Bayer Ag S/Adr

Good morning to everybody and welcome to our conference call for the second quarter of 2024. Bill will start our presentation with his perspective on the business development and the progress made towards our strategic objectives. Wolfgang will then speak in more detail to the operational performance in the second quarter and comment on the full year outlook. The presentations will then be followed by Q&A, where Bill and Wolfgang will be joined by the presidents of our three divisions. Before starting, as usual, I would like to briefly draw your attention to the cautionary language included in our safe harbor statement. And with that, over to you, Bill.

Well, thanks, Joost, and thanks to all of you for joining us. It's really a privilege to represent the work of Bayer today. Over the next hour, my colleagues and I will highlight the progress that we've made in the past quarter and we'll take your questions. And in that time, we hope you get a picture of what we see when we look at the company, an organization that's focused on the biggest challenges and the opportunities ahead of us. that's committed to delivering what we promise and is making progress in each of the areas we outlined at our Capital Markets Day at the beginning of March. One of the central commitments we made to you on that day is that this organization will consistently perform while simultaneously addressing the longer-term roadblocks that hold us back. The 154 days since March 5th have been pretty good evidence that we can do both. Our business is competitive in each area. We're overhauling bureaucracy. We're ramping up our efforts on litigation. We're stepping up cash generation. We're advancing the pharma pipeline. Particularly on the last one, you should see us making a lot of progress. Just yesterday, we got great news on Corendia, which I'll touch on later in my remarks. We still have a lot of work to do, but I like our momentum, and we can confidently say that Team Bayer is up to the task. Let's start by looking at our operational performance. Here, the key message is we remain on track to deliver. We're confirming our outlook for the group. Revenues are up slightly in currency and portfolio adjusted terms, which we'll use throughout the remarks. Core earnings per share came in at 3 euros and 76 cents, and free cash flow improved from minus 2.6 billion euros in Q1 to minus 1.4 billion euros at the half-year mark. I'll touch on key highlights from the divisions, and Wolfgang will give you more detail on the numbers and what's behind them. It's no secret that the agriculture market has been challenging. We've felt that as well. But our crop science business nearly offset headwinds with corn pricing as well as increased soybean and glyphosate volumes. We saw margin pressure in the first half, but our team has shown discipline in recovering costs and improving inventories to improve our cash generation throughout the first half of the year. And we'll continue to make that a priority in the second half. Pharma posted another very solid quarter in Q2. The team has good momentum, and I'm impressed by how we're managing the LOE transition. Xarelto declined 11% in Q2, which doesn't come as a big surprise given increasing pressure from generics. On the other hand, our launch products, Nubeka and Corendia, are continuing their impressive momentum, with sales of each up 70% or more year to date. ILEA is growing in all regions and the eight milligram launch underway in the first markets. Our base business has proven to be robust. In fact, if you exclude the Xarelto business, our pharma sales would be up 9% in Q2 and 7% in the first half of the year. That kind of growth would position us at the upper end of the industry. And year over year, we've managed to expand our margin in the first half of 2024, despite headwinds from an unfavorable product mix, currencies, and the higher costs associated with launches. Consumer health returned to growth in Q2, bringing half-won sales to a 2% increase, with most categories up. We see great growth coming from our dermatology category, thanks largely to the Bepanthen brand family. And I've heard from pharmacists in Europe firsthand that they're very happy to see supply improvements for Iberogast, which is driving growth in our digestive health category. Our EBITDA margin came in at 22.3%. These results put us in a good spot to confirm our full year guidance. We still have plenty to do, but we're gonna continue building on our momentum quarter by quarter. I speak for all my colleagues and all of Team Bayer when I say that we know what we need to do to deliver, and that's what we plan on doing. Well, let's take a look at our strategic priorities. First, growth and innovation. There's a lot happening on our pharma pipeline. We'll cover that in a minute on a dedicated slide. But I see important things happening in other divisions as well. In crop science, we continue rolling out short stature corn. It's in the ground and fields in the United States, with pilots running in Italy and Spain. But that's not the only innovation we're working on in corn. This year, we've launched a new generation of VT4 Pro corn in the US. The technology helps the corn plant protect itself from one of agriculture's most perilous pests, the corn rootworm. With a demonstrated yield advantage of more than five bushels per acre, we expect it to reach up to one million acres in its first year in the market. In consumer health, we've articulated a vision to reach billions of consumers with trusted self-care. That's a step change from where we are today, and it will require quality growth through innovation, through expansion of new brands, and the right portfolio choices. That's why we're taking brands like Iberogast, a beloved gut health treatment, and we're expanding it to the US. We're launching one a day into the emerging field of cellular health. Now to litigation. On PCBs, we had some news at the end of July that I'd like to put in context. You might remember that in 2020, we communicated a nationwide class settlement with 2,500 local governments. Some municipalities opted out. Seattle was one of them. A unique case with special circumstances as it involved claims not present in the other opt-outs. So reaching a settlement here is significant. Overall, there are nine environmental cases involving municipal plaintiffs that are still pending, and each case is different. If we choose to pursue settlements, we expect them to come in at lower terms. Beyond that, we've ramped up our efforts to enforce the indemnity agreements signed with Monsanto. In the Roundup litigation, we achieved a very favorable decision from Down Under, where the Federal Court of Australia dismissed a class action. Once again, when it's really about science in the courtroom, we win. We've also seen positive developments in the US. Even the Philadelphia Court of Common Pleas, which is the most difficult court for companies as defendants in the US, they made some decisions in our favor in the most recent Roundup case, and this ultimately led the plaintiff to dismiss the case. We consider this a great success. Outside of the courts, we continue to explore measures to contain litigation risk. This involves partnering with American farmers who understand glyphosate's great importance for their livelihoods and for global food security. We continue to focus on legislation at both the state and the federal level, including advocating for the passage of a farm bill in Congress as early as possible. We want to see a bill that gives American farmers the reliability and the science-based regulation they deserve. We will continue to champion their voices. Further, we continue to evaluate every appropriate measure to bring closure to the situation, both for our company and for U.S. farmers, because we need our revenues to go to funding the company's mission, not the litigation industry. Third, cash. We're advancing toward our target of two to three billion euros in free cash flow this year. We saw effects from lower incentive payouts in Q2. We're also putting a strong focus on managing inventories and optimizing working capital. Expect more progress here in the second half. Finally, dynamic shared ownership. Two weeks ago, Julio and his team announced the architecture of our consumer health division. They're combining roles and removing multiple layers for more focus, bigger impact, and stronger integration of the consumer in the way we work. We've expanded the scope of leadership roles. For example, combining our head of R&D and head of marketing. We've consolidated regions. We're extending the span of coaching. These are bold decisions and we're gonna continue making them. All three of our businesses now have an organizational blueprint that's leaner, less hierarchical, more focused on customers and products, and will continually improve toward that standard with the goal of orienting everything around the mission. We're systematically installing a new way of operating across the whole company, and it's proceeding apace. We have 3,200 fewer jobs in the company than we did to start the year. And we've stood up 900 teams, working on some of our most important missions. Our new BECA team is fully schooled in the new model. And the business is growing in all regions, ahead of expectations, quarter over quarter and year to date. Our crop science team plans to roll out 10 blockbusters over the next 10 years, and those 10 teams are among the 50 product teams that we've activated in crop science, each with the sole goal of improving the solutions we develop for the world's farmers. Well, I just hinted at the progress in our pharma pipeline. Let's take a closer look at it. In just the past 90 days, we've taken big steps toward filling the mid-stage pipeline, expanding labels and advancing late-stage assets. I'll start with our most recent piece of news on Carindia. Just yesterday, we released positive top-line results from the phase three trial, Fine Arts Heart Failure. That's important news, especially in a high-stakes, innovation-driven business like ours. And we're happy to be able to say that each of our past five phase three clinical trials has yielded successful results. This trial evaluates the medicine in patients with heart failure with left ventricular ejection fraction of 40% or greater. Let me put that in context. Heart failure is the leading cause of hospitalization for people over 65. Mortality rates are comparable or even worse than most common cancers. Of the 60 million people who suffer from heart failure worldwide, approximately half meet the parameters that this study evaluated. We look forward to sharing the detailed data from this study in less than four weeks at the upcoming Congress of the European Society of Cardiology on September 1st. And we're hopeful that these results can lead to a significant expansion of the patient population we reach with corandia. We're also making progress in the fight against Parkinson's, a devastating disease that hasn't seen significant advancements in the standard of care for far too long. The FDA gave fast-track designation to AB1005, a gene therapy to treat the disease. The therapy was also awarded the Innovation Passport, the UK MHRA's innovative medicine designation. A phase two trial, including 87 patients, is underway. And this is already the second investigational gene therapy from AskBio to reach mid-stage clinical development. In addition, the FDA also gave a regenerative medicine advanced therapy designation to Bimdaniprosyl. Bimdaniprosyl is the most clinically advanced investigational cell therapy in the US for treating Parkinson's disease. It has the potential to help patients living with Parkinson's regain functions that they've lost to this terrible disease. Finally, we're working on an investigational tyrosine kinase inhibitor in order to treat patients with non-small cell lung cancer whose tumors have HER2 mutations. This work was recently backed by FDA's breakthrough therapy designation. Our phase one results were so promising that we were able to advance the program directly to late stage, and enrollment of the first patient in a phase three trial is just around the corner. Beyond these pipeline advancements, we're also seeing good momentum in commercializing our portfolio. We got positive top-line results out of the Aranote study in mid-July, and with that, we've further advanced the data package of Nubeka's clinical profile. We expect the data to pave the way for a broader label in the metastatic hormone-sensitive setting of prostate cancer, now including the use of the medicine without concomitant chemotherapy. Looking ahead to 2025, we're preparing to launch both elenzanetant, a potential novel non-hormonal solution for women suffering from vasomotor symptoms associated with menopause, and acaramidis, a cardiology drug that we have exclusive marketing rights for in Europe. We recently submitted the regulatory filing of elenzanetant in the US, and acaramidis was already filed in Europe in January of this year. Since then, new data from the ATTRIBUTE-CM trial presented in May confirmed this medicine's potential for a best-in-class clinical profile. Our pharma pipeline is one of our biggest levers for value creation. There's certainly much more to do here, but it's been a very productive 2024, and we can be optimistic about what's ahead. Well, before handing it over to Wolfgang, I want to close my remarks by looking at the remainder of the year. As I said earlier, we have some work to do to hit our targets. Let me assure you that we're keeping our eye on the ball and we're going to deliver. Here are a few priorities that we're focused on across each business. In pharma, we're going to make the most out of our growth opportunities. Expect us to keep writing the ILEA growth story, powered in part by the continued rollout of the eight MiGs. And we'll keep growing our new BECCA and Corendia franchises. In crop science, we expect to see strong growth in our core, particularly from our core crop protection business, including innovative products like the Fox family and Curbix in Latin America. In addition, we're stewarding our costs very carefully, and we're assessing how to respond to increasing generic crop protection pricing pressure. We believe this is going to require a tailored approach, similar to how we manage glyphosate today. We continue to explore options to mitigate price pressures that we see in crop protection. Further, we want to expand our margins in the second half of the year, leaning on dynamic shared ownership In consumer health, we're gonna drive demand and accelerate growth through effective launches and science-based innovation. We're gonna go after each of these priorities in the near term while continuing to address our longer-term challenges. If we wanna earn back trust, we have to do both, and I know that we have what it takes. So thanks for your attention, and I'll turn it over to Wolfgang.

Thank you, Bill. And hello also from my side. I'd like to provide a bit more color on the drivers of our second quarter results before I turn to our outlook for the full year. Well, let's look first at our group results. Q2 sales increased by 3% on a currency and portfolio adjusted basis to 11.1 billion euros. We faced a 240 million euro foreign exchange headwind. Therefore, as reported sales growth was about 1%. Our EBITDA before special items came in at 2.1 billion euros, which is a 16% or about 420 million euros below the prior year quarter. This was largely driven by an unfavorable mix effect in crop science and a higher provision for short-term incentives compared to a significant reversal in the prior year quarter. We also saw about 130 million euros of FX headwinds in our EBITDA before special items. Altogether, margin before special items at the EBITDA level came in at 18.9% for the quarter. The lower EBITDA before special items translated into core earnings per share of 94 cents in Q2, which is 28 cents or about 23% below the prior year period. Our core financial result came in at minus 0.5 billion euros and was in line with the prior year quarter. Despite lower earnings, our free cash flow came in at 1.3 billion euros compared to a negative 0.5 billion euros in last year's Q2. Two major effects drove the improvement. Due to active working capital management, we improved our earnings conversion into cash. Our Q2 free cash flow, for instance, includes positive results from our inventory optimization efforts. In addition, we had lower incentive payouts versus prior year of about 1 billion euros. The positive cash contribution in the quarter reduced our net financial debt to 36.8 billion euros by the end of Q2. Let me now comment on the divisional performance on behalf of my colleagues. In a market where overall growth is considerably softer than anticipated at the beginning of the year, crop science sales came in at 5 billion euros in Q2, up 1% versus the prior year. Our core business declined by 3%, driven mostly by a decline in corn acres, adverse weather and generic pricing pressure in core crop protection. However, we were able to mitigate some of this by the growth in our soybean business, which benefited from higher volumes on the back of acreage expansion in North America. In addition, our insecticide franchise showed strong volume growth, driven mostly by our Movento product in EMEA. For corn, we continue to see strong pricing globally, driven by the excellent performance our portfolio offers. Our glyphosate business recorded a 42% sales growth as volumes increased due to normalized shipping patterns, with prices largely within range of hysterical averages. As a reminder, the prior year quarter was impacted by channel inventory destocking, drought conditions and volatile prices in the market postponing purchases into the second half of 2023. In terms of profitability, EBITDA before special items came in at 524 million euros and a margin of 10.5%. The significant decline versus the prior year was equally driven by an unfavorable product mix and higher short-term incentive provisions. The latter was driven by a significant reversal of provisions in Q2 of last year's that I already mentioned. Main drivers of the mix effect were much higher volumes of glyphosate coupled with lower corn and fungicide volumes. To the positive, we are starting to see some COX recovery in the quarter, led by lower crop protection raw material costs. Positive currency effects also helped to offset some of the headwinds. Let's now move on to our pharma business, which again grew 4%. Prices were up 3% and volumes were up 1%. Strong performance of our launch assets and ILEA compensated, overcompensated actually, increased pressure on Xarelto. In addition, our base business contributed positively. It includes, for example, the radiology and women's health businesses and showed a robust performance despite persistent headwinds that we have in China related to the volume-based procurement over there. Our launch assets, Nubeka and Carantia, demonstrated ongoing strong growth momentum. Nubeka almost doubled sales again and reached blockbuster status when looking at the moving annual total. Carantia crossed the 100 million euro per quarter mark for the first time, primarily driven by higher volumes in both the United States and also China. In addition, ILEA contributed to the overall increase due to gains in all regions. While this dynamic was still largely driven by the solid performance of the 2 mg formulation in Japan and Canada, the 8 mg launch gained further momentum. Allow me to comment on Xarelto in a bit more detail. We registered sales declines of 11%, as expected, the expiration of patent protection in Canada and of the compound patent in Europe triggered a generic pressure. In Europe, we are facing legal disputes on the once daily intake patent as generic producers are challenging our IP position on an individual country level. We've prevailed in all first instance rulings on the patent validity so far, except the United Kingdom and France. It's triggered generic at-risk launches in both of these markets in the second quarter. Although first instance disputes are still ongoing in the majority of the European countries, this didn't prevent generic players from launching at risk neither. We saw that, for instance, in Switzerland and Poland. We have baked in generic headwinds into our 2024 guidance for Xarelto, but will of course continue to take vigorous action against any infringement of our IP rights. On the profitability side, EBITDA before special items came in at 1.3 billion euros, which is a 4% decline versus the prior year quarter. We also here saw higher incentive provisions following the already mentioned reversal in the prior year. In addition, we recorded a 220 basis point FX headwind and unfavorable changes in product mix driven by Xarelto's sales decline. These effects could be largely balanced by stringent OPEX management and result shifts. Now for consumer health, the sales performance in Q2 returned back to growth as expected. Sales increased by 5% versus the prior year. We expanded sales in almost all categories, continuing to bring superior innovation to the market. Combined with an improved supply situation, we achieved 15% growth in digestive health, our strongest category this quarter. Our allergy and cold business declined largely due to a weak allergy season. In addition, we faced ongoing headwinds from lower volumes since retailers in the United States continued to optimize their inventories across the industry. Still, we were able to mitigate the downsides due to targeted price management. On the bottom line, EBITDA before special items came in at €314 million and a margin of 21.5%. Continued focus on cost and price management could partly offset the higher investment in our innovative products and launches. Moving now on to the divisional full year outlook. With the first six months behind us, we have better visibility for the full year. So let me talk a little bit about the business drivers for each one of the divisions. And I'll start with crop science. Given the market-driven headwinds, we now expect our crop science division to come in at the lower end of our sales growth and margin guidance. For the second half of the year, we expect strong growth in our core business to be muted by significant volume declines in glyphosate following the phasing patterns we saw in 2023. On the profitability side, growth in the core business, Cox recovery, DSO and other efficiency savings are expected to mitigate inflation and merit increases. This will lead to expanded margins compared to the second half of the prior year. In addition, we updated our FX estimation based on June end spot rates compared to the March end spot rates. We now anticipate for crop science an increased currency headwind and that's on sales and that's about two percentage points compared to about one percentage points previously. Moving on to pharma. Based on the good performance in half year one, we foresee year-on-year sales growth between 0% and 3% for the full year. As a reminder, this is up from the previous minus 4% to 0%. For the remainder of the year, we anticipate increasing pressure on Xarelto. This headwind is expected to be partially compensated by ongoing strong performance of our launch assets and ILEA. For the latter, we expect a low single-digit percentage sales growth for the full year. Our guidance on EBITDA margin before special items remains unchanged, illustrating a sequential margin decline in half year two versus half year one that is largely driven by an unfavorable product mix and continued investments in launches as well as R&D investments in our pipeline. In consumer health, we confirm our full year guidance at constant currencies. We expect to accelerate growth in the second half, driven by innovation and targeted pricing, coupled with further improvements of our supply situation. We see continued cost pressure, which is weighing on our profitability. Together with enhanced operational efficiencies, targeted price management, and speedy implementation of DSO, we are actively offsetting these effects. Let's now finally look at the group outlook. We reaffirm our full year guidance for the group. FX group estimates based on June end spot rates remain unchanged compared to the March end spot rates used previously. Our other modeling considerations also stay as previously guided, as you can see in the appendix to our presentation. With that, we would like to close our prepared remarks and Joost, over back to you to moderate the Q&A, please.