Bayer MaterialScience: Slump in business leaves a distinct mark

The performance of the Bayer Group’s businesses in the first quarter of 2009 varied widely as expected. “While CropScience and Pharmaceuticals continued on a path of growth, the slump in business at MaterialScience (www.bayermaterialscience.com) also left a distinct mark on sales and earnings of the Bayer Group,” Management Board Chairman Werner Wenning explained on Wednesday when the interim report was published. Wenning described the goal of limiting the decline in the Group’s earnings before interest, taxes, depreciation and amortization (EBITDA), before special items, for the full year 2009 to 5 percent as increasingly demanding. However, he believes it could still be achieved if there is a tangible recovery in the MaterialScience business. He said the downturn seems to be bottoming out. “The first signs of a modest recovery in demand are appearing,” said Wenning.

Group sales for the period January through March came in at EUR 7,895 million, down 7.5 percent against the record figure of EUR 8,536 million reported for the same quarter last year. After adjusting for currency and portfolio effects (Fx & portfolio adj.), sales declined by 9.7 percent. EBITDA before special items decreased by 22.4 percent to EUR 1,695 million (Q1 2008: EUR 2,185 million). Here, too, the improvement posted for the life-science activities was not sufficient to offset the declines for the industrial business. The operating result (EBIT) before special items also moved lower, dropping by 32.1 percent to EUR 1,017 million (Q1 2008: EUR 1,497 million).

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Demand at MaterialScience drops sharply
Sales of our high-tech materials business posted a severe drop of 34.9 percent (Fx & portfolio adj. 38.4 percent) to EUR 1,636 million (Q1 2008: EUR 2,512 million). The global economic crisis led to considerably weaker demand in the relevant customer industries. “The MaterialScience subgroup experienced a steep fall in volumes, with pressure on prices increasing at the same time. Nearly all product groups at MaterialScience were impacted by this trend in all regional markets,” said Wenning. “This is an unprecedented development for Bayer.”

Business with foam raw materials (Polyurethanes) in the first quarter was down by 39.3 percent on a currency- and portfolio-adjusted basis. Sales of the Polycarbonates unit also fell sharply (Fx adj. minus 41.7 percent), as did those of raw materials for coatings, adhesives and specialties (Fx & portfolio adj. minus 40.8 percent).

The drop in volume sales and selling prices was accompanied by significantly lower capacity utilization at the production facilities of MaterialScience. This caused EBITDA before special items to slump to minus EUR 116 million (Q1 2008: plus EUR 407 million). No significant benefit was yet felt from the fall in raw material costs compared with the first quarter of last year.

Wenning pointed out that steps such as temporarily shutting down certain plants and cutting back production at others, bringing forward planned maintenance work and making greater use of flextime arrangements were introduced at all sites of MaterialScience worldwide at an early stage. Furthermore, management and the employee representatives at MaterialScience agreed to a reduction in the working hours of payscale employees at the German sites for a limited period, accompanied by a corresponding reduction in collectively agreed rates of pay. Comparable measures have been instituted for the subgroup’s managerial employees. These measures have been in effect since February 2009. “We will continue to observe and continually analyze the trend in the market environment for MaterialScience. Possible further steps and adjustments will be designed in such a way that they do not impair the sustainability of our business,” the Bayer Chairman announced.

Outlook for the full year 2009
The drop in sales and earnings at MaterialScience in the first quarter of 2009 turned out to be even steeper than expected. However, sales stabilized at a low level in the first three months. “The downturn thus seems to be bottoming out. The first signs of a modest recovery in demand are appearing,” said the Bayer CEO. Bayer anticipates an improvement in sales and earnings at Material¬Science in the second quarter compared with the first, and this subgroup is targeting positive EBITDA before special items for the full year.

“Against this background, we consider our goal of limiting the decline in Group EBITDA before special items to 5 percent to be increasingly demanding,” Wenning explained. However, he believes it could still be achieved if there is a tangible recovery in the MaterialScience business. Wenning said it would no longer be possible to match the prior-year earnings figure, still less to improve upon it. Group sales for the full year will likely come in at approximately EUR 32 billion.

The company now expects to make capital expenditures of EUR 1.4 billion in 2009, while research and development expenses are planned to rise to roughly EUR 2.9 billion. “We still expect to bring down net financial debt toward EUR 10 billion by the end of the year,” Wenning stressed, adding that the conversion of the mandatory convertible bond into equity when it matures in June 2009 and the improvement of net cash flow will help to achieve this. This forecast does not take into account any possible portfolio changes.

Bayer MaterialScience AG, Leverkusen, Germany

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