© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on the Second Quarter 2018 Results.[Operator Instructions] I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations, Bayer AG.Please go ahead, sir.
Thank you, Haley, much appreciated. I would like to welcome all of you to our second quarter conference call.With me on the call are Werner Baumann, our CEO; Wolfgang Nickl, our CFO. And with Dieter Weinand, Heiko Schipper and Liam Condon, the different businesses are represented by the responsible management board members. Werner will start off today, the call with some -- presenting some highlights of the second quarter. Wolfgang will then go into the financials for the second quarter with some more detail, also to cover on the performance for the divisions. Werner will then wrap it up with the outlook for 2018 before we go into the Q&A session.So the prepared remarks might be somewhat longer today than normal, but it's obviously not a normal quarter, with the first-time consolidation of Monsanto and all the moving parts that came along with such a transaction and its consolidation. [Operator Instructions]So as always, I would like to start the call today by mentioning the cautionary language that is in our safe harbor statement and as well as in the materials that we've distributed today.So with no further ado, I would like to hand it over to you, Werner. The floor is yours.
All right. So thanks, Oliver. And good afternoon also from my side, ladies and gentlemen, and it's my pleasure to welcome you to our conference call today.Let me preface my talk with one important topic. And that is since we offered a separate call on August 23 covering the recent verdict in the Johnson trial and the glyphosate product liability litigation and also given that the transcript of this previous call is available on the website, we do not intend to address that litigation in today's call. Instead, we will be focusing on the second quarter and the first-time consolidation of Monsanto, as Oliver already alluded to. There is only one meaningful development since our call on August 23, and that is that the courts have vacated the October 22, 2018, and the January 7, 2019, trial dates in the Missouri glyphosate litigation. A number of trials are currently scheduled, beginning in February 2019, but that may also be subject to same, so in bottom line, there is no further case that is going to be tried for the remainder of the year.So with that, let me now focus on the second quarter of 2018.In Q2, we finalized the acquisition of Monsanto. And as I mentioned in other occasions, we are really very proud to now finally operating the leading agrochemical and seeds company in the world. The Monsanto business is included in our Q2 numbers from the closing date of June 7 onwards on a pro rata basis. The conditions of the Department of Justice included a whole separate order that remained in place until all of the divestments to BASF had been completed. And these divestitures closed on August 1 and August 16, respectively, which allowed us to take full operational control of the Monsanto business as of the later of those 2 dates. We have started to execute our integration activities right away, and we will be fast in implementation.From an operations perspective, our Bayer stand-alone business performance in the second quarter is fully in line for us to meet the originally announced full year guidance we gave at the beginning of the year. Our combined 2018 outlook now reflects only the impact of the Monsanto acquisition. We confirm our group outlook for 2018, with the adjustments to reflect the acquisition as of the closing date. Due to the typical seasonality of the Monsanto business, the vast majority of its 2018 earnings were realized prior to closing, whilst the resulting cash flows will be largely coming in, in the second half of the year. Consequently, we anticipate reducing our net debt position to roughly EUR 37 billion by the end of the year.Given the better-than-originally expected net debt development and the future growth opportunities of the combined entity, we actually already at this stage want to emphasize our commitment to propose an absolute dividend per share of at least EUR 2.80 per share for fiscal 2018.So as mentioned, after the hold separate ended, we officially kicked off our joint organization and integration efforts. And I can tell you there's an awful lot of enthusiasm and excitement in the organization to finally get going with our combined company. Actually, as a matter of fact, we are now the leading agrochemical and seeds company in the world, with leading innovation capabilities; an excellent and most comprehensive product portfolio across crop protection, seeds and traits; and also the most advanced digital platform; plus a very strong and experienced team in place. Together, we are fully committed to shape agriculture to benefit farmers, consumers and our environment.The strong value creation profile we see for this combination remains fully intact. Let me clearly state that nothing has changed concerning our strategy, the attractive synergy potential and longer-term growth and margin expectations for our combined Crop Science business. We are striving for long-term, above-market growth and industry-leading profitability through achievement of our synergy target of $1.2 billion per year on an EBITDA basis as of the year 2022. From a core EPS perspective, the combination will be accretive already in 2019. And we are very optimistic for the future of the business and see it as a game changer in the industry.That being said, let me now move on to the highlights in our business in the second quarter.At Pharma, we remain on track to deliver our 2018 fiscal year guidance. Our key growth products will continue to drive our performance, especially Xarelto, for which we see further differentiation potential being supported by the first approval in the CAD, PAD indication. Despite many advances in the area of cardiovascular care, coronary artery disease, CAD, and peripheral artery disease, so PAD, remains an area of unmet need. The European Commission has approved the regimen of Xarelto twice daily plus Aspirin once daily for the prevention of atherothrombotic events in patients with CAD or PAD at high risk for ischemic events.We recently submitted the marketing authorization application for larotrectinib to the European Medicines Agency. The potential first approval of larotrectinib in the U.S. is expected before the end of this year and would actually mark a paradigm shift in the way we treat cancer by targeting the genomic alteration that is causing the cancer to grow rather than the site where it originates in the body. Just a couple of days, the FDA approved Jivi for the routine prophylactic treatment of hemophilia A. Jivi's extended half-life allows for twice-daily initial dosing and may be adjusted for every 5 days and further individually adjusted to less or more frequent dosing. Approvals in the U.S. and Japan are expected until year-end, being important milestones for our hemophilia portfolio.At Consumer, the challenging year continues to manifest itself in quarter 2, as earlier indicated and expected. For North America, it was a difficult first half year, primarily due to our important seasonal business. Claritin was impacted by a late start to the allergy season, and so was Coppertone by a late start to the sun care season. In Europe, supply interruptions continued to weigh on our performance. On a positive note, Asia Pacific returned to growth, driven by our strong nutritional business in China. The OTC version of our product Kang Wang is back in the market in China since late July.In terms of portfolio adjustments, you have also seen the sale of our derm Rx business and the recent close of the U.S. part of that business just yesterday.At Crop Science, the positive Q2 performance, sales performance, was driven by the normalization of our Crop Protection business in Brazil and an improvement in our corn business. We saw double-digit growth rates in Herbicides, Fungicides and Insecticides driven by Brazil, EMEA and Asia Pacific. Our newly acquired business delivered on key metrics with continued adoption of new soybean, cotton and digital technologies.Animal Health improved its performance, with North America, Asia Pacific and Latin America growing; and also benefited from a phasing of Q3 into Q2, particularly driven by double-digit percentage increases in our top line for Advantage and Seresto.With this quick overview, let me now hand it over to Wolfgang, who will shed some more light on our Q2 performance from a financial perspective.Wolfgang?
Thank you, Werner. Ladies and gentlemen, also a warm welcome from my side.I'll now guide you through some of our financials, as these are a bit more complex due to the first-time integration of Monsanto. Let me dive right into Q2. If you look at the reported sales numbers, they are positively impacted by the inclusion of Monsanto starting on June 7. Monsanto added EUR 543 million to our top line. However, continued negative FX effects burdened sales by more than EUR 500 million for the quarter. The underlying business looks good. We achieved sales growth on group level of about 9% organically when adjusted for currency and portfolio effects. 3 out of our 4 businesses grew versus the same quarter last year. In particular, the normalization of our Crop Science business in Brazil supported this growth.EBITDA before special items for the group came in at about EUR 2.3 billion, with a contribution from Monsanto of about EUR 70 million. This reflects an increase of about 4% over the same period in the prior year despite a negative FX impact of approximately EUR 130 million and strong incremental investments in R&D of about EUR 160 million.Core earnings per share in the second quarter were up 1% to EUR 1.54 despite the negative currency impact and a higher number of shares. This compares to a consensus of EUR 1.50 per share.With the inclusion of Monsanto, we have updated our simulation for the impact on (sic) [ of ] currency fluctuations on our financials. On a full year pro forma business, a 1% change to the euro -- of the euro versus our currency basket now impacts sales by about EUR 340 million and EBITDA by about EUR 100 million. Before the acquisitions, these effects were EUR 250 million and EUR 70 million, respectively. Negative FX effects will continue to be a theme for the remainder of the year. On an earnings level impact, we expect for the first half -- the impact we expect for the second half is also -- is approximately the same as the impact of EUR 280 million we saw in the first half of the year.Sales of Pharmaceuticals rose by 3% to about EUR 4.2 billion in Q2. Our key growth products Xarelto, Eylea, Adempas, Xofigo and Stivarga maintained their strong performance overall, with the combined sales rising by more than 13% to now EUR 1.7 billion for the quarter. As for our 2 highest-revenue products, Xarelto sales once again rose significantly at 11%, driven by higher volumes in Europe, Japan and China. Our license revenues in the U.S. also showed a positive development. We also recorded substantial sales gains for Eylea, up 23%, primarily due to the expanded volumes in Europe, Japan and Canada. Among other things, the differentiated clinical profile of Eylea had a very positive impact.As expected, Pharma's Q2 sales were held back by temporary supply disruptions for some of our established products such as Adalat and Aspirin Cardio in our supply center in Leverkusen.EBITDA before special items for the Pharma business declined by 8% to approximately EUR 1.4 billion. Adjusted for negative currency effects of EUR 54 million, earnings were down by 4%. The decline was mainly attributable to higher R&D and selling expenses as well as to the effects related to the temporary supply disruptions I just mentioned. We continue to expect the full year negative effects of these supply interruptions to be unchanged at roughly EUR 300 million at both sales and EBITDA level. The impact was rather limited in Q2, with the majority still to come in the second half of 2018.Overall, all commitments given to the FDA according to the quality improvement plan are on track.Now moving on to Crop Science, where we achieved a significant year-over-year improvement in both sales and earnings after a weak prior year quarter.In May, the DOJ conditionally approved our acquisition of Monsanto. The conditions included a hold separate order that remained in place until all of the divestments to BASF had been completed. These transactions closed on August 1 and August 16, 2018, for a total consideration of EUR 7.6 billion, which finally allowed us also to start the integration August 16, 2018. In the second quarter financials, sales and earnings of these divestments were still fully included as part of the Crop Science business. They had a contribution to sales of EUR 468 million.Overall, Crop Science sales increased to a level of about EUR 3 billion in Q2, mainly due to a positive portfolio effect of 25% or EUR 543 million from the acquisition of Monsanto. On a pro forma basis, this represents a 10% improvement. For Bayer on a stand-alone basis, the currency- and portfolio-adjusted development showed a 21% growth, particularly due to significantly higher provisions for product returns in Brazil recognized in the prior year quarter, driven by then-high general inventory levels. Inventories in Brazil have now normalized as a result of the measures that we initiated last year.Crop Science almost doubled its adjusted EBITDA level to EUR 631 million, mostly as a result of the recovery of our Crop Protection business in Brazil, despite negative currency effects of around EUR 50 million. The adjusted EBITDA margin increased also substantially to 21%. The newly acquired business contributed EUR 70 million to earnings. The relatively low EBITDA contribution is a result of the seasonality profile of the Seeds business, which I will spend some more time to explain on the following chart.We show on this next slide on an illustrative basis the quarterly seasonality of sales, earnings and cash flow of the Monsanto business for the last 4 years normalized to Bayer's definition of fiscal quarters. This chart plays an important role to understand Monsanto's contribution to Bayer in 2018 and going forward. Due to the seasonality of the Seeds and Crop Protection business with a stronger first half, it's very important to realize that around 60% of sales and 80% of profit are on average generated in the first half of our fiscal year. On the other side, about 120% of the cash flows come in the second half of the year, and that's mainly driven by cash collections which only start after the planting season. These trend patterns also applied for this business in the first half of 2018. This means that -- for Bayer that we will only see a very limited sales and EBITDA contribution for the second half of 2018, but a very strong cash flow contribution from the acquired business.Let me now transition over to the Consumer Health business. The second quarter remained challenging, as expected. Top line declined slightly by 1% to approximately EUR 1.4 billion.For North America, it was a difficult quarter, impacted by the seasonal categories. The second quarter is always an important quarter for us, as we are key players in allergy with Claritin and in sun care with Coppertone. Both seasons, sun and allergy, started late and therefore impacted our sales levels significantly. In Europe, the supply situation continued to weigh on our performance, specifically sales of Canesten and Aspirin. This will remain a substantial headwind for the remainder of the year. In Asia Pacific, business picked up and returned to growth in the second quarter. And as Werner already alluded to, we do have the majority of SKUs of the OTC version of Kang Wang back in the market since late July.Driven by lower volume, unfavorable product mix as well as currency effects and increased investments in sales and marketing, the adjusted EBITDA margin declined by 230 basis points to 18.1%.We divested our prescription dermatology business to LEO Pharma in Denmark. Just yesterday, we successfully closed the sale of the U.S. part. We expect to close the transaction during the second half of 2019 for all other markets. The total consideration we will receive for this business amounts to EUR 613 million, including EUR 55 million for the U.S. business.Now turning to our Animal Health business, which recorded a strong quarter, with both sales and earnings increasing significantly over the prior-year period. Sales on a currency- and portfolio-adjusted basis increased by 8% to EUR 453 million, driven by strong volume expansions. We posted considerable top line increases in North America that resulted mainly from phasing of demand at the expense of subsequent quarters. U.S. distributors were building up stock to prepare for a packaging change in our Advantage line. We also achieved encouraging sales gains in Asia Pacific and Latin America.Q2 EBITDA before special items increased by 10% to EUR 128 million. Adjusting for currency effects, earnings would have grown even faster with 19%. This development was attributable to significantly higher volumes but somewhat mitigated by negative price effects, higher selling expenses and an increase in cost of goods sold.So far, I have focused on sales and EBITDA before special items. On Slide 14 in the deck, I would like to now spend a minute to explain how we get from EBITDA before special items of EUR 2.3 billion to a core EPS of EUR 1.54 for the second quarter. We focus on core EPS in order to provide the capital markets with a meaningful non-GAAP measure, which usually also provides the base for our dividend proposals. To derive core EPS, we exclude special items and noncash amortization, mainly resulting from former acquisitions. We also adjust for impairment losses and loss reversals from intangible assets.Special items in our EBITDA for the quarter amounted to EUR 318 million, mainly driven by our Crop Science business. This included EUR 126 million associated with the sale of acquired inventories that were remeasured at fair value in connection with the preliminary purchase price allocation. Our reported financial result of minus EUR 322 million includes special charges of EUR 106 million, mainly in connection with the bridge financing for the Monsanto acquisition, which we have excluded here. For modeling purposes, for the full year, you can assume a core financial result of approximately minus EUR 1.3 billion.The core tax rate of 24.4% was down year-on-year but is higher than the reported or effective tax rate of 21%, mainly due to tax effects related to amortization and special items. For modeling purposes, for the calculation of core EPS for 2018, you can assume the core tax rate to be around 23%.In the second quarter, we have seen 2 significant equity measures which had an impact on our average weighted number of shares. In April 2018, Temasek of Singapore subscribed to 31 million new Bayer shares. And in June 2018, the capital increase with subscription rights for existing shareholders was implemented, issuing approximately 74.6 million new shares. As the subscription price of the new shares was below the market price of the existing shares, this capital increase contained a so-called bonus element pursuant to the International Accounting Standard #33. The weighted average number of the shares was adjusted to reflect the effect of this bonus element for all periods prior to June of 2018. This resulted in an adjustment for the core EPS for 2017 from EUR 6.74 to now EUR 6.64. The weighted share count for Q2 was 916 million shares. For the total number of shares exiting 2018, you can assume approximately 980 million. And the average for the full year 2018 is currently estimated at around 941 million shares.Let me cover 2 more topics before I hand the call back over to Werner for our outlook for the fiscal year.First, on Slide 15, you see the development of gross and net debt during the second quarter as well as the measures we have taken during the quarter to finance the acquisition of Monsanto. During the quarter, we issued euro and U.S. dollar bonds, exchanged existing Monsanto bonds into Bayer bonds and drew from the bridge financing bank facilities. Due to higher-than-expected cash levels at Monsanto on June 7 and better-than-expected collections, we ended the quarter at a net debt level of about EUR 45 billion. The bridge financing, which stood at EUR 13.6 billion as of the end of June, has declined significantly in August. This was driven mainly due to the proceeds from the divestment of certain Crop Science businesses to BASF for a total purchase price of EUR 7.6 billion. I'm glad to announce that due to a higher-than-expected cash position and the better-than-expected cash flow for Monsanto, we do now forecast a net debt position of around EUR 37 billion at the end of 2018 compared to our original guidance of around EUR 39 billion.In this context, I want to emphasize again how important it is for us to delever our company further. Let me clearly state that we are strongly committed to get back to a credit rating in the A category in the long run.I want to -- I do want to spend -- I don't want to spend too much time on this chart, Chart 16, as you all got some detailed information on the purchase price allocation with our analyst briefing document this morning. However, I believe it's important to mention that the amortization of intangible assets of EUR 27.1 billion and the depreciation of fixed-asset step-ups of EUR 1.1 billion related to the acquired business are expected to be between EUR 1.7 billion and EUR 2.1 billion on an annual basis. This will be the run rate for about 12 years. Thereafter, the charges will decrease continuously. We have also illustrated in our analyst briefing document how this will affect our EBITDA and EBIT before and after special items.The acquired inventory that have been stepped up to fair values will likely be consumed within the next 3 quarters. Let me conclude this topic by saying that this information should be considered as indicative only, as the PPA is preliminary and figures might still change during the finalization of the entire purchase price allocation process. Nevertheless, we thought this might be helpful to get a good understanding of the moving parts on the technical end of this process.With that, let me hand the call back over to Werner, who will cover the outlook and some pro forma illustrative calculations for fiscal year 2018.
All right. So thanks, Wolfgang. We have adjusted our group outlook to account for the sales and earnings contributions from Monsanto since the date of the acquisition, as I already mentioned earlier. Fiscal 2018 earnings including Monsanto will be lower than we had projected in our February forecast. And this is due to the later-than-anticipated closing and the significant seasonality of Monsanto's business, as Wolfgang alluded to earlier in his presentation. Our outlook takes into account the financing costs for the acquisition of Monsanto shares as well as the higher number of Bayer shares following the capital increases on a pro rata temporis basis. In addition, it assumes the absence of onetime corn licensing benefits of approximately USD 200 million from prior year in Monsanto's results.The businesses divested to BASF are no longer taken into account from the dates of their respective sale.The forecasts are based on the exchange rates as of June 30 and adjusted for currency effects to enhance the comparability of operating performance.We now expect the Bayer Group sales to be more than EUR 39 billion for 2018, with more than EUR 5 billion attributable to the acquired business. The divestment of selected businesses to BASF will reduce anticipated sales by approximately EUR 1 billion. This forecast now corresponds to a mid-single-digit increase on a currency- and portfolio-adjusted basis. We now anticipate EBITDA before special items to increase by a low to mid-single-digit percentage. On a currency-adjusted basis, this corresponds to an increase by a high single-digit percentage.We now expect core earnings per share to come in at between EUR 5.70 and EUR 5.90 per share. On a currency-adjusted basis, this corresponds to a decrease by a high single-digit percentage. Prior-year core earnings per share were restated to EUR 6.64 to reflect the bonus element of the capital increase with subscription rights, and this is taken into account here, as Wolfgang already indicated to earlier. Realizing, now on Chart 19, that the reported numbers are hardly indicative for a real underlying performance, we decided to include illustrative information on a pro forma number for full year 2018 in order to underline our statement that Monsanto will, as a matter of fact, be accretive to core EPS already in year 1, assuming that on a pro forma basis 2018 is year 1.Starting from the adjusted core EPS number from -- of around EUR 6.60 for 2018 and based on the various assumptions listed on the left side of the chart, we come to pro forma EPS for 2018 of about EUR 7, which is an increase and with that an accretion from Monsanto of around 5%. The impact from U.S. GAAP-to-IFRS conversion is actually cash neutral, reduces that number by EUR 0.30 to about EUR 6.70, still an accretion versus starting point of around EUR 6.60. Adjusting for the negative FX effects, the accretion in both cases would be clearly higher.When you think about modeling Bayer and Monsanto now on this base for 2019 going forwards, you can take the pro forma EPS of around EUR 6.70 current currencies as a starting point and should think about operational performance and incremental cost synergies we might achieve next year as you model 2019.With that, let me come to Chart 20. As mentioned already at the beginning, given the strong cash flow generation capability of Bayer and Monsanto combined, the lower-than-expected net debt level at year-end 2018 as well as the exciting future growth opportunities, we will propose a dividend per share for 2018 of at least EUR 2.80 per share. We have decided to deviate from our existing dividend policy of 30% to 40% payout ratio of core EPS, as the core EPS figure for 2018 will be impacted by acquisition timing and technical effects and is therefore not indicative of the underlying earnings power of our company, as we have just discussed.So with that, let me conclude my remarks with a view on the upcoming events. On November 13, we will publish our Q3 figures. And on December 5, we will host our Capital Markets Day in London. The event in December will go way beyond any typical business update, as we intend to have a comprehensive overall strategic overview on the group, including financial targets for 2022 as well as measures to enhance group performance further in the future. In addition, we will have a deep dive on Crop Science with various workshops in the afternoon, as we would envision the understanding of the Crop Science business being the largest lever for our valuation and therefore, value creating going forward.With that, I will hand it back to Oliver.
Great, thank you, Werner, thank you, Wolfgang, for your remarks and for the update.Haley, I think we are now ready to open up the call for Q&A.
[Operator Instructions] The first question comes from the line of Mr. Michael Leuchten.
It's Michael Leuchten at UBS. Two questions, please. I think most of us try to model your divisions by EBITDA. So your 2018 illustrative number, core EPS number, is very helpful, but could you help us with maybe the depreciation number that you assume so we can work out an EBIT number or an EBITDA number from here? Or maybe help us with what the Monsanto EBITDA was in the first half so we can actually get to an EBITDA number for modeling purposes. Because I don't think anybody starts at the EPS number to model a company bottom-up. And also, that EBITDA number would help us then to assess where you are in terms of your trajectory to get to making cost of capital by year 4, which you previously stated. And then my second question is on the warning letter. You did say in Q1 that there wasn't much of an impact. You now said in Q2, there wasn't any impact. Given that, I think, your expectations was that this was an inventory issue, a supply disruption issue. How come you still expect it to be an impact in the second half if Q1 and Q2 did deliver good revenues for those products impacted by the warning letter and the distribution center?
Okay, this is Werner speaking. Thanks for the question, Michael. We can certainly look at what we can provide in addition, but you have for the -- certainly for all of the divisions, including now Crop Science, the relevant incremental depreciation and amortization with the information that we have provided, as far as it relates to the step-up for fixed assets, the purchase price allocation. And you should also have received a table on an annual basis on how it develops so that you can also clearly distinguish between the one-off that is going to wear itself out over the next 9 months, by and large, for the inventory step-up. And then, let's say, the next 12 years on average that is going to come for the D&A. So that should as a matter of fact, if you simply add it on top of the underlying earnings that you can back into, give you a good number to work for with Crop Science. And other than that, I would just ask you to follow up with Oliver and also Jürgen in our IR team if that does not suffice. Secondly, on the warning letter, we have actually a continued impact, looking at some of the trade-off positions we made with our manufacturing and the impacts we have seen so far over the first 2 quarters, with a larger part of the impacts still to come in the second half of the year. And that is also due to the fact that we do expect another standstill of the production as part of the cost audits, the FDA inspection that we are going to have in the second half of the year. So overall, that is part of the explanation why we are going to see a sustained impact throughout all quarters of 2018, both from a volume but also from -- and with that, as we say, from a sales and underlying EBITDA perspective. And of course, the remediation activities that account for a mid-double-digit million amount that is actually stretching across all quarters of the year.
The next question is from the line of Mr. Jeff Zekauskas.
[Audio Gap]For soybean seeds and traits data. In the second quarter, your sales were down 6.6%, currency and divestiture adjusted. And for the first half, they were down 7.8%. Intacta grew and Roundup Ready Xtend grew. And in the United States, soybean plantings were flat to down. So I was wondering, why was it that revenues were lower? Is that a price issue or a volume issue, something specific to you? And then secondly, I think there's an agricultural health study that shows -- that looked at 89,000 U.S. farm workers, showing glyphosate as a safe chemical, but I don't think that data has ever been published. And I was wondering whether you thought that data would be published in 2018 or 2019 or whether you don't have an opinion on that?
Okay, so Liam is going to take the first of your questions, Jeff. And then I'm going to comment on the U.S. ag health study, okay?
Sure, sure, yes.
Yes, thanks, Jeff. So as you rightly point out, there has been a very solid increase in market penetration for Roundup Ready 2 Xtend in North America and Roundup Ready 2 PRO in South America, but sales down is primarily due to competitive issues in the U.S. market, which is specifically linked to a very competitive situation on the ground. And a lot of this is driven by growers looking for more options now for weed control. And you know that we also had Liberty. We had launched at Bayer, Credenz, a new brand, into the market, so that plays in, one element. But on the pricing side, there's clearly a competitor out there, a state-owned competitor, who is taking a very aggressive stance. And here we accept that we have to -- we'll have some degree, small degree, of market share loss, because we want to ensure that the innovation that we're generating, that we can still maintain the premium pricing in here. But that's the effect that you're seeing, is basically due to competitive pricing situation in the U.S.
So Jeff, the -- okay, so Jeff, now to your second question. To the best of my knowledge, the U.S. ag health study data has been published, but let me elaborate a little bit more on where the confusion might come from. The IARC assessments did not include the findings of that large real-life evidence study, because it was at the time of the assessment still preliminary and not, let's say, a finished document. And that is why it did not find its way into the IARC assessments. From a scientific perspective, it actually backs up all the other 800 studies now with real-life evidence study where -- with 50,000 farmers, and then there are significant others, there's absolutely nothing that has been seen in terms of a statistical signal that there is a cause-and-effect relationship between the application of glyphosates as a formulated product, so not only the active, but also a formulated product, and the onset of cancer on some individuals. Nothing whatsoever.
The next question comes from the line of Sachin Jain.
[Audio Gap]Your financials, please. Firstly, as we think about sort of future earnings power, at the Analyst Day, do you still intend to provide midterm targets? And if so, what would the format of that be? And is there any intention to give an early look on '19 numbers for -- at the Analyst Day rather than waiting until March next year? Secondly, a follow-up to Michael's question around sort of thinking about moving parts into '19. Werner, in your introduction, you mentioned some drivers of the underlying growth of the business and incremental synergies. I wonder if you can just wrap up, are there any other factors to think about as we think about pushes and pulls into next year, such as the Pharma remediation, any deleverage, any incremental impact on FX or anything else we should think about, given the complicated moving parts? Second question is just on the dividend payout ratio. Should you pay out roughly EUR 2.80, the midpoint of your guidance is close to a 50% payout ratio. Should we think of that as a 1-year effect or a more sustainable payout ratio?
Yes, I can take the first one, this is Wolfgang, on the future earnings power. First of all, as Werner said, in December, we want to give a very comprehensive midterm picture of our earnings power. And we are intending to show core EPS all the way to 2022. That is also the year when we have the first time, fully achieved the complete synergies for our Crop Science business, so it makes sense to put a stick in the ground for that year. As it relates to specific guidance for 2019, we intend to do that with the publication of our annual report. And that will be in the February time frame, but I think -- in the part that Werner gave you earlier with a illustrative pro forma, if you add the business growth and further progress on synergies, I think you have a good platform to start estimating that well.
So on top of what Wolfgang said, we will not, from today's perspective, be able to judge what the FX impact is going to be, yes. So you should expect that we are going to give a prospect of the midterm aspirations we are going to have. And the year we are going to anchor it around is going to be 2022 on a constant currency basis, because everything else is going to confuse the hell out of everybody. Secondly, as Wolfgang already mentioned, as we speak, we are already ahead of our deleveraging objectives, because we are starting from a quite a bit better-than-expected place. And that's what Wolfgang also related to with our year-end net debt position of about EUR 37 billion, which is better than the number we gave you earlier for quarter 2 when we still thought it would be EUR 39 billion, yes. So it's actually a significant improvement. And we will, of course, going into 2019, continue to focus on delevering the company in order to get back to, let's say, our single A target or A- target that we are anchoring our financial policy around. Relative to payout ratio, if I may deviate a little bit from the prepared remarks and say in my own words: 2018 is an artifact that is completely useless if you look at year-end guidance, because it includes a fraction of Monsanto in our reported base, but it actually includes the full cash flow. And it is absolutely meaningless when you then look at the core EPS that is a resulting number that comes out of it. That's why we said we simply have to take a step away from the reported numbers, also from our existing dividend policy that is the 30% to 40% of core EPS, and look, simply look through it and look at the overall position of the company. Hence, you will see at least EUR 2.80 next year. This is important in 2 aspects. First, we want to make sure that our shareholder base continues to benefit from the underlying earnings power of the company, yes. And that is exactly what we do, because Monsanto only paid out one quarterly dividend and the rest accrues fully to our shareholder base. Secondly, the -- we'll continue to increase our earnings, based on, let's say, the pro forma number that we had explained. And with that, the dividends will also increase in line with that, assuming that things go on schedule. And dividend continuity and cash returns are very important to our owners, and that is exactly what we are catering to.
The next question comes from the line of Mr. Emmanuel Papadakis.
Papadakis from Barclays. A follow-up on Pharma margins, if I may. I just wanted to check, you're reiterating that approximately EUR 300 million EBITDA impact from the disruption. And it sounds like you're saying that will now mostly fall in the second half versus prior comments, where I think it called for it to be spread mostly within Q2, Q3. The second question was around the Consumer margin. You didn't change the full year guidance. It was clearly a relatively weak quarter. If you could just give us a bit more color on specifically what was the pressure at the EBITDA level for Consumer and your confidence therefore as to why that will be made up to meet that maintained guidance for the full year, that would be very helpful.
Okay, Emmanuel, the first question is going to be answered by Dieter. And then Heiko will comment on Consumer.
So with regards to margins, as you know, we have reconfirmed our previous guidance of a low single-digit decline; or FX-adjusted, a low single-digit increase. And the margin this quarter was impacted by 2 main things: One was -- almost equal size -- one was currency; and the second one, increased R&D investment due to an increase in accelerated patient enrollment in our late-stage pipeline, particularly finerenone, Vilaprisan. And again, we -- that's offset by sales expense, sales in other places and continued growth momentum of our key products. So going forward, we confirm again our previous guidance.
Heiko?
Yes, Emmanuel, if we look at where we are at the first half of the year and now looking forward to the second half, we believe that we can continue to confirm our guidance, which would mean both on growth and on bottom line, that we will have a better second half. If we look at second half for this year versus last year, we are obviously cycling some one-off effects, particularly the one that we had in China last year. And we also are seeing some underlying dynamics starting to look slightly better. So that's why we feel, for both of these reasons, that growth is just starting to look better in Q3 and probably the bottom line will be more towards Q4 and still landing on the guidance for the year.
The next question comes from the line of Peter Verdult.
Pete Verdult from Citi. And just a couple questions, if I may. Just with Dieter, just on the ARAMIS data later this month, could you remind us how you hope to position darolutamide, given the presence of ERLEADA and XTANDI in the non-metastatic prostate cancer market? And then just on Xarelto in CAD and PAD, I think in the past, you've talked about, on one hand, label expansion opportunities being around 500 million; and on the other, a very large potential patient population of 30 million versus 24 million in AF. So wondering now, as you prepare for European launch and hopefully, U.S., whether you're willing to provide any more perspective as to what you think the commercial opportunity there is. A quick one for Liam, just on glyphosate, could you just talk about the volume, price trends experienced year-to-date and confirm that there's been no evidence that the recent headlines have had any sort of impact on glyphosate demand trends around the globe? And then lastly, if I can push my luck with Wolfgang, after the recent litigation call, if I remember correctly, you alluded that you might be in a position to give more information on the level of provisioning for glypho, Xarelto and Essure litigation. Are you able to share anything on today's call?
Let's just start, Wolfgang.
So it was about the provisioning for the legal case?
Yes.
Yes.
Yes, I think we can there only confirm what we did say on the call, that we have provisions of -- on the books, as it is our current practice, for the legal cost for 3 years for the defense in the glyphosate complex. It is not our practice to accrue for damages. And that's also not possible if it's not a estimable. And if it's not more likely than not, then we believe the probability is not given here. And we therefore have not put any provision on the books for potential damages.
So let us now switch, Peter, you -- it was actually quite difficult to understand, yes. We understood that one question related to darolutamide. And the second one on Pharma was on CAD and PAD, so Dieter is going to try and answer. And if there's 1 or 2 things that we missed, so just let us know. And then on price trends, Crop, that is what Liam is going to start with then.
So just on darolutamide, there is really nothing new. It's progressing well, as we said before, with the enrollment. We are actually encouraged by some of the recent data we have seen with other products that the dual pathway approach has proven to be efficacious. And we believe we can differentiate the product based on some of the -- these activities against resistant cell lines as well as the difference in blood-brain barrier penetration. So there is really nothing new. It's progressing well, and we hope to have the data in by the end of the year or next year. So that's the darolutamide side. As for CAD and PAD, again, we have previously gauged the opportunity in terms of the patient numbers. And we feel that the label we've seen in the U.S. and in Europe is a very good label for both PAD and CAD. We -- it is a paradigm shift, as we said previously, in therapy. And we are well prepared to roll out the launches and are quite confident in the opportunity this represents, as we have previously stated. So there is nothing really new on that, but the growth potential that we believe will bode well for Xarelto.
Yes, Pete, thanks a lot for your questions. So I can just confirm, related to litigation, that there is no impact and that we can see whatsoever on demand for glyphosate. And it's, of course, due to several reasons. One is that there is no change whatsoever in the regulatory status. And this again was a jury decision in California. It was not the -- there was no new scientific finding of fact, and with that, no regulatory consequences. And at the end of the day, what happens in the field is farmers decide whether or not to use a glyphosate or indeed, any other herbicide based on the situation that they have in the field. And glyphosate has been used and trusted and is well known for its profile for over the last 40 years. And with that, we haven't seen any change whatsoever. For your information, sales in the first half of the year of glyphosate for Monsanto were basically flat, as overall for Herbicides. This is also due to the weather situation, particularly in North America, where we had a situation with a cold and wet winter for quite some time and then went very quickly into a hot spring or an early summer, so there was simply less time for spring. That impacted volumes. And in contrast, we saw an increase in prices for glyphosate, which is largely due to generic prices increasing because of increased material costs out of China. So this is a trend that we expect to continue because the source of that increased material costs from China is due to environmental pressure and clamp-downs in China, which is tightening up supply of glyphosate, and with that, increasing overall prices. And as we put our prices at a premium to generics, we see a benefit from this as well.
The next question comes from the line of Mr. Vincent Andrews.
It's Vincent Andrews from Morgan Stanley. Just 2 quick ones. One, if you could just discuss U.S. seed price cards for next season have come out. They're out and around at Farm Progress. So if you could just sort of discuss your outlook for seed pricing, and maybe you could tie it back to the issues with the soy price competition. And then separately, can you just give us some insight into where crop chemical inventory levels are in the key regions, particularly Brazil?
Okay, thanks, Vincent. So Liam is going to take those questions on seed pricing and crop inventory.
Yes, thanks a lot, Vincent. So bag prices, of course, for our products, I mean, Roundup Ready 2 Xtend, Genuity, Roundup Ready 2 Yield Soybeans, they always vary, of course, by product. And so I won't go into any of the details here. I mean, we can get back to you on this and what we have as pricing for different varieties, but ultimately, we will have a variety of new releases into the market that will bring incremental value. And with that, as you know, we always share this value with growers. So wherever there's premium potential, we would expect premium prices for the newer products. And then for existing products, we make simply adjustments based on the performance-driven value that they deliver to farmers. So overall pricing, we'll say, with our new varieties, simply will be increasing, in line with the additional value that we create. And for existing varieties, it will be based on whatever the current competitive situation is. On regional inventories around the world, I would say we're not seeing any major anomalies or oversupply. One area where we are concerned to a degree about is Europe, simply because we've had drought for a very long time now, which means for sure that there will be additional fungicides in the channel. So this is something that we'll be working through in -- basically now in the third quarter. So that's, I would say, a yellow traffic light that's flashing from an inventory management point of view. In Brazil, in LatAm, which you referenced to specifically in Brazil, we are very pleased with where channel inventories are now for our products. There has been very, very robust demand. And that led to the situations where we took a lot of measures, as Wolfgang and Werner both mentioned, to basically ensure healthy inventories going into the new season. And we could complete all those measures in the second quarter and also based simply on the robust in-market demand that we have seen. And we're expecting ongoing very robust demand out of Brazil, simply based on the fact that there will be more soybean acreage planted. And this will, for sure, drive Crop Protection sales, where -- which are for soybeans even higher on average than the seed and trait sales. So there, I'd say, versus last year, we feel very, very -- in a very comfortable position.
The next question comes from the line of Ms. Luisa Hector.
It's Luisa Hector for Exane BNP Paribas. I just wonder whether you could provide for legacy Bayer Crop, the Q2 growth excluding the inventory impacts. So I'm getting to around minus 2. It was minus 1, I think, in Q1. So just to get a sense of that development. And then as we look to your 2 launches in Pharma, could you talk a little about the launch costs? Should we see those spanning both 2018 and 2019? So I'm referring to the long-acting factor VIII and Xarelto in the COMPASS indication. And maybe talk a little bit about how you see the long-acting factor VIII ramping up, what we could expect from Kogenate in the face of that line extension. And the same with Xarelto, how soon could we see an inflection in the ex U.S. sales with COMPASS on the label now?
Okay, so the first questions, on launch costs for Jivi, the impact of Jivi on Kogenate, so the overall franchise and then the CAD, PAD and how it ramps up and also with the launch costs, that is what Dieter is going to comment on. And then Liam will comment on your question on underlying growth rate excluding the Brazil inventory effect, to the extent possible. Because there has also been some underlying market dynamics that have impacted overall market growth.
So I'll start with the CAD and PAD launches. So you will see the majority of countries, major countries, launching still this year for CAD and PAD, followed by the smaller countries next year. Yet we don't have significant, somewhat significant incremental resource requirements, because we have a full team in place in all countries for support to Xarelto. And so we are well prepared. I don't see a significant impact in terms of expense base, but I see a significant growth opportunity ahead of us with Xarelto. Similarly, with Jivi, we have a very significant team in place. And it will be the market where we -- with Kogenate and Kovaltry. And if you correct for the CSL impact, you will have to see that we have been growing very nicely in the first half of the year for the both products, Kogenate and Kovaltry. So in the first half, it was 7%, and again, we grew 3.2% in the second quarter. So that portfolio is actually evolving very nicely. We believe that Jivi will continue to contribute to that growth in the long-acting market. So the teams are in place. The resources are in place. There are not significant incremental resources required in what we can do to launch these products, in all of these launches.
Okay, thanks, Dieter. Liam?
So thanks, Luisa. It's a Little bit tricky to simply take out that, the exact stocking effect, because of course, this has happened over multiple quarters and in different ways, with different provisions built. But maybe to give you a sense of the underlying business, what's happening, if we left out LatAm and Brazil, for example, and look at the other regions, what we can see is in [ AP ] year-on-year, at currency and portfolio adjusted, what we can see is a growth in APAC of 10%; in North America of 2%; and in EMEA, we had a slight decline of 3%. The decline in EMEA is primarily due to the drought in Western Europe, and a particular situation in France, where we had the biggest overall decline, where we have a market-leading position. So of course, we have very, very strong growth on -- in LatAm, in Brazil. A part of that is simply the rebound, but there is clearly underlying growth here. And again, all regions, except for EMEA, were growing in the first half of the year. So that's just to try and give you a sense of the underlying growth going forward. And I think what you will see now is, as we go into the second half of the year, which is, of course, heavily dominated by the Southern Hemisphere in Brazil and LatAm, there we will benefit from the cleaning-up of the channel inventories, because now we have a much tighter fit between sell-in and sell-out. And so overall, again, just to give you a sense of what we see as the underlying business going forward.
Okay, thanks, Liam.
The next question comes from the line of Mr. Steve Bryne (sic) [ Steve Byrne ].
Yes, Steve Byrne from Bank of America. Liam, you were talking about your expectation for robust demand for crop chemicals down in South America as their planting season gets underway. My question for you is what's your commercial strategy to address the very sharp currency declines year-over-year, Brazil and Argentina? Are you pushing pricing on a local currency basis commensurately? And are you hedging forward any? And then just one additional pricing question on Seeds, are you pushing the Intacta pricing, given the ongoing patent challenges maybe making that a little more politically challenging?
Okay, thanks, Steve. I mean, it's a very important issue for us. It's managing the currency risk in the second half of the year. And I guess Wolfgang might want to comment in addition, but let me just explain in general how we overall approach the business in LatAm, and take specifically the example of Brazil, which is by far the biggest market. So we have to invoice in Brazilian reals, but we try and tie the business as tightly as possible to U.S. dollars. So the price lists are basically regularly updated according to the U.S. dollar prices, so whenever there is a change, any kind of significant deviation between the real and the dollar, we try and immediately update the price lists to reflect the latest situation. And you can't do this on a daily basis, but we try and do it as often as possible. That's one method of trying to lock in the currency tighter to U.S. dollar, as opposed to being completely exposed to the Brazilian real. The second element is barter. And for example, with Crop Science, about 25% of our current business is actually through barter, which again locks into the U.S. dollar base, because at the end of the day, these are commodities that are traded on international markets and in U.S. dollars. And of course, we have hedging policies in place, which maybe Wolfgang might want to allude to, but here overall, we of course do have an exposure. And our goal is to try and limit it through multiple mechanisms, but we cannot reduce this exposure to 0, that's very clear.
Yes, Steve. This is Werner. Maybe I'll comment a little bit broader on FX and how we deal with it for both the Crop business but also for our remaining businesses. So our standard policy is as follows. The anticipated net exposure for our operational business is hedged in the main currencies, as long as it's not prohibitively expensive, at about 50% of the anticipated exposure. Currently, we don't hedge in the real because it's just simply it's not economical. It's too expensive. Secondly, everything that has been booked, the net booked exposure is hedged at 100% level in the main currencies. And maybe one last word, for the combined new company going forward, what the overall sensitivities are that Wolfgang already alluded to, a -- on an annualized basis, so full year annualized basis, the total FX exposure, if the basket that we operate in moves by 1% up or down, means a top line impact by roughly EUR 340 million and a bottom line impact by about EUR 100 million. And what is included in this impact is actually 3 things. It is actually the transactional FX impact, the translational impact and then the net delta hedging impact that we see from our hedging operations, all right?
Next question comes from the line of Mr. Richard Vosser.
Richard Vosser from JPMorgan. So one question, just thinking about bolt-on Pharma M&A and R&D. So how are you thinking about Pharma bolt-ons, given the demands from cash, as you've alluded to, to deleveraging and potentially for ongoing litigation purposes as well? And tying that into R&D spend, a little bit higher maybe seasonally at the moment or this quarter, but we should see a significant reduction in R&D spend, as the life cycle management on Xarelto has officially largely completed now. So just your thoughts on R&D spend and Pharma innovation going forward. And then just coming back, second question, onto the guidance, and Werner, you highlighted moving from the 2018 pro forma. I think synergies are targeted to be about 300 -- or EUR 170 million to EUR 300 million next year. At the upper end, that's about EUR 0.23. We have EUR 300 million of one-offs this year from the manufacturing. Do you expect those to fully reverse next year? Again, that's about EUR 0.23. And potentially, growth next year, I know, of 5% to 7%. So perhaps you could just maybe talk about some of my maths and where consensus is at EUR 7.78 on a core EPS level for 2019.
Okay, Richard. To start with your last ask first, I will not comment on the EUR 7.78, because that's something that we don't make the consensus or the prospective on 2019. We will give guidance on 2019 at the release of our full year earnings, as Wolfgang alluded to. So -- but now coming to your questions. What we've always said is that we are going to put ourselves into a position that we can continue to fund all of our businesses that we continue to operate, let's say, as core businesses going forward. And that means, of course, also for Pharma, that there is funding available for external growth. And we have been talking about it before. I can only reiterate it. As you've seen with Loxo, if a Loxo opportunity came about, we would, of course, jump on it. And we would certainly have the financial means to secure such an asset. We have also talked about stepping up our efforts in business development and licensing growth going forward in order to further complement our own internal R&D efforts, and the funding that is needed is available to the company. We have a rating that, if we look at the 3 that are out there, Moody's, Standard & Poor's and also Fitch, that ranges from BBB to A-, which also means that we would have, if need be, a little bit of debt capacity. But clearly, our focus is, first of all, on delevering, and with the free cash flow generation of the combined business, with the incremental synergies coming in on top of the funding that comes from growth, we are well-positioned to fund growth and also opportunities in innovation going forward in Pharma in particular, but also in our other businesses. Now having said that, how do we look at, let's say, potential cash-out for litigation? First of all, I'll just come back to what Liam said. We have provided for our current estimate for the next 3 years of defense costs for the glyphosate litigation, and that is solidly baked into our financials. The second thing is that we have always said that the financial profile of the company needs to actually mirror the operational risks of a business. So if something unforeseen happens, we should be able to deal with that unforeseen event from a cash funding perspective, while at the same time continuing to fund our business operations and the growth opportunities we have. So there is no conflict or trade-off that from today's perspective we would have to make. Now on guidance, first of all, I can confirm that we are for 2019, actually in line with the information that we provided you. We are looking at a net synergy realization of 20% to 35% of the $1.2 billion in fiscal 2019. Secondly, the EUR 300 million are a adjustment to our typical 2018 growth profile. What it's going to translate into in terms of what we are going to see coming back in 2019, we will for sure comment on as part of our -- the Capital Markets Day or at the latest, when we give guidance for 2019. That is something that we would have to look at separately.
I think, Haley, are there any more questions? We're running out of time a little bit. So are there any more questions on?
There are no further questions.
Okay, great. So thank you very much, everybody, for participating in today's call. It was a little longer and a little bit more complex, but I hope we provided all the information necessary.So thank you very much. Talk to you soon.
Ladies and gentlemen, this concludes the Second Quarter 2018 Results Investor and Analyst Conference Call of Bayer AG. Thank you for participating. You may now disconnect.