as I do. This is, to a very large degree, mechanics. Just to ground everybody, we, as a company, have a significant amount of intangibles on the balance sheet. It’s about €37 billion goodwill and €26 billion in other intangibles.

When you have -- you evaluate that at the end of every year or more frequently, if you have a triggering event. And the triggering event last quarter was because we all know interest rates went through the roof. And that was paired with a higher beta because of the volatility in the markets. So, it drives you back up. So now, you need to discount your future cash flows for all these assets at a much higher discount rate, and that drives the impairment needs. You’ve also seen that we had that last year and then parameters change, and then you write it up after some time.

Now, on goodwill, you can’t write back up, but on other intangibles, you could write back up. The effects for the total company of about €1.4 billion were, to a large degree, driven by WACC. For cotton, it was also WACC, and there were some probably conservative business assumptions that we review with our annual cycle. We will review that from time to time. Nothing that I’m concerned with at all. Non-cash, it’s bookkeeping. So, I hope that answers your two questions.

[Werner Baumann, CEO]

Right. Thank you, Sebastian. And Francy, I think we have time for about two more questions.

[Operator]

Okay. The next one will be from Jo Walton from Credit Suisse.

[Jo Walton, Credit Suisse]

Two questions, please. Firstly, on the ag side, you’ve talked, Rodrigo, about the excellent performance of the underlying business. But you’ve had a strong upgrade from 7% to 13% top line growth. Can we just understand what proportion of that upgrade comes from high glyphosate pricing and what proportion comes from the underlying business? Because I think the suspicion is the vast majority of it is glyphosate which, of course, may reverse.

And then, associated with that, you’ve also talked about lots of new product introductions going forward. Just to help us understand this, do you get to a decent level of profitability with new products very quickly, or should we think of the next couple of years as being heavy investment years as you roll out these new products, at the same time as your glyphosate excess profitability may decline whenever that happens?

And just finally, on the helpful financing question, please. The €1.8 billion, is that a good guide going forward for your underlying charge given the higher level of interest rates, or are there some one-time events that mean it won’t be as high as that next year?

[Rodrigo Santos, Head, Crop Science]

So, let me start. And I’ll answer your question very precisely here. Yes, this season with a 13% guidance that we have, we have a significant contribution of glyphosate on that growth. No doubt on that one. When we said at the beginning of the year that we have half of the growth coming from glyphosate, half of the growth coming from the core business, now with the update, glyphosate represents more than that. It’s a significant impact this year.

Also because of the -- all the elements that we are capturing on this guidance as well in terms that we mentioned, that was mentioned by Wolfgang when we talk about the cost impact of production, commodity price, all energy costs and so on. What we see for the next year is when you ask me the question about the new technologies. Now, when we launch, and this is a little bit of the experience that we have, we normally drive the penetration of those new technologies, new products very high, especially on a scenario that we have today that the farmers are looking for highest yield possible to help on the food security, I think that we are seeing an adoption of all these new technologies even higher than we used to see in the past. So, we are confident that we’re going to continue launching these new technologies. The penetration with high, we plan for that, and that has a positive contribution on the margin as well.

For the next season, clearly, the core business will play a more important role for the next year. And that’s why when I mentioned about the corn and soybean in U.S., pricing that we are planning for the mid of this year is an important component of that. But yes.

[Wolfgang Nickl, CFO]

Let me take the -- I think you were talking about the core financial results, which we originally guided to €1.5 billion, now €1.8 billion. I gave you the three reasons on the call. One was the reevaluation of asset -- security-backed assets. That will completely depend on what the stock markets and bond markets will do. I can’t predict that. There was one that’s related to getting cash out of Argentina. That is probably something that will be with us for some time, but it’s very hard to predict. And the third element is indeed interest. I mean if you look at the €1.5 billion that we went into the year with, a good two-thirds is interest expense. And there, we are relatively good protected as long as we are on the current bonds, and we have, in many cases, fixed interest rates. But you also saw that we replaced the hybrid at higher interest rates. And I think you should assume that as we have to refinance over the next two, three years, depending on the development of the interest cost, that there could be a slight uptick on these numbers. But we’ll get to guiding these numbers when we get into next year. But interest is obviously, for a company with €33 billion in net financial debt, an important component.

[Operator]

The next question is from Falko Friedrichs from Deutsche Bank. Please go ahead.

[Falko Friedrichs, Deutsche Bank]

I have one last one on Eylea. Trying to understand a bit better the strong performance in H1, 13% growth. I think your initial guidance for the year was mid-single digits. Is there any reason why it should slow down significantly in H2, or can it actually continue to grow at these rates in the second half? Thank you.

[Stefan Oelrich, Head, Pharmaceuticals]

So, thank you, Falko. So, we’re seeing -- we’re seeing continued strong demand for Eylea. So second half, we have the introduction of competition in the market, so that may slow down acquisition in new patients. But I remain confident that we’re going to have a strong year for Eylea. But it’s hard to read when you compare what market entry of faricimab has done in the U.S., how that’s going to translate to Europe. We feel strong about our data. We feel strong about our safety, and we’ll see the rest in the second half.

[Operator]

Ladies and gentlemen, we kindly ask you to understand that we have to close the call now due to the time interest. And I’ll hand back over to Mr. Maier for any closing comments.

[Oliver Maier, Head, IR]

Thank you, Francy, and thanks to all of you for your time and your attention today and the questions. Greatly appreciated.

Before we close the call, I also would like to remind you of the upcoming Crop Science Field Technology Showcase on August 11th. Really looking forward to be getting out in the field and seeing some of you, or hopefully most of you. We still do have some seats available, so please reach out if you’re interested. It’s always a great event.

And this closes our call for today. Thank you.

[Operator]

Ladies and gentlemen, this concludes the second quarter of 2022 Investor and Analyst Conference Call of Bayer AG. Thank you for participating. You may disconnect. Have a good day. Goodbye.