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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on the Full-Year/Q4 2022 Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions].
I'd now like to hand the conference over to Oliver Maier, Head of Investor Relations of Bayer AG. Please go ahead.
Great. Thank you so much, Heidi. Good afternoon and thanks for joining us today. I'd like to welcome all of you for our fourth quarter and full-year 2022 conference call.
With me on the call today are Werner Baumann, our CEO, and Wolfgang Nickl, CFO, along with our division heads. Werner will begin with key achievements of 2022 as introduced last year. We will then have Rodrigo, Stefan and Heiko comment on the respective divisional performances and outlook for 2023. Wolfgang will close with an overview of the group performance and outlook before we open the Q&A session.
As always, I would like to draw your attention to the cautionary language which 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.
All right. Thank you, Oliver. And good afternoon, ladies and gentlemen. It's my pleasure to welcome you to today's conference call. 2022 was a year with unprecedented macro volatility and geopolitical challenges. Russia's war in Ukraine, one of the world's major exporters of key crops, caused significant harm to global food security. Russian sanctions led to energy supply risk, specifically for European-based operations. At the same time, the COVID-19 pandemic continues and major lockdowns, e.g. in China, stretched global supply chains even further. These macro events led to accelerating global inflation, causing central banks to increase their target interest rates in major economies worldwide.
Now, against this backdrop, our business model proved highly robust, with solutions that address the world's most pressing challenges around nutrition and health care. Our vision, Health for All, Hunger for None, has never been more relevant than in times like these.
For the year, 2022 was actually an excellent year, both operationally and strategically. We delivered on our ambitious financial targets which were revised upwards in August. Sales reached €51 billion, up 9% on a currency and portfolio adjusted basis against an already strong prior year. Growth was led by Crop Science and a strong contribution from Consumer Health, while Pharmaceuticals top line came slightly in above previous year.
In Crop Science, growth largely originated from pricing both for glyphosate-based herbicides, as well as the remaining portfolio. Consumer Health benefited from high demand for products against allergy and cold and growth of our launched brands.
Pharmaceuticals, Eylea continued to exceed our expectations and grew across regions. Our new pharma products gained further encouraging momentum that combined sales of Nubeqa and Kerendia crossing the € 0.5 billion sales mark in 2022. This actually helped offset near term headwinds such as volume-based procurement impacts in China and loss of exclusivity for Xarelto in Brazil, which were more significant than we had anticipated at the beginning of 2022.
Our EBITDA before special items increased by 21% year-on-year to €13.5 billion. With a strong pricing leverage and savings from our efficiency programs, we were able to offset around €2 billion in cost inflation and still grow earnings significantly. Therefore, core earnings per share came in at €7.94, well above our expectations for the full year.
Based on the strong operational performance, we propose a 20% dividend increase to €2.40 per share to our shareholders.
We also made further substantial progress on sustainability and we are well on track to achieve our 2030 non-financial targets. Please take a look at our new sustainability report which is published today.
Moving on to innovation, let me focus on some of the highlights and further outlook. Backed by encouraging study results in 2022, we recently raised the peak sales potential of our major short and mid-term growth drivers in pharmaceuticals to over €12 billion euros. Half of this growth potential is expected to come from our recently launched products with Nubeqa and Kerendia. The other half is expected to come from our Phase 3 assets, Asundexian and Elinzanetant.
In 2023, as just seen yesterday in Japan, we look forward to further approvals for Nubeqa metastatic hormone sensitive prostate cancer in various geographies, and we recently presented new data confirming survivor benefits and the favorable safety profile of Nubeqa across different subgroups of patients in this indication.
We also submitted the Eylea 8 milligram formulation for regulatory approval in two major retinal eye diseases in the EU, with a chance of first launches in 2023. Last, but not least, we are expecting the readouts on our Parkinson's first Phase 1 and Elinzanetant Phase 3 studies for menopause management in 2023.
For Crop Science, we will initiate on farm trials in the US this year for our short stature corn. We also expect the full commercial launch of our first ever biotech trait for piercing and sucking insects, and we will launch first digital B2B solutions as part of our collaboration with Microsoft.
For Consumer Health, we will further move ahead with our Astepro launch in the upcoming US allergy season. We also plan to launch an innovative offering in personalized health later this year.
In line with our strategic agenda, innovation is not only coming from within the company as we continue to invest externally and enhance our research collaboration. We again expanded our lease portfolio with the addition of seven companies in 2022. We entered into a multi-year strategic partnership with Boston-based biotech company Ginkgo Bioworks, and took a majority stake in CoverCress, the producer of a sustainable oil seed cover crop.
At the same time, we further optimized our portfolio with the sale of the Environmental Science Professional business and some of our non-core pharma assets.
Now, let's look at 2023. After two years of recovery and dynamic top line development, we expect further growth for the current year at normalized rates. We see a more challenging environment with softening glyphosate prices. We expect further price cuts on our mature pharma portfolio, which will be partially compensated by new product growth, pricing and volume contributions in other areas.
Against that backdrop, we expect EBITDA before special items and core EPS not to reach the 2022 record levels, but remain ahead of our midterm planning. My colleagues will now comment on the respective business performance and outlook.
Rodrigo, over to you to make the start for Crop Science.
Thank you, Werner. And thanks to everyone joining us today. 2022 was a tremendous year for us and I'm pleased to share that we delivered our parallel commitments to both perform and transforming agriculture.
In terms of performance, it was another record year for Crop Science, surpassing €25 billion in sales, with 15.6% cpa sales growth, ahead of our most recent guidance of 13%. Pricing drove this sales growth as we execute our innovation driven, value-based pricing approach and effectively managed the market dynamics of our glyphosate-based herbicides. Roughly two-thirds of our sales growth, or approximately €2 billion, came from higher glyphosate pricing due to the tight global supply. Meanwhile, fungicides and insecticides each delivered 5% sales growth and the rest of our herbicide portfolio grew by 11%. With improved supply, we could have easily seen high-single digit growth in insecticides and fungicides, given the strong dynamic.
Moving to seeds and traits, our global corn business grew its number one share position in the market, delivering nearly 9% cpa sales growth. In the US, stronger price offset the lower planted corn acres and a decline in royalties from some older licensees.
In all other regions, we achieved growth rates in corn of 20% or more based on our strong combination of volume gains and price increases. In soybean, we have our leading position despite slack global sales, reaching more than 80% of the acres in Brazil and close to 50% of the acres in the US with our trait technologies.
Finally, our cotton business grew by nearly €100 million or more than 15% in 2022, from price as well as higher volumes from higher planted acres in the US and Australia. This strong pipeline growth, coupled with approximately €200 million of cost savings from our ongoing transformation programs, resulted in an industry-leading 27% EBITDA margin before special items, in line with our guidance and more than covering the approximately €1 billion of incremental cost inflation and 110 basis points of FX-related margin headwinds.
In addition to disciplined management, particularly of our receivables, our 12-month average working capital to sales ratio declined from roughly 49% to 42% by the end of 2022, and improvement of 640 basis points.
Our continued efforts to transform the industry have been no less impressive. Year in and year out, our R&D team consistently delivered more innovation to our customers than any in this space. Our R&D investment of €2.6 billion in 2022 continues to advance a pipeline with a long term peak sales potential of more than €30 billion, half of which are incremental to our existing base. Most importantly, we replenished more than we launched through our relentless pursuit of new, more sustainable solutions.
In 2022, as you can see on this slide, we advanced numerous projects, deployed more than 500 new hybrids and varieties of our seed business, and generated hundreds of new crop protection product registrations and several new formulations. This refresh of higher performing seeds and formulations is foundational to the price gains we intend to capture in our 2023 plants.
In addition, our digital tools now reach more than 220 million acres, and we successfully launched ForGround by Bayer, our digital platform that goes beyond carbon offsets, to help farmers transition to sustainable practice and connect with businesses looking to advance their sustainability goals. This was a natural outgrowth from our Bayer carbon program that now reaches 1.5 million acres.
Finally, we are expanding our current leading portfolio of biological solutions. We delivered approximately €200 million in annual sales with our open innovation platform. These include the three-year collaboration we struck with Ginkgo Bioworks on nitrogen optimization, carbon sequestration, and next generation crop protection, our recently announced M2i distribution agreement for pheromone-based biologics, as well as a strategic partnership with Kimitec on crop protection and biostimulant products.
As we move into 2023, there are numerous milestones and we are eagerly anticipating on our transformation journey to empower farmers everywhere to produce more with less. We are initiating our US Ground Breakers trials for the Smart Corn System, bringing our breeding approach to short stature corn. Our ThryvOn Cotton, the first ever biotech trait that protects plants from piercing and sucking insects, expected to move to a full commercial launch. We look also forward to our first to business digital solution for in agriculture and adjacent industries by our Microsoft collaboration. To learn more about these advancements and technology engines that power them, see our investment case on Bayer.com and watch for our invitation to our Crop Science Innovation Summit in June in New York.
With this innovation in our portfolio and continuous strong farm incomes, we see opportunities for accelerating growth in several of our business segments despite the expected glyphosate hedges.
Overall, we're expecting to grow Crop Science sales by around 3%, with glyphosate-based herbicide sales decline by roughly 15% to 20% or approximately €900 million at the midpoint, while the rest of the division sales grow by approximately 8%, mostly from pricing.
For glyphosate specifically, we're anticipating that prices will continue to normalize to not fully back to the levels seen in 2021, given the higher cost position our generic competitors are facing. We expect to offset a portion of these pricing headwinds with the stronger glyphosate volumes as our supply returns close to our full capacity. This outlook also assumes double-digit percentage sales growth in corn seeds and traits, fungicides and insecticides, supported by the new innovation and we are moving into the market as well as the strong commodity price. In addition to higher pricing, we expected volume and share gains in corn globally, and higher volumes of improving supply in our insecticides and fungicides portfolios.
From a calendarization perspective, the outlook is heavily influenced by glyphosate-based herbicide sales trend, considering the tough comp in the first half of the year. As a result, total Crop Science sales are expected to be relatively flat in the first half and then accelerate in the second part of the year, to average 3% for the full year.
Moving to the outlook for EBITDA before special items, we still expect to lead the industry margin despite some modest dilution versus 2022, with an expected margin in the range of 25% to 26% of sales at constant currency. For the first quarter specifically, the margin is estimated to be in the range of 36% to 38%. Incrementally, inflation is expected to persist at roughly 4% of sales, largely from higher cost of goods sitting in our existing inventories.
To counter some of these, we're expecting approximately €300 million in cost savings. The good news is we are seeing raw material contract prices and transportation costs starting to ease. So we expect this cost inflation in our cost of goods to begin to abate by the end of 2023, setting us up for a return to margin expansion in 2024.
With that, let me pass it to Stefan to discuss Pharma.
Thank you, Rodrigo. And good afternoon, everyone. Starting with last year's financial, sales of Bayer Pharma were up 1% year-on-year as a result of higher volumes. While we were facing significant headwinds in mature parts of the portfolio, I'm happy to report that our launched assets of Nubeqa and Kerendia continue to perform very well.
Like in the previous year, Nubeqa doubled sales again in 2022, reaching €466 million, that were driven by ongoing market expansion in non-metastatic prostate cancer. In addition, we saw a rapid adoption of Nubeqa in the metastatic setting. According to our data, Nubeqa has already established itself as the number two product in the US in new patient share in both indications.
Kerendia, on the other hand, generated sales of €107 million in 2022, crossing the €100 million mark, only five quarters into the market. In fact, we're seeing one of the strongest launch dynamics in the cardiovascular space despite the initial COVID restrictions we had to face in 2021, with a continued US market uptake that is driven by reimbursed access for the majority of commercially insured and Medicare Part D patients as well as inclusions in treatment guidelines and recommendations.
We have compiled the new prescriptions data for Nubeqa and Kerendia in the appendix of today's slide deck for your reference.
Looking at the remainder of our portfolio, also Eylea performed strongly again, growing 9% with contributions across regions. In contrast, Xarelto sales declined by 6% year-on-year, driven largely by headwinds in various markets, which included the loss of exclusivity in Brazil and pricing pressures in several countries in Europe. Again, you can find a summary of Xarelto's upcoming patent expires in major markets in the appendix of today's slide.
Most prominently, however, China's volume based procurement regulations were heavily weighing in on Xarelto's performance, lowering our sales by almost half in this region. And we have been seeing similar impacts on full-year sales of Nexavar and starting to see those for Adalat since the fourth quarter [indiscernible] in China.
Lastly, sales in 2021 included a milestone payment of €190 million for Adempas that did not recur in 2022. EBITDA before special items came in at €5.9 billion, up 2% year-on-year and equivalent to a margin of 30.5%. While changes in foreign exchange rates had a positive 400 basis points stimulus on the top line, the impact on the margin was diluted by 110 basis points, primarily reflecting our high cost position in territories where foreign currencies appreciated last year. Adjusted for that, the margin was on par with the year before and in line with our guidance, although we were facing significant inflation driven cost increases and a margin diluted portfolio effect, which were in part compensated by proceeds from the sale of smaller non-core businesses.
Talking about last year's strategic achievements, we've made excellent progress and generated outstanding results in key clinical studies in the mid and late stage of our portfolio.
With a very consistent dataset from our Phase 3 ARASENS trial, we pave Nubeqa's way for a broader label and our ambition to make this medicine a foundational therapy across all indications in prostate cancer.
For Kerendia, we're seeing continued positive news flow and label expansion. In addition to the Phase 3 results of Eylea 8 milligram showed this medicine's potential to change the treatment paradigm for patients with wet AMD and DME and become the new standard of care, building on Eylea's gold standard in this category and positioning the franchise for prolonged leadership.
And finally, based on the successful completion of our Phase 2 development program, PACIFIC, we moved our Factor XIa inhibitor Asundexian into Phase 3.
As a result of these strong achievements, we felt very comfortable to upgrade the combined peak sales potential of our launch assets, Nubeqa and Kerendia, to more than €6 billion, while at the same time we project an equal combined peak sales potential for our Phase 3 assets, Asundexian and Elinzanetant combined.
Putting this into a broader perspective, we expect our launch medicines and current Phase 3 drug candidates to more than offset sales declines, triggered by upcoming losses of exclusivity in the long term, thus effectively addressing any major near and midterm patent loss concerns.
Finishing up with last year's innovation progress in our Pharma division, we further expanded our development portfolio in the areas of cell and gene therapies, as it currently contains six projects at different stages of clinical development, including programs that address indications where there's a high level of unmet medical need such as Pompe disease and congestive heart failure.
In 2023, we're very much looking forward to the readout of our cell therapy study, DA-01 in Parkinson's disease by mid-year. In addition, we will see headline data for Elinzanetant from our Phase 3 study program, OASIS, in this year's second half as well.
In between, we're expecting a steady drumbeat of ongoing approvals for Nubeqa in the metastatic cancer setting in various regions as well as submissions and potentially first approvals for Eylea 8 milligrams.
Looking into 2023, from a financial perspective, we do expect top line growth of around 1%. The positive momentum from our new products, Nubeqa and Kerendia, for which we foresee combined sales of more than €1 billion this year should more than offset losses of market exclusivity in other parts of our portfolio. In particular, we anticipate a mid-single digit decline for Xarelto, also impacted by patent expiries in smaller markets like Mexico, Australia and Canada.
In China, the expanding COVID-19 wave at the beginning of 2023 held back hospital sales significantly across the portfolio. On top of that, Adalat is being hit by the country's volume based procurement regulations since November last year, which could lower its sales in 2023 in this territory by up to 50% as a result of lower price and volumes, just like it did it for Xarelto. In contrast, we expect Eylea to compensate price pressure in our territories through growing volumes this year, effectively playing out its market leadership.
The EBITDA margin before special items should come in slightly above 29% at constant currencies in 2023. While we continue to drive investments in R&D, we're shifting marketing resources for mature franchises towards the launch medicines. At the same time, we will tightly manage operating expenses and drive efficiency measures to mitigate gross margin dilution from pricing headwinds and cost inflation.
For modeling purposes, I think it is fair to assume that the first half of this year will be clearly below the second half, both in terms of top and bottom line, as we're likely to see the sales decline from mature assets and the impact of the soft trading conditions in China at the beginning of the year and then offsetting dynamics from our launch assets. So be prepared to see improving quarterly performance and profile sequentially over this year.
With that, I conclude my comments on Pharma and pass it on to Heiko for Consumer Health.
All right. Thank you, Stefan. And hello, everyone. It is my pleasure to share the performance of our Consumer Health division in 2022 and also give you an outlook for 2023.
In a volatile environment, we grew our business 8.4% to more than €6 billion last year, significantly exceeding our updated guidance of 6% to 7%. On the bottom line, we were able to make big investments in innovation that we expect to generate strong returns in the future, while maintaining a margin of 22.5% in a highly inflationary environment.
Further, we drove significant cash productivity, improving our working capital to sales ratio by 220 basis points. Here's what's behind that performance. First, our growth was once again very broad based. All regions and all categories contributed.
Over the past few years, we have seen unprecedented shifts in demand in categories like nutritionals and more recently cough and cold. Even with these shifts, we were able to deliver consistent growth, drawing on our strength of our category footprint. We focus on categories where sound science, innovation, and strong brands make the difference. Our success over the past few years shows us that our focus is the right one.
Our growth in 2022 was driven by a high incidence level of cold and flu versus soft previous year, with strong demand for our products throughout the year. We also saw significant growth in our allergy business with the launch of Astepro.
Dermatology, with a continuous rollout of our Bepanthen Derma innovation, a science-based product range for dry skin, saw equally strong growth in 2022.
After two years of substantial growth in our nutritionals category, we saw more moderate growth in 2022, yet on a significantly higher absolute level than prior to COVID-19. This performance shows us that we can successfully steer our business through unpredictable circumstances.
We have capitalized on growth opportunities, also expanding the share of sales coming from ecommerce to now roughly 11%. We have stepped into new growth markets like India. We executed successfully on our comprehensive productivity programs and have taken pricing measures to counteract inflation and fund innovation.
Despite challenges from stretched supply chains, we were able to serve our customers and meet or exceed our targets. This is also true for our EBITDA before special items target. Also, we saw continued constraints in global supply chains and high inflation effects across markets. We increased our EBITDA level before special items by 15% to €1.4 billion and delivered an EBITDA margin before special items on previous year level at 22.5%, in line with our guidance.
We compensated for significant inflationary cost pressures by leveraging our operational productivity programs and actively managing pricing. At the same time, we also continued to make substantial investments in innovation, particularly for the launch of Astepro in Q3 2022.
As our colleagues in Crop Science and Pharma know, innovation…
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…products. This truly differentiated solution will drive significant incremental growth for our leading allergy business.
In the digital space, we partnered with Huma Therapeutics, a leading digital health company, to launch a cutting edge personal health tool that evaluates an individual's risk of developing cardiovascular disease over the next decade. Through user friendly questions and advanced algorithm and scientifically backed research, the Bayer Aspirin Heart Risk Assessment gives individual actionable insights they can share in conversations about heart health with their doctor.
The tool will first be rolled out in the US, a country with more than 100 million people who may be at risk of cardiovascular disease. In our view, bringing digital technology to healthcare can transform the way people take care of themselves in the coming years by giving them insights to make smarter decisions about their health.
Finally, we also advanced innovation in nutritionals, a category that remained in the black even after a remarkable 12% growth in 2021 and 23% growth in 2020. We launched a new immunity formulation behind our Supradyn, Redoxon and Berocca brands. The formulation we launch is backed by seven clinical trials supporting each layer of the immune system to help people get and stay healthy.
Looking ahead now at 2023, innovation will once again be the key growth driver. We are totally focused on making sure that Astepro is the nasal spray of choice in the upcoming US allergy season. We also plan to launch an innovative offering in personalized health later in the year.
Further, we will maintain our laser focus on disciplined business steering. Before normalizing in the second half of the year, we expect to see continued inflation in the first half of the year. Even in this environment, we are prepared to further drive our margin progression, while continuing to invest in innovation and brand building that fuels future growth.
These priorities translate to another competitive business outlook in 2023. While we expect continued growth across our industry, we plan to grow at the top of our industry with sales growth of around 5%. In line with our midterm ambition, we target an increase of our EBITDA margin before special items to around 23% at constant currencies.
And with that, I'm happy to hand it over to you, Wolfgang.
Thanks, Heiko. Let's now look at the group financials for 2022 and the combined outlook for fiscal 2023 based on what my colleagues just shared.
We achieved or even exceeded all relevant group guidance parameters last year. Currency and portfolio adjusted group net sales increased by 9% to €50.7 billion, in line with our upgraded guidance range. The cpa growth was largely pricing driven. In 2022, the top line also benefited from currency tailwinds of approximately €3 billion. This was mainly driven by the strength of the US dollar, Brazilian reais and the Chinese RMB against the euro.
Our top line growth translated into a 21% increase in EBITDA before special items to €13.5 billion. This represents a margin before special items of 26.6%, exceeding the upper end of our guidance range. As expected, foreign currency effects of around €430 million were less pronounced in EBITDA compared to sales, thus leading to a margin dilution of approximately 80 basis points.
For earnings per share of €7.94 exceeded our upgraded guidance and came in 22% higher than the prior year. Divisional contributions were led by Crop Science and more than offset a negative year-over-year impact in the core financial result which was driven by higher interest expenses and non-cash relevant fair value changes, in line with our full year guidance.
For tax expenses of €2.1 billion were comparable to last year in absolute terms. However, reflect a lower core tax rate of 21.7% on higher earnings.
Our free cash flow more than doubled to €3.1 billion, mainly driven by lower settlement payments compared to the prior year. Settlement payments came at €1.2 billion, which did not include the approximately €700 million payout for the Oregon settlement. Both the Oregon settlement and the municipal water class settlement were paid at the beginning of this year and are included in our financial guidance of 2023.
Net financial debt decreased to €31.8 billion euros at the end of 2022. The higher free cash flow contribution and €3.4 billion euros in divestment proceeds from the sale of the Environmental Science Professional business and other non-core assets in Pharma were partially offset by approximately €2 billion in dividends paid and around €2 billion euros negative impact from foreign exchange effects.
Let me now move to our guidance for 2023 at the group level. We expect group net sales of €51 billion to €52 billion at constant currencies, representing 2% to 3% currency and portfolio adjusted growth.
As currency impact, we estimate around €1 billion headwind in 2023 based on the month-end December spot rates compared to average actual prior year rates. The effect is mainly driven by the US dollar. For all other KPIs, we do not project the material impact from foreign exchange rates at this point.
For modeling purposes, please note that the group net sales guidance includes a negative portfolio effect of approximately €500 million from the businesses we divested in 2022. In terms of phasing, we expect business performance to be skewed towards the second half of this year when compared to 2022.
On our bottom line, we protect EBITDA before special items of €12.5 billion to €13 billion. We expect the [indiscernible] in glyphosate and pharma, cost inflation and growth investments to be partially offset by active pricing management in the non-glyphosate Crop Science business and Consumer Health, as well as about €500 million to €600 million in cost savings across the company.
For core EPS, we expect between €7.20 and €7.40 for 2023. I will come back to the core EPS bridge after I finish the guidance.
We remain focused on effective cash management. We plan on around €3 billion in free cash flow for the full year despite higher net settlement payouts of around €2 billion to €3 billion. This represents an underlying free cash flow before settlement of approximately €5 billion to €6 billion in 2023.
Net financial debt is expected to be slightly higher than last year at €32 billion to €33 billion, including higher dividend payments in 2023.
Finally, for the other guidance parameters, please note that our reconciliation result is expected to come in at minus €700 million to minus €800 million. This includes the catchup effect of our long-term incentive provision based on a share price assumption of €60. We have included an overview of all the other elements of our guidance in the backup to this presentation.
Let me now come back to core EPS for just a moment. I would like to share an illustrative bridge from 2021 to 2022 and then from 2022 to 2023. In 2022, increased glyphosate pricing accounted for about €2.07 per share pretax impact versus 2021. This was offsetting material cost inflation affecting all of our divisions in about the same amount.
As mentioned before, the core financial result and core taxes combined had a negative effect, while we benefited from foreign exchange tailwinds. Without these effects, the underlying business performance contributed €1.93 to core EPS year-on-year. For 2023, our ambitious plan again includes a high contribution of the underlying business of between €2.20 and €2.40.
As outlined by my colleagues, this includes anticipated higher pricing from our Crop Science portfolio excluding glyphosate. We also expect volume gains in corn, strong contributions from our launch efforts in Pharma as well as above market growth in Consumer Health to contribute along with the before mentioned cost savings.
Rodrigo mentioned the expected normalization of glyphosate pricing to be partially compensated by higher glyphosate volume. We expect this to result in an overall impact of about minus €1.40 to core EPS.
Cost inflation is expected to continue to have a material effect of about €1.60 on a per share and pretax basis, particularly stemming from higher valued inventories that will hit our P&L this year.
As a result, and considering the continued high level of expected macro volatility, we are guiding towards a core earnings per share range of €7.20 to €7.40 cents for the fiscal year 2023, as I mentioned before.
And with that, I will hand the call back over to you, Oliver, to start on the Q&A.
Thank you very much, Wolfgang. And thanks everybody for the insights. Before we begin, I would like to remind you to please keep your questions to about two per person, so that we can take as many questions as possible from the participants and try to prevent using headsets. Makes it easier for us. So, Heidi, I think if you don't mind opening up the line for questions, that will be perfect. Thank you.
[Operator Instructions]. The first question comes from the line of Michael Leuchten from UBS.
It's Michael Leuchten from UBS. One question for Wolfgang and one for Stefan, please. Wolfgang, just a clarification on the savings of the P&L for the year. Could you just clarify in terms of hedging of energy costs in 2023, where are you hedged in terms of percentage of total? Does it vary across the year as in first half versus second half?
And then your commentary around the inventory, the first in, first out, does that mean that until the third quarter, once we're through your normal turn of 50 days of inventory, the P&L will be significantly distorted, then in the fourth quarter, we go back to normal?
And a question for Stefan. What happened in the fourth quarter? You were on track to make guidance from a revenue perspective and then we saw a decline. Why all of a sudden did that happen in Q4? And then, as we think about going into 2023, is it all about new products gaining momentum? Or was there something in the mature portfolio in the fourth quarter that also could normalize in the first half?
Michael, let me try to dissect this all for you. So, the €500 million to €600 million cost savings that I mentioned were actually relating to the programs that we announced two years ago. So these are ongoing contributions from this €1.5 billion plus program. And it's really distributed mostly across Crop Science. Rodrigo talked about Pharma, and also enabling functions. And part of that is, quite frankly, also used to reinvest in the business.
Energy is a relatively small part of our COGS, take it at about 3%. And obviously, the hedging for 2022 in 2021 was easier than the hedging for 2023 over 2022 because the prices were elevated. But assume that there is a manageable impact year-over-year and the prices are starting to come down on the energy front.
But despite that, we still see about €1.6 billion in inflation in the year, including what's in the energy, and that is active ingredients. That is freight that is coming down, but still above the 2021 level. That's labor, quite frankly, as well. And a lot of this is already sitting in inventory. You will have probably seen that our inventory went up last year by about €2 billion. And we were not asleep at the wheel. We did this on purpose because we were afraid at one point in time that energy availability could become an issue for us or our suppliers. And therefore, we allow it to take in a bit more of inventory than usual. And obviously, the inventory has also the inflationary effects in there.
To the quarterly phasing, you're absolutely right. The inventory gets consumed, usually sometimes FIFO, but at least at an average cost methodology, and therefore, as we go through the year, the COGS are then charged with the higher inventory. And hopefully, if we can buy cheaper again throughout the year, that will then benefit the P&L in the second half of the year. So you read that correctly.
Over to you, Stefan.
The fourth quarter had some extraordinary effects that we were seeing. One, of course, is the beginning of the Adalat VBP. So that started right at the end of the – at the beginning of the fourth quarter. And then we've seen in December, and quite frankly, also in January, extremely soft demand in China as many people were staying at home because of their COVID infections. We've had, in our own workforce, an overwhelming amount of our own employees that were affected by the disease over those two months. And that could be a good reflection of what happened in the country and lack of demand that we saw for especially December and January.
Add to that a continued softness in our woman's health care business in the US in the fourth quarter compared to our plans. And you have the mix of the answer to your question, at least I hope.
The next question comes from the line of James Quigley from Morgan Stanley.
Two please. So, one, Pharma margin. So, in the short term, as you mentioned, it will be impacted by [indiscernible] launches, R&D and inflation. But how should we think about plotting a path back towards low 30s margins? Will this be achievable purely through mix, as in your assets start to grow and the US business becomes less of a drag on profitability? Or would it require additional cost savings or restructuring to get back to those levels?
And secondly, on the PCB litigation, could you give us an overview of the process for the indemnification claims? So what are the next steps? What's the potential timing associated with those? And how difficult or easy is it to identify the third parties given that this is back in the late 70s? Also, if you could give us an update on any potential timing of the appeals for the PCB litigation as well?
You largely gave the answer in your question. So, margin improvement will be very much driven by mix and mix is coming over the next years out of a much stronger US situation. And so, we're already seeing now that the US is our fastest growing region across the globe. But at the same time, we're also very cognizant that we need to manage our costs tightly. And that's precisely what we intend to do.
Also be reminded, as we improve our mix for the US, we have a little bit more latitude on pricing compared to our over-indexed Europe business that we have today.
Let me take your question on PCB. First of all, we have had two settlements that have already by now in early 2023 paid out. One is the Oregon state settlement that you're aware of. The other one is roughly 2,500 municipalities settled. We continue to work on a number of state claims, such as Maryland, Pennsylvania, New Jersey, and Illinois. And those plus a few others will probably see the light of day going forward.
Secondly, we have the Sky Valley buildings complex, where we have lost a number of cases which we are appealing. And we have had one mistrial.
And in terms of the so-called undertakers, which is our customers in the 60s and 70s, actually, virtually all of our major customers are well identified and they are still – their successor companies are still around. We do have very, very comprehensive indemnity claims against them. We filed in the court last year in order to activate these claims. And in parallel, we are discussing – negotiating with them.
When it comes to timelines on these particular ones, if you look at the indemnity laws used, the first trial date set is not before quarter four 2024.
The next question comes from the line of Richard Vosser from J.P. Morgan.
A question on the glyphosate pricing assumptions. We can see sort of the Chinese glyphosate pricing falling to sort of average 2021 levels in February 2023. So, how should we think about that €2 billion pricing benefit? Obviously, some of it is retained, as you said. Could you give us more detail on what benefit you think is retained in 2023 and how you see that developing in 2024? Would you see more price reductions there? And maybe some idea of the revenue impact of volumes, I think back in the day, when Luling was out of commission, it was something in the region of €200 million, €300 million revenue loss. So is that the sort of – volume loss as well. Some help there would be great.
And then second question just on Pharma. Just on the hemophilia franchise, we have seen a new Factor VIII from Sanofi getting approved and, of course, there's been continued competition from Roche's product as well. So, just how do you see that impacting the Kogenate franchise going forward?
Let me go first here and then I pass to Stefan. On the glyphosate, as we are guiding, so we're guiding for a €900 million lower in glyphosate, and this is a combination of price and volume. So, we said that we're going to be on the range of 15%, 20% less than last year. And this is a downside on price and an upside on volume. As we mentioned, the volume for the first time in the last two years, we were still impacted in the end of 2021 by the hurricane. That also impacted the beginning of 2022. So this year is the first year that we're going to have the full volume for glyphosate. So that will help a little bit. But the average is a €900 million downside versus last year that we guide for this year.
First of all, it's always good to see you when there's innovation in the category, even though it's competitors because that's good for patients. But on our hemophilia business, I must say I'm really happy how resilient it has proven to be, especially over the last year. When I look at the total year, we've been pretty much flattish over the year, given all of these new entrants.
Our biggest challenge right now in our hemophilia business is that we're moving patients from Kogenate into the KOVALTRY product and into Jivi, the longer acting Factor VIII, but we're seeing very strong loyalty to our brand. And, yes, this is getting more difficult. And I would anticipate that we're going to be not growing this business. But I'm quite positive about the resilience, but there's a negative trend here.
The next question comes from the line of Keyur Parekh from Goldman Sachs.
The first one is on Crop. And as we look at 2023, you're pointing to €900 million in headwinds on glyphosate. And on the rest of your Crop portfolio, expecting to grow 8%. I'm wondering if you're going to be able to give us a sense for the overall business. What do you expect the pricing and the volume dynamics to be? In 2022, you had 16% price, 0% volume. So on that basis, what do you expect price versus volume to be kind of for your crop business in 2003?
And then, separately, how should we think about the outlook for the soybeans kind of seeds and traits business, given the continued penetration for [indiscernible] and kind of the situation around Dicamba registrations?
Let me use your question just to make a reflection here. Just one year in the position here. And I really feel that we came on a very strong year in 2022. And I feel that what we planned for 2023 is working as we designed. So, let me share a little bit what we plan for 2023. Right?
So, we're planning on our corn seeds and traits, our fungicide and our insecticides double-digit growth. And this will be a combination of pricing and volume. And also, we are gaining some volume, some market share as well. That's one of the elements that we have in our plan. So as we knew, because we are managing this glyphosate for 25 years now, we knew this would be coming for us. I think we planned in the core business to really drive the growth that we're planning for next year. And that's why that businesses, we are projecting 8% average growth for 2023. So, that's what we're driving here.
When you think about pricing of those elements, we launched pricing in the northern hemisphere. And that was very successful so far. We are in the middle of that campaign. We launched it in US and in Europe, what we call low-double digit prices increase, and we still need to launch in the southern hemisphere in the end of the year – in the middle of this year, sorry. And we're going to see that coming, that one.
But we feel good about our innovation here. What I want to emphasize here, when you think about 2023, the launches that we're having in corn, soybean, cotton, our CP, our biologics, the new technologies that we're bringing like this Smart Corn System with short stature corn, this will fuel a little bit of the growth in 2023 and, even more important, the coming years ahead of us.
Soybean, let me address your questions on soybean, right? We were flat last year. And that was a combination of a higher growth in Latin America and with lower sales in North America mainly because of excess seed and also because of the trait share. And your question, when you think about the trait share, we have increased gaining trait share over the last years because, basically, Corteva was migrating their germ plasma with their trait platform out of Xtend.
So what we see today, and what we see for 2023 and for 2024, prior to the launch of [indiscernible], what we see now is that we're seeing more an equilibrium market. They shift their portfolio, but now it's a more market to market competition. There will be a combination of germ plus, plus the technology trait. And we feel very good. We still hold the number one position in US and by far in the South America as well.
Total sales of soybean, €2.5 billion years, ahead of the second company in the market. So we're still leading that market. And from now on, we see more an equilibrium, a competitive market that we're going to be competing in every acre in US or in South America as well. But we feel good about this year, but even more we are planning and we are working on the launch of the new technologies to come as well.
The next question comes from the line of Peter Verdult from Citigroup.
Rodrigo, could you provide a ballpark update on current digital ag revenues, as well as licensing revenues across the seeds business? And the reason for the question is, I'm trying to get a ballpark sense to assess the relative materiality to current business, because we can all understand that the digital ag piece of the business will be increasing and growing nicely. But similarly, there will be downside pressures from licensing revenue erosion from the partners. So just wanted to explore that topic in a little more detail.
And then, Stefan, just back to Eylea, you made some remarks around 2023. Is that net-net a flat year or slight growth? But more importantly, how are you thinking about Eylea 8 mg long term? I think you've been cautious ever since we've seen the data are going to be difficult to see pan extensions in Europe and major international markets. As the dust is settled and you start to file the 8 milligram formulation, how has your view on the long term outlook for Eylea changed if at all? We in the market have got it eroding. But I wanted to understand the very latest view on the long term outlook for Eylea?
Thank you for that question. It's a very important one and can help me to clarify that one. So our licensing business today is a €2.6 billion business. And out of that, only less than 10% is going to big multinationals like Corteva, Syngenta. So, 90% of the licensing businesses is regional or small seed companies that we have globally. So, that's why we see a continued growth of our licensing business. And even more when I think about the mid-term with opportunities of the launch that I just mentioned before, when you think about corn and soybean and ThryvOn in cotton, we even see more opportunities that come in. But, today, 90% is regional and small companies. Stefan?
What we're seeing with Eylea, we're seeing continued good growth on volumes, but we're getting some pricing challenges, especially in in Europe, and potentially also in other geographies. So, overall, this is not going to be the same type of success that we've seen in prior years. Still a little bit positive, but not as good as in prior years for 2023. And again, still good volume growth, but tough on the prices.
For 8 milligrams, I think this – and I've said this before. I project that this will give us a renewed additional life for Eylea beyond loss of exclusivity for the 2 milligrams in the coming years. So we should have – compared to probably what many people did foresee a declining Eylea in the coming years, we now should see a much more stable and maybe even growing outlook for the next two to three years in Eylea. So I think that's really a positive compared to what I've seen from some of the forecasts that came from outside.
Peter, just to make sure, I think we were debating whether there was a piece of your question relating to digital and how that [Multiple Speakers]. Rodrigo is going to touch on that.
That's also a very important element. So, let me talk a little bit about digital here. So, this year, we reached 220 million acres with FieldView. Now 23 countries. The first country in Asia in Australia right now where we have a very successful business there as well. But also, there are two other elements that I want to share that I think is very important. The other one is that we launched the digital platform in US, that's ForGround. We are connecting companies that are working to reduce their sustainability or their carbon emissions with farmers, right. The [indiscernible] business is a good example of that. We're connecting. And I think Bayer has a very good position connecting those companies with farmers because of our footprint, our presence in the field. So, ForGround is a digital platform that I feel very excited about next years.
Another two examples on digital that we're going to see in the midterm, a lot of new things coming. One is our collaboration with Microsoft and 2023 probably will be the first year that we're going to see some business coming out of that. And finally, if you go to South America, we had a very successful launch with a bank there on Orbia, our platform, expanding also credit terms on the digital platform.
So, Peter, I would say that we're full speed on the development of those digital platforms. You heard also that from Keiko on Consumer Health reaching 11% of sales. We're expanding that platforms globally. And I'm sure that when we're going to see the next year, the midterm, we're going to see a lot coming from that side as well.
The next question comes from the line of Laurent Favre from Exane BNP Paribas.
Two questions for Stefan, actually. The first one is regarding the R&D spending, which I think reached an all-time high last year as a percentage of sales. Can you give us a sense of where you think that's going for 2023? And then the second question, I just want to clarify whether you think that 2024 margins will be up on 2023 for the division.
[indiscernible] head of R&D. So, I can tell you, for this year, that we anticipate that we're going to slightly increase our R&D spend. That's the only line item where we really allow for more spend because we've said that, directionally, let's say, in the next decade or so, we're going to rather move towards more to 20%, but always keeping our overall profile in good shape.
For 2024, in terms of where the margin is going, 2024 is going to be obviously a continuation of the relative erosion. So, our margin is under a lot of stress in the – as long as Xarelto continues to erode, when you lose such a major product. That being said, we're offsetting very nicely with our launches which require significant investments.
Back at the Capital Markets Day in 2021, you talked about roughly 200 basis points of margin pressure 2024 versus 2023. Is this the same type of pressure that we should be expecting then?
Can you repeat that? Because I couldn't hear you.
At the Capital Markets Day in 2021, you had guided Pharma margins down about 200 basis points between 2023 and 2024. I'm just wondering whether it's that type of decline that we should have in mind for 2024.
I would say it's really difficult at this point to reconcile to the 2021 guidance that we gave because we had VBP in the middle to a much larger degree than it was anticipated way back then. At the same time, we have extended patent for Xarelto in Europe until 2026. So it's hard to reconcile those numbers at this point.
The next question comes from the line of Sachin Jain from Bank of America.
Just a couple of clarifications, please. On the glyphosate €900 million decline you're commenting to, would you view that as a stretch or conservative target? And any color on whether you're assuming price stabilization within that assumption, given pricing is still in decline?
Stefan, on Eylea, I wonder if you could just quantify the price precedent you'll see and the source of that. Just trying to get a sense of whether you think that accelerates into 2024, 2025. On the volume growth you're expecting, what's the [indiscernible] impact you're seeing within that?
And then, my last question is on Kerendia. Accepting the positive commentary you're making in sort of strong CV launch given COVID, €200 million of sales for 2023 is still small relative to your absolute peak sales of €3 billion. So if you just walk us through what you think the next steps are that get us there in terms of what are the main hurdles, is it payers, is it physician feedback, is it positioning relative to STLT-2.
On the glyphosate, briefly, we shared a little bit about that in the past. We supply around 40% of the market. There is still 60% of the market that comes from China. It's very hard for me to give an assessment of that piece of the market. We monitor that very close.
One thing that we learn over the last 25 years managing glyphosate is that we have a very lean business, very tight, very low rebate season, working on a way that we are able to be very agile here. We feel that we what we guide for the year considering also of the cost that it's impacting not only us, but the generic companies as well is the right guidance. But we're going to continue monitoring that one and reacting to the market. But I feel that what we plan is, as you said, a combination of pricing decline and an upside on volume is the right guidance for the year. And we're going to continue monitoring that market.
On Eylea, so pricing is something that I would expect in 2023 to be more pronounced than in the following years because the following years, we will have the 8 milligrams to sort of like stand against that. So, where are we seeing pricing pressures is in multiple markets in Europe and in Canada, especially for this year. And it's sometimes a little bit hard to predict In which month that's going to hit you. But we will see that that is happening this year.
And on Kerendia, thank you for acknowledging the good launch. So what we're seeing is ultimately, other than – we didn't have an easy to educate physicians in the launch year, quite frankly, because our reach and frequency was very much impaired. So we're catching up there. In parallel, you will see that we're doing very well on guidelines. And what is most notably, I think, on guidelines is that the guidelines are starting to recognize that STLT-2 and mineralocorticoid receptor antagonists and actually – they're now naming it only Kerendia because it's the only one that works because it has a clean side effect profile, that being really differentiated strongly in the guidelines. And I think we're going to see this in clinical practice materialize because Kerendia is the ideal solution to add to an ACE or ARB given its mechanism of action, which is the baseline therapy for all renal patients. And we hope that that will also give us a significant thrust when we come to our cardiovascular indications.
You know that we have a trial underway in heart failure and we're exploring to expand our data generation on the heart failure side because we see that the mechanism of action of the mineralocorticoid receptor antagonists is now more and more coming into focus. And that gives us great expectations about the drug. Don't forget we have a second large indication that's coming up.
And the next question comes from the line of Christian Faitz from Kepler Cheuvreux.
Two questions please. One for Rodrigo, one for Wolfgang. Rodrigo, in Crop Science, how do you see seed production costs evolving this year, both in northern as well as in the southern hemisphere?
And then, for Wolfgang, you have roughly €12 billion of bonds and notes that have to be refinanced or ideally even retired over the next three years. Can you give us an assessment of incremental interest rates from today's perspective?
Just starting with the seed production here, let me share a little bit of that. It's a lot, as you know, very local production that we do have. And with that, we face some of the challenges, like the drop in Argentina or some parts of the of the globe that we faced that. But, overall, when I compile the average of the market, and that's a little bit of dilution when you do this local production, I think we are in a good shape for offering the farmers for next year the campaign that we planned. So, the planned growth that we have for the corn business, an example, that we have a double-digit growth, combined price and volume is supported by the seed production that we have today.
Thanks for your question on debt and refinancing as well. I think your ballpark correct. In the next two or three years, we have significant bonds coming due and hybrids coming due. And therefore, also some refinancing to do, which, obviously, will depend on the free cash flows and so forth. Don't nail me down on this. But if you assume like €7 billion refinancing between now and 2025, you can do the math very easily. Every 1% is €70 million. If we would have to refinance today, and then taking the same – 10 years and the same mix, you would probably be talking 3% or something like that. But interest rates are easing a bit. And that would be then offset by the net financial debt that would be lower. So, net-net, it would be less than that. But that's probably a good orientation for you to work with.
The last question comes from the line of Vincent Andrews from Morgan Stanley.
Rodrigo, just wondering if you could talk a little bit about the seed order book for the North American season. As we kind of look into March here, where are you as you come in – so earlier than expected, on time or so forth? And are you seeing sort of any benefit from the fact that farmers have much lower fertilizer costs year-over-year and, therefore, still have actually even better farm economics this year versus last year in terms of what they can put towards the seed portfolio?
I was taking a look on that material last week from the USDA. So, basically, the farm economics for us this year, is lower than last year, but it's still above the 20 years average. Right? So, that's a little bit of, like, the farm economics of the farmer is still positive. So, that's why we are considering a recover on the corn acres. Last year, we had a minus 5 million. I'm sure you remember that one. So there will be a recovery of corn area that we're seeing. How much will be that one? This is a little bit to be defined, but we're considering that one. But also, when we look to our orders book, we see all the adoption of the high technology. That's a good indication as well that we are having a good season, Vincent. But, again, should be another good year for the northern hemisphere, as we see.
Okay. I think that was the last question we could take. Thank you, everybody, for participating today. Very much appreciated. Talking soon. Thank you so much. Take care, everybody.
This concludes today's conference call. Thank you for participating. You may now disconnect.