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Bayer Aktienges Ads (OTCPK:BAYRY)

Q1 2010 Earnings Call

April 29, 2010 05:00 pm ET

Executives

Werner Wenning

Patrick Thomas

Arthur Higgins

Werner Baumann

Klaus Khan

Alexander Rosar

Friedrich Berschauer

Analysts

Richard Vosser - JP Morgan Cazenove

Ronald Koehler - MainFirst

Jean de Watteville - Nomura

Sachin Jain - Merrill Lynch

Fabian Wenner - UBS

Cornielia Thomas - WestLB

Andrew Benson - Citigroup

Andreas Heine - UniCredit

Florent Cespedes - Exane BNP Paribas

Daniel Wendorff - Commerzbank

Jo Walton - Credit Suisse

Martin Flueckiger - Helvea

Operator

Ladies and gentlemen, dear friends, welcome also on behalf of my colleagues to our conference call to in which we want to review our first quarter numbers with you. With me on the call today are from the holding Werner Wenning, Marian Jacobs, Klaus Kuhn and Werner Bauman and from the subgroups Arthur Higgins, Friedrich Berschauer and Patrick Thomas. As always, Mr. Wenning will start off our conference call with a brief summary of the developments in the quarter. We assume you have all received and reviewed our stockholders news letter, the briefing documents and for slides. So we’ve just run you through the main points. Before handing over Mr. Wenning, I’d also like to draw your attention to the Safe Harbor statements.

Werner Wenning

Good afternoon ladies and gentlemen. It’s also my pleasure to welcome you to our conference call. At first, the overview. The Bayer Group achieved from gains in sales and earnings in the first quarter of 2010. The recovery at MaterialScience is taking place faster than anticipated. After the late start business at CropScience gained considerable momentum towards the end of the quarter. Lower sales of Yasim/Yaz in the United States and of Betaseron prevented a better performance at pharmaceuticals. Consumer Health reported a successful start to the year. Overall, we remained confident for 2010 and are raising our earnings forecast for the Bayer Group. We are now targeting to increase core earnings per share by more than 15%.

Now let’s take a closer look at the major business developments in the first quarter. As usual, we’ll be talking about portfolios and currency adjusted amounts in most cases. Group sales were 6% higher while underlying EBITDA was up by 13% and core EPS by 32%.

These increases were driven by the strong recovery of MaterialScience, the successful start to the year for the consumer health businesses and an outstanding performance at BioScience. As guided, growth at pharma was hampered by lower sales of Yasmin/Yaz in the United States, a decline in business with Betaferon in Germany and Russia. Mirena and Nexavar on the other hand continued to grow significantly. As a result, adjusted sales of Pharma were level with the same quarter of last year.

Ladies and gentlemen, we are convinced that Yasmin and Yaz are a good choice for women seeking convenient and reliable contraception. It’s a user product as directed and that the risk profile is comparable to that of other combination of oral contraceptive. This view is supported primarily by the results of two prospected observational studies in the U.S. and in Europe with more than 120,000 users. We are now implementing a number of new health care provider and consumer directed initiatives to support the recovery of the brand. We however expect sales of the Yaz family to decline in the U.S. by approximately 25% this year. Outside the U.S. we anticipate continued growth in the high single-digit percent range. This leads to a mid single digit decline of the global business.

Our consumer health business benefited from the economic recovery particularly in the United States. Sales rose by nearly 7% compared to the weak prior year quarter with all divisions contributing to growth. Underlying EBITDA of health care increased due to the improvement in sales especially at animal health and consumer care. Earnings were held back mainly by the lower sales of Yaz as well as by the last year’s oncology divestitures and increased expense expenditures for research and development.

In light of the business trends, in the first quarter, we are adjusting our 210 forecast for health care as follows. For pharmaceuticals, we anticipate below market growth. In consumer health however, we expect to spend faster then the market. This corresponds to currency and portfolio adjusted growth for healthcare of about 3% again, previous guidance of about 5%. We continued to target a further increase in underlying EBITDA.

With approvals and launches of Yaz plus and Crelan expected this year and its tremendous commercial promise of our R&D pipeline, we are convinced that we will re-gain business momentum and growth sales faster again is a future. Third quarter phase of CropScience, they are down 10% year-on-year due to lower volume with selling prices stable overall. This was mainly because of adverse weather conditions in major growing regions and high product inventories in the distribution channels.

Another factor was a drop in prices for key agricultural commodities. Phase in the Crop Protection segment therefore fell 16% year-on-year. In Europe, with the late start to the spring season hampered business at the beginning of the year. Sales were down significantly in front for market related reasons. By contrast, business in Germany, matched the strong level of the first quarter of By contrast, business in Germany matched the strong level of the third quarter of 2009.

In North America, we have reached a 30% drop in sales because of the adverse market environment and an adjustment to our pricing strategy. As in Europe, selling was delayed by the long winter. The market also developed unfavorably due to price erosion for corn and wheat as well as high inventories in the distribution channels.

In Canada, we raised prices for our canola seed and lower the prices for the corresponding canola herbicide. This of course, had a negative effect of the Crop Protection business but increased BioScience sales correspondingly.

In addition, we considerably reduced prices for our Ignite herbicide in the United States in order to secure a greater share of the growth in the market for genetically modified soybeans. In Latin America, sales were down by 8% compared to the prior year period. This was primarily due to lower sales in Brazil, which were largely the result of high inventories in the distribution channels. It should be noted that the entire season in Brazil ran fairly well, Q4 and Q1 sales taken together matched the performance of the previous seasons. In the quarter, business trended positively in Argentina because of insect and disease infestation pressure. Sales of the Environmental Science business unit rose by nearly 4%. The market environment for high quality seeds was relatively favorable leading to stronger demand. Our BioScience business grew by 29% mainly due to much higher sales in the area cotton, canola and vegetables. Underlying EBITDA in the Crop Protection segment was down by nearly 38%. This was mainly due to result of a significant reduction in volumes and by lower selling prices. First quarter earnings were also diminished by a lack of fixed cost absorption.

As it continues to under produce while selling down inventories. By contrast, earnings of BioScience expanded substantially despite higher research expenditure. Underlying EBITDA of Environmental BioScience segments improved by 42%. Following the delayed stock to the season, business at CropScience has now gained momentum. We now anticipate lower sales growth overall in 2010 in view of the weak market development in the first quarter. We confirmed our goal of achieving slightly above market growth this year. We now anticipate sales growth of between 2% and 3% on the currency and portfolio adjusted basis, against previous guidance of approximately 4%.

We now expect underlying EBITDA to come in level with last year, against previous guidance of slight increase. MaterialScience got off to a substantial start in 2010. We achieved sales of more than EUR 2.2 billion, up nearly 38% against the prior year quarter, when business was greatly hampered by the global, financial and economic crisis. The growth in sales against the first quarter of 2009 was due to significant increases in demand from the principal customer industry.

Selling prices fell overall year-on-year, but improved slightly quarter-on-quarter. While volumes rose significantly in all product groups. The strongest increase in demand came from the automotive industry. The Asia-Pacific region was again the main growth engine where we also succeeded in implementing price increases. Volumes also rose significantly in Europe and North America. Underlying EBITDA of MaterialScience improved remarkably thanks mainly to considerably higher volumes and the related increase in capacity utilization at our production facility.

Raw material cost eased somewhat compared with the prior year quarter, but increased quarter-on-quarter. Lower energy prices and savings achieved through our restructured measures also made positive contributions to earnings.

The economic recovery is currently progressing more quickly than we had expected and should continue to fuel an upturn in business at MaterialScience in the coming quarters. Against this background, we are significantly raising our sales and earnings forecast for this sub group. We are now targeting sales increase in the region of 20% on the currency and portfolio adjusted basis in 2010, against previous guidance of more than 10%.

We planned to more than double underlying EBITDA, compared to our previous forecast of a considerable increase. In the second quarter of 2010, we anticipate further growth in sales at MaterialScience and an improvement in EBITDA before special items, compared with the first quarter of the year.

Ladies and gentlemen, we remain confident for 2010 and anticipate that the slower pace of growth at HealthCare and CropScience will be offset by the recovery at MaterialScience. Exchange rates have so far trended more favorably as well. We (inaudible) raising our earnings forecast for the Bayer Group. We continue to target currency and portfolio adjusted sales growth of more than 5%. We now aim to increase EBITDA before special items to more than EUR 7 billion and we expect core earning per share to improve by more than 15%. Our estimate a base of a change rates at the end of the first quarter.

Before opening the Q&A session, please allow me to summarize my remarks. In the first quarter, we generated strong improvements in both, sales and earnings. The recovery at MaterialScience is taking place faster than anticipated. After late start, business across Science gained considerably momentum towards the end of the quarter. The planting season is now well underway. Lower sales in Yasmin/Yaz in United States and of Betaferon prevented a better performance of Pharmaceuticals. Consumer Health reported successful start to the year.

Overall, we remain confident with 2010 and raising our earning’s forecast for the Bayer Group.

We are now targeting to increase core earnings per share by more than 15%. That ladies and gentlemen, concludes my remark. We are now happy to answer your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions). The first question comes from Mr. Vosser. Please state your name, company name followed by your question.

Richard Vosser - JP Morgan Cazenove

Hi, it's Richard Vosser from JP Morgan Cazenove. A couple of questions please. Firstly on materials, I noticed you haven't provided guidance for the second quarter, should we take this as a sign that you have substantially better visibility for this division. Are you going to provide quarterly guidance going forward and if you could give us an idea of how you see demand for at least the second quarter and if possible the rest of the year, maybe a little bit from the pricing environment, how that is shaping up far as you can see and also an outlook on the raw material that would be very good.

And then secondly, on Nexavar, could you comment on the relative growth profiles of the two approved indications renal cancer and liver cancer in each of the geographies. And if you could provide us so with the sales split in Japan and China as well that would be very useful. Thanks very much.

Werner Wenning

Yeah, let’s start with your question related to Patrick who materials on, by the way, we gave just prior to give you a guidance for the second quarter, but Patrick if you go forward and answer the question.

Patrick Thomas

Yes, thank you Richard. Yeah, in the second quarter, we anticipate further growth in sales and an improvement in the EBITDA before special items compared to the third quarter. So, we see the trend continuing and just to give you a flavor in April, our businesses continued on the strong level of the end of quarter one. And order increased in May also think could be at the reasonable level and confirm our optimism for quarter two to exceed quarter one in terms of sales and earnings.

I think your next question related primarily to the sort of guidance for the rest of the year but to answer that, we would expect to continue giving quarterly guidance for BMS. I don’t believe the visibility has improved so much that we can revert to our annual guidance. But Richard on the rest of the year, I think what we’re seeing is the customer industries we’re serving are fairly positive and upbeat. Couple of examples, the US automotive industry has just upgraded their forecast through the rest of the year, the optical data storage market is not in decline, and it’s pretty much flat with Blu-ray starting to take over quite significant market shares. So, Blu Ray is now penetrating the market in a period of perhaps one or two years where as DVD took nearly five to six years.

And for example Blu-ray holds 20% of the market now in Japan. So there’s some quite strong underlying growth driven by our customer industries. Secondly, as for the hold of our business, Asia is the major driver for our portfolio and is continuing to be strong. 42% of all MDI’s now sold in Asia and 65% of all polycarbonates are now sold in Asia. So, that gives us confidence because of course Asia hasn’t really suffered from the slow down. And we believe therefore, quarter two will be strong and the final piece which is here to your question about pricing, utilization rates in polycarbonates and TDI are now about 90% and are therefore very strong in terms of pricing power and our NDI’s and our grace of 80% which means that we are fairly positive about price movements in that area as well.

Raw materials, you have seen oil prices been bouncing around in the first quarter as we go into the rest of the year, we believe that the oil price will rise. There are different views amongst those forecasting oil. We believe we will see perhaps seeking of the $100 towards the end of the year per barrel. If that is the case then that will be a hit on raw materials which could be up to about half a billion but we would expect to have try and offset that pipeline.

Arthur Higgins

Richard, first of all, we estimate the split between renal and liver is approximately 50% in the fever of liver. In terms of growth, we estimate the majority of our growth is coming from weather. The recent negative head-to-head studies that Pfizer had between certain Nexavar, I think confirms two things Richard. Firstly, the liver cancer, the very difficult cancer to treat and it underlines how significant and advanced Nexavar was in liver cancer. And secondly confirms what we always said that Nexavar is a better tolerated drug that I think you will continue to see strong growth in liver and that will be the key driver of the brand.

As in previous calls, we are prepared to give you the breakdown by regions and if you have your pen and paper ready, in the U.S. these numbers are all in euros. We sold 39 million in the quarter. That was plus 11. In Europe, 66 million plus nine and as you requested the split in Japan and China, 21 million in Japan plus 150%, 8 million in China plus 19 and in total 155 million plus 16%.

Operator

The next question is from Mr. Koehler. Please state your name, your company name followed by your question.

Ronald Koehler - MainFirst

First question is regarding Betaseron. Can you little bit quantify the Russian tender effect and as far as I understood actually Extavia or Novartis made the business right now and I'm not quite clear, is it now a quarterly effect or will that impact the whole year? Can you little bit elaborate that issue and how made Extavia actually that bid because their sales growth was quite low meaning the pricing that seems to have offered for Russia seems to be quite low.

So can you perhaps little bit elaborate on that? Second question the pharma side is Aspirin Cardio actually did not continue the growth path, at least not quarter-on-quarter and can you little bit elaborate on that? And third question is actually regarding Bayer CropScience and you now lost the first case in Arkansas this punitive damage in the rice case, how is the development here and how, actually how do you book that? I know you are appealing here but nevertheless will we see special items on that in the second quarter and is there an insurance coverage on these cases. These are the questions, thanks.

Werner Wenning

Yes, Koehler, let’s start with Betaseron, Arthur.

Arthur Higgins

Yes, let me first of all say we stick to our guidance all at the claims in mid-to-single digits in 2010 for the Betaseron franchise. We still believe that it is somewhat conservative position but again you will recall we previously guided that you should take into account three factors Extavia in the US and where we have seen minimal impact. We have to look at the full year effect. Secondly, the possibility we may face to new oral MS drugs and suddenly we discussed that our year-end call, the loss of the Russian business.

For your information that still your business last year in Russia was EUR 48 million and EUR 16 million of that were in the first quarter. As to who we have lost the business to, it seems to be a combination of Extavia and a yet to be really understood generic interferon 1 beta, the source of which we are still trying to understand. And as for Aspirin Cardio, I would not read anything into the quarter we still expect double-digit growth for us in cardio for the full year.

Ronald Koehler - MainFirst

In Russia, just to make me aware, though you lost the business for the full year is that fixed, so to say, as a tender or was it a quarterly tender?

Arthur Higgins

It was a quarterly tender however clearly we are concerned about out ability to win back that business so at the moment baked into our guidance is an assumption that this business does not come back.

Werner Wenning

And Koehler, about rice and rice litigation, perhaps one first comment from my side. We fully disagree with the four decisions so far and of course, we will file and appeal and perhaps one general comment, we believe that the outcome of the first case is it does not allow any direct conclusions on the outcome of the other cases, since they claim demands and underlying facts it differ significantly from case-to-case and of course, we evaluate each case separately. To the one times, Baumann.

Werner Baumann

Yes, Mr. Koehler. The overall one time we provided for essential items with the amount of 77 million for both the Yaz and Yasmin defense and for the rice.

Ronald Koehler - MainFirst

But the Arkansas case and the punitive damage payment is not included I guess and obviously I would be interested in any insurance coverage of these items actually if you lose a claim, a court case.

Werner Baumann

I think we accrued also for parts of the punitive for those; we did not accrued for those which were exceeding the legal ceiling and Arkansas because that is I think a very well adjustment that will not prevail.

Werner Wenning

And Koehler one final comment that there is no insurance coverage available.

Operator

The next question comes from Mr. Watteville. Please state your name, company name followed by your question. Jean Watteville please proceed with your question.

Jean de Watteville - Nomura

I think it's me, Jean de Watteville from Nomura. A couple of questions please. First of all on Kogenate can you just give, provide what you are looking for the full year? I mean is the fact that third party sales and the phasing of distribution inventories will mean that you expect a recovery in Q2 and still we should expect for Kogenate growth to be on the mid-to-high single digit or do you expect a full year impact?

Secondly, actually a clarification on CropScience guidance. You are implying that you expect margin pressure this year. Is that all related because of higher R&D spending in BioSciences or there are other factors that we should be aware of? Obviously I understand in Q1 there was an impact of idle capacity because of the poor volumes, but given that you expect volume growth this year, I would expect that there would be some recovery on the next quarters. And last question is actually on pricing in Crop Protection. You kindly gave the pricing for the overall CropScience, which is roughly flat, but reading the press release it seems you have nice price increases on seeds and price pressure on Liberty. So I just, I'm interested if you can give us the figure for Crop Protection and provide a bit of color or what area of the portfolio is experiencing the most price pressure and where you see the best resistance. Thank you very much.

Werner Wenning

Okay. Let’s start with Kogenate. John, I want to make it very clear, we are not changing our guidance for Kogenate. It remains mid single digit; the performance in the first quarter was purely due to timing of CSL and the fact our own Kogenate business performed very much in line with our expectations. Then in CropScience

Werner Baumann

CropScience, the first question was R&D spending, what we had planned in 2010. Its overall round about 70 million more than last year of the majority will be the clearly in BioScience. The other question was volume growth in 2010 and you asked the question going to Crop Protection and BioScience. It’s very obvious that when you analyze our number, our performances maybe effect by influence by the Crop Protection business in the first quarter is outlined.

So we are expecting overall that the Crop protection market that is based on our present assumption would call in the range of 1% to 2% Crop Protection. Again on the present assumptions, we are expecting such a seasoned place market will go for around about 5% this year that’s our present assumption. In terms of pricing, as Mr. Wenning outlined, we had basically fled situation of effective development from reduction in prices but really limited profile in Crop Protection and good situation in BioScience.

What we discussed in terms of the prices decreases in terms of recognizing] its limited, important product in United States and Canada. Here, we have a price decrease of round about 30% in order to compete this glyphosate, invested so far for having the look on the full year, the buyers would expect that there will be some volume growth in Crop Protection prices and basically flat or a small decline. That’s the overall situation based on today’s situation.

Operator

The next question comes from Mr. Jain. Please state your name, company name followed by your question.

Sachin Jain - Merrill Lynch

Hi. Sachin Jain from Merrill Lynch. Thanks for my questions. A few please. First on the Yaz franchise, wonder if you can provide some more color on your more cautious stance today versus the investor day and why you are not expecting a recovery to occur there in the US despite the additional DTC and marketing effort. Second on Yaz Plus, any color on regulatory discussions, whether thrombosis risk in that product is representing part of the discussions on whether any caution or additional caution there is reflected within guidance for the franchise?

Thirdly on Pharma margins, just wonder whether you'd be willing to provide any color on expectations for margins this year given declines in your guidance to both Yaz and Betaseron, the additional market support you are putting forward and I guess the impact you are absorbing on US Healthcare reform. And then, just one quick question on Crop Protection, I may have missed it, but can you just outline your market share progression in Crop Protection through the first quarter. Thank you.

Werner Wenning

Let’s start with Yaz and following questions.

Arthur Higgins

Yeah, thanks Sachin. I think with Yaz, we are simply reflecting that the impact in the first quarter was more severe than we expected. We are clearly disappointed that good signs and good mixes have been trumped by opportunistic field mongering by litigations lawyers. We are, as we mentioned doing our best to address this, we believe the measures we have in place will make a difference and answer to your, the second part of your question, we remain very much on track with the approval of the Yaz Plus.

The recent label update in the US I think was very positive in all the conditions taking place the same time we are discussing the approval of Yaz Plus led the agencies to concur with our assessment that based on information evidence. So, there is no difference in the risk with Drospirenone, the active ingredient in Yaz and other OCs.

So I think that’s the situation with Yaz. I think it’s prudent that we are cautious until we see some recovery, we have seen a little bit of stabilization. But unfortunately, we still see a lot of this negative advertising by litigation lawyers. Regarding Pharma margins, here again, just to we don’t loose the big picture. We are very fortunate in Pharma that we have a really strong late stage pipeline, eight significant assets that will be launched between now and 2014.

So, we expect to be able to invest in these assets, offset the negative impact of health reforms. Now, if we weren’t as exposed to some companies that were still a significant impact, as well as the negative margin impact relating to Yaz and Betaferon. This year as we’ve done through a combination of product efficiencies in our cost structure as well as some tailwind from currency and going forward being offset primarily by operational efficiencies.

Sachin Jain - Merrill Lynch

Is it fair to say that those operational efficiencies would be sufficient to help you keep margins at least flat through this year?

Arthur Higgins

That would be how I would take my comments.

Klaus Khan

Okay. You asked a question in terms of market sale based on quarterly [investments]. Allow me with all due respect give a very general comment. I never made any comment on the market share based on quarterly results and core protection just due to the nature of our business, just a very short explanation. Our phase in the northern hemisphere in the fourth quarter is mainly its general feeling, because application of products in the Northern hemisphere start in April basically and ends in majority through, so again, its not due to the nature of the business coming to any conclusion in terms of market sales based on quarterly numbers. Its really not meaningful in Crop Protection our business, you really need to have look on the full year and then you need to compare the performance of the company with that. So I think that’s the only meaningful judgment and if you are talking about market share.

Operator

The next question is from Mr. Wenner. Please state you name, company name followed by your questions.

Fabian Wenner - UBS

Yes, good afternoon. It’s Fabian Wenner from UBS. On your health care reform, you just mentioned that you expect that those effects to be offset by operational efficiencies, can you also give us an impression of the German healthcare reform and what you asses the impact to be there and also the pharma weakness in Europe, was that mainly due to Yaz and Yasmin and thirdly, is there anything new to share with investors on Xarelto? Thank you.

Arthur Higgins

Okay Fabian. You are right to point out its not only are we facing health reforms in the US we are facing health reforms in Germany and other markets around the world. We estimate at a moment the impact of the German healthcare reform will be up approximately this year, EUR 10 million to EUR 15 million, bottom line impact and approximately EUR 25 million in two thirds. And as far as the Xarelto grows, I don’t think there is very much that I can add to what we said in the past.

The big news I think you want to hear today is that Xarelto remains on flat for application of both SPAF and DVT treatment indications in the second half of 2010 and in anticipation of the question, when will we see data as it’s been a crisis in the past, we will share, lift the market, top line data as soon as it becomes available and then, we will present the store benefit at the next available scientific conference. And then, your question on Europe, the performance in Europe was not impacted, we are in fact, as we indicated in Mr. Wenning’s presentation, Europe continues to show very seasoned growth, high single-digit growth. It was primarily due to some timing and the impact of Betaferon in Russia and in Germany.

Operator

The next question is from Ms. Thomas. Please state your name; company name followed your question.

Cornielia Thomas - WestLB

Two questions please. Some of your chemicals peers, I'm more cautious regarding the outlook for 2010 particularly once government stimulus programs and how much of that is reflected in your forecast for MaterialScience please? And then the second question is on Nexavar actually. If I look at the sequential growth, it looks to me that since the third quarter in 2003, sales have been falling. I was just wondering if you could comment on that, tell us what the background for that is please? Thank you

Alexander Rosar

Okay. The first question. The factor was maybe the government programs are kind of staggered in terms of impact and we do factor all of them into our forecast. One example, the Chinese are just putting around about $0.5 trillion into their transportation infrastructure. And that is important to us because as they built the world’s largest railway system, they need specialist coatings for their trains and rail stocks but also very specialist coatings for the high speed train tracks and the stabilizing system for the ballast.

So, those are projects that will actually last for a number of years. So many of these incentive schemes have been put in place for not having short term impact, it’s very long term. If you take the other extreme, the cash for clunkers scheme in America, then that did have a relatively short duration impact in similar schemes in the year.

But what we’re seeing now is the car industry coming back and if I just take the German car industry for example, a very strong drive in the luxury car segment which is very important through our polyurethane business, directly into China. So, it’s a mix fixture. We do factor all of these effects into our forecast and I think we have a reasonably good understanding of where the impact will come and over what time.

Cornielia Thomas - WestLB

Okay.

Alexander Rosar

As of Nexavar?

Arthur Higgins

Yes. They nearly are. The sequential performance of Nexavar, I think can be explained roughly by the decreasing number of competitors as we’re facing in the kidney cancer market I referred to. If I tell, you notice almost all of that growth is coming from liver which is more than 60% of our business. Going forward we expect to see that liver business contribute more sequential growth due to new approvals of the investment in Taiwan and South Korea, further development of the Japanese market to the very important liver market. And secondly I think as I referred to the fact the recent head-to-head data I think it reaffirms the appropriateness of Nexavar and liver cancer. All of these effects give us confidence that we will see above 10% growth in Nexavar for the full year 2010.

Operator

The next question is from Mr. Benson. Please state your name, company name followed by your question.

Andrew Benson - Citigroup

Yes, Andrew Benson here from Citi. Thanks. I just want to explore Crop Protection a little bit. You're basically saying flat EBITDA on the year. And I know there's seasonality and timing effects and this year things are a bit later, but it is down, EBITDA is down in the order of 40% in Crop Protection. I just want to explore what the building blocks behind that assertion are? And I know obviously and the degree to which there is hope that you can recover position and the degree to which current trends validate that assertion? And secondly, just on cash flow and working capital, if you could just give us an update on where you think you are going to be in terms of net debt at the year end assuming no portfolio change? Thanks.

Friedrich Berschauer

So talking about Crop Q1 was of course mainly affected by our sales decline and here we had the significant impact of the product mix in both. In the first quarter it’s a very important part of our portfolio, our herbicides, and here mainly cereal herbicides, so (inaudible) that where we have fairly significantly higher margins. And you are aware that the cereals business really was significantly down due to low wheat prices specifically. So that was main driver for the EBIT situation in Q1. On top of it we had R&D costs as outlined in the dimension of EUR 30 million in Q1. Then you asked about the trends, so we had a weak January, we had a weak February, we had a record March, and we’re expecting now, we are close to the end of the month, we are also now expecting a record April in 2015 and 2010.

So the business is really now performing significantly better. In terms of the full year EBIT, we so far it looks like that we will have currency gains in terms of EBDIT as well. Then finally we are implementing of course very, very severe and strict cost control.

Alexander Rosar

Okay. The cash flow and debt expectations Baumann?

Werner Baumann

Yes, protocol of course in line with our earnings performance, we expect better gross cash flow compared to last year in 2010, but certainly not the same levels of net cash flow improvement, because that was very much written by the significant swing in working capital performance in 2009. In 2010, we will continue to work on saw that improvement of our operational working capital management means better performance in certainly inventory and days on hand, or to some extend all the DSOs and payables. But that will be very much offset by the growth in business we expect this year and then the capital knocked-off that’s coming with it.

Overall, we do net-to-net expect a further decrease in that debt factor at about 35 at this point in time. Always also to be understood that debt excludes portfolio activities.

Operator

And next question comes from Mr. Heine. Please state your name, company name followed by your question.

Andreas Heine - UniCredit

This is Andreas Heine from UniCredit in Munich. I have two questions. First, could you please elaborate a little bit more on the price trend in polycarbonate MDI and TDI? You said you have more pricing power in polycarbonate and hopefully also in MDI. So far the price trend at least as I could follow it I have not shown as tremendous increase. And secondly, on CropScience again, it is a very seasonal business so there is not much time to recover the earnings as you usually have very thin earnings in the second half and earn basically everything probably already in the BioScience business and will have higher R&D costs in that sense. So I'm a little bit puzzled how you can recover this high amount of earnings in this very seasonal business because it mainly means that you regain most of that in the second quarter. And even if one month is a new record level, looking on a historic involvement you have an increase of 200 million in the quarter would be very substantial. So if could give some more flavors on this please?

Alexander Rosar

Okay let's start with the price trends in BMS. Patrick?

Patrick Thomas

The first part you asked was really to do with individual price by product. MDI was seeing at pretty level pricing levels. So if I look at end of quarter four ’09 through to end of quarter this year very much leveling Europe and North America. In Asia, there is actually been some slight increases. There are some outages of facilities at the moment which mean that prices are being pretty stable to be honest even though your capacity level is round about 80% plus. In TDI, the price trends have been up in Europe, they have been very volatile in Asia, but around a very, very high pricing points at the moment although I believe prices will go higher later in the year because TDI is relatively short.

If we then look into polycarbonates the story is very positive, all the major producers implemented price increases in quarter four and in quarter one, which were successfully implemented and there are now further price increases posted for quarter two as well. So I think those price increases all around EUR 20 to EUR 30 per kilo. So these are quite significant price rises in polycarbonates arena and probably only area where there is price flatness at the moment between quarter four, quarter one would be (inaudible).

Alexander Rosar

And your question of course is valid but we should keep in mind that 2009 was a hard exceptional year. I give you all the numbers clean EBIT. In Q1 we had a clean EBIT of 616, in Q2, 374, in Q3 minus 15 and then Q4 plus 41. This means we made basically all our clean EBIT in the first half of the year. This was exceptional if you have a look on the year from 2004 to 2008 we always had a significant EBIT in the second half as well so this needs to considered. The year 2009 was a very exceptional year in terms of the performance in the first half and then a significant decline in the second half.

On top of it, we are expecting a significant increase of our business in Americas, in North America as well as in Latin America in the second half. North Americas is mainly driven by our portfolio, we have as you know new herbicides, corn herbicides for example which basically are those in the certain in the first quarter in North America. And in Latin America, in Brazil of course the second half is of key importance. We are expecting a good business in Brazil as well.

Operator

The next question is from Mr. Flueckiger. Please state your name, company name followed by your question

Martin Flueckiger - Helvea

Martin Flueckiger from Helvea. Three questions please. Could you talk a little bit about, in CropScience about the reasons for the decrease in business in Brazil? Sorry, if I've missed earlier comments, but that seems to be a new issue here, at least to me. Then secondly, again in CropScience, could you talk a little bit more about the competitive environment that you are seeing, whether you've seen any changes since March due to a positive performance since then?

And if I remember correctly at the full year reporting stage you said that you would expect to be able to raise prices in both Europe and to some degree also in the US in 2010 and whether you still stick with that view? And then finally that’s my third question on MaterialScience, could you talk a little bit about the raw material price contributions to EBIT in the first quarter of 2010, both on a quarter-on-quarter as well as on a year-over-year basis? Also in that respect I'd be interested in sequential changes in sales prices in the first quarter.

I know you've talked about a slight improvements here quarter-on-quarter, but I was wondering whether you could quantify that? And finally with respect to MaterialScience, could you talk a little bit more also about the expected raw material price developments and EBIT contribution in 2010? I know it's a difficult one but I'd still be interested in your best guesstimate.

Alexander Rosar

Yes. Crop Protection Brazil I think its important we talk about Brazil that we realized that we are talking about the southern hemisphere and the business basically, the majority of the business is in Q3 and in January, basically January and small part of April. So analyzing a performance, Crop Protection performance in Brazil that basically should combine Q4 in Q1, because this describes the overall situation and if you do this, our performance in this season in Brazil was on last year’s level, which is really not the best of form. Then we also had an increase in market share last year. So we have no let’s say performance problem in Brazil.

I think it’s really important to understand the nature of the business here in Brazil. Coming back to your question on the prices in Crop Protection it drives. We believe last year when the autumn time for example that we would gain to increase prices. The math of the equation now is more difficult. Why? Because, we are holding those [three] we had this problem with the long winter as outlined. Secondly, that key issue that commodity prices basically did not recover. We have still very, very large prices in cereals, in wheat for example. Corn prices are on a, not very exciting levels. The same is true for soybean for example. So I firmly believe the chance to increase prices in Crop Protection this year. Again, will depend very much on the development of commodity prices, and I outlined the situation as it is today.

Patrick Thomas

Yes Martin. The bridges that you are asking about, I can do is an EBITDA bridge, just to give you some rough idea. If we take quarter one ’09 to quarter one ’10 then, the biggest variance is of course on volume which is about a third of a billion. Then, there is this negative impact on price year-on-year of minus 50, offset by roughly equivalent positive variance in raw material. So you have to remember that this time, last year, raw materials were actually lower, so we see a positive variance.

If we then go to the sequential quarter-on-quarter, quarter four ’09 to quarter one ’10, we see both positive variances in volume and price, roughly call low end double digit, offset by a raw material negative variance to round about 30 million. So both comments are true about raw materials. Year-on-year, it's an a positive effect quarter-on-quarter, a negative effect.

And as we look to development raw material through the year, of course, there is a tremendous volatility which makes any forecasting extremely difficult. Our average crude oil assumption for this year is $90 a barrel for full year, which is higher than some people are forecasting, but I actually believe that will be close to the truth. In quarter two, we expect raw material and energy prices to be higher than in quarter one. And overall full year, we expect raw material and energy to be about 2009 levels.

And I think as I said earlier, the total impact of that could be a negative 0.5 billion.

Operator

The next question is from Mr. Cespedes. Please state your name, company name followed by your question.

Florent Cespedes - Exane BNP Paribas

Florent Cespedes from Exane BNP Paribas. Few quick questions. First on Yaz. In Europe, it looks a bit soft in Q1; could you maybe give us some color of the dynamic ex-US for this product? Secondly, we’ll try this one on Xarelto. Do you believe that’s the Einstein-DVT results could be presented at the ESC Congress in August or do you believe it is a bit short?

The last, one on the healthcare guidance, apart from the softer YAZ family Q1, is there any other specific world product, weaker performance that explains the cut of the full year [Healthcare] guidance?

Arthur Higgins

Let me just comment again on Yaz. I mentioned that we are actually quite pleased with the performance I would say with the US with the Yaz. I wouldn’t lead anything into Yaz performance in Europe. We still expect to see solid mid-high single digit growth for Yaz in Europe. As far as EINSTEIN is concerned, I’m not going to comment apart from what I said earlier which again I think a very important message.

We remained very much on track for the submission of both the EINSTEIN and ROCKET data which support SPAF and DVT treatment for this year. I’ll make available to you the top line data as soon as we have it and we’ll present it at the next available scientific conference. And that’s the status with EINSTEIN.

And then its all I can say. I hope that answers your question Florent.

Florent Cespedes - Exane BNP Paribas

Yes. The last one was on the Healthcare guidance for 2010. Is there anything?

Arthur Higgins

Right. If you look to the first quarter, the key issues which we already mentioned but the largest of which was the performance of Yaz in the US. We had an impact on Betaferon due to the loss of the Russian tender. I told you after EUR 16 million but that’s was already factored into the gains we gave you. So the real issue we have in and again, we reassure you we’re not taking this with any level of complacency. We are doing everything we can to recover Yaz performance in the U.S. but its going to take time. But that’s the issues that is really sort of caused the weakness in our Pharma business in the first quarter and the issues we have to deal with for the rest of the year.

Florent Cespedes - Exane BNP Paribas

Okay. But there is no other issues with other products?

Arthur Higgins

No, none.

Operator

The next question is from Mr. Wendorff. Please state your name, company name followed by your questions.

Daniel Wendorff - Commerzbank

Daniel Wendorff from Commerzbank and thanks for taking my questions. A few if I may and starting off with HealthCare, and two product related questions regarding Yaz. Can you give me an update on the timeline for Yaz Plus launch in the US and also potentially elsewhere? And then on Betaferon, just for clarification, and you realized EUR 48 million in revenues in Russia last year and due to the lost tender that is gone? Did I understand that correctly?

And also on Consumer Healthcare question. And the performance there looked quite good in Q1. I was just wondering were there any particular positive impacts which led to the very strong Q1 performance. And then a question on MaterialScience. I know you elaborated already a bit about the raw material and energy price developments. And when I look at the adjusted EBITDA margin in Q1 that appeared to be already quite strong at 13%. And assuming and your expectations for the full year of $90 per barrel for oil remains at that level, is on a mid-term basis 14% to 16% EBITDA assumption still a valid estimate going forward?

And then finally one question on the exchange rate and the impact on 2010 guidance, and you have now factored in $1.35 per euro versus $1.40 before. And I was just wondering whether one can quantify, whether you can quantify the impact of how that has positively impacted your adjusted EBITDA margin guidance for 2010. Thank you very much.

Alexander Rosar

Okay. Arthur first, HealthCare, Yaz timelines.

Arthur Higgins

Yeah let me first of all correct you the number we gave for Yaz, sorry for Betaferon in Russia for full year with EUR 48 million of which EUR 16 million were lost in first quarter. I think for conservative reasons are assuming we may lose out whole 48 million for the full year, we don’t know that at this stage, but that was what we baked into our guidance. As for consumer businesses as you were late to identify that we got a very strong stock with our consumer businesses and really it was across the board I think it’s very consistent with the recovery and consumer confidence. We have strong brands that are performing well and really I wouldn’t highlight any brand I would say this is an across the board performance and we are looking to a very good year, as we indicated we expect all of our consumer businesses to grow above mark and the sub question.

Daniel Wendorff - Commerzbank

Was the Yaz Plus launch in the US and elsewhere?

Arthur Higgins

Let me make it clear that we remain committed to Yaz plus being launched I mean obviously at the end of the day were are depended on regulatory authorities, but as we speak we have no reason to assume that we will not launch Yaz Plus and [Clara] in the US in the second half of the year and we also expect to launch Yaz Plus in Europe in the second half of the year. Again with the caveat, we cannot guarantee regulatory authorities, but based on our discussions we remain committed to our guidance.

Daniel Wendorff - Commerzbank

And separate DMS and margins.

Alexander Rosar

Yeah, Daniel I think you added [spot] on mid-term guidance 14%, 16% is still valid. Exchange rates Mr. Baumann impacts are for.

Alexander Rosar

Yes the exchange rates impact [third] quarter top line growth was minimum EUR 30 million negative, EBITDA effect was roughly EUR 40 million against last year. You also asked about the effects and hope its included that into our full year guidance yes we have. We have already indicated that based on prior guidance as $140 over the Euro and then the corresponding baskets of other currencies behind. We have taken it down to 135 now. If you look at sales, the full year effect is roughly EUR 900 million positive and we also expect a positive bottom line effect based on clean EBITDA is going to be around 300 million, that’s what we expect for the full year.

Daniel Wendorff - Commerzbank

And that is just due to the change in your exchange rate which you applied to the guidance?

Werner Baumann

Yes. This is year-on-year.

Operator

The next question is from Mr. Walton. Please state your name, company name followed by your question.

Jo Walton - Credit Suisse

It's Jo Walton. Could you tell us a little bit about the R&D increase in pharma, was it a significant factor in impacting the margins to give us some hope for the full year and can I also on Nexavar challenge you little bit more as to why there has been no growth sequentially for the past few quarters in China, this is a liver only market, you seem to have it yourself, you are fantastically positioned in China, how come you are not getting this product to sell more?

Alexander Rosar

Jo, I am really pleased you might have to go back on to the phone and I mean that’s sincerely. Jo, in terms of R&D, we had an increase in the first quarter of about constant adjusted about 6% that’s glad to ratio of sales of 16.4% for the quarter, which we would compared with 14.7% in the prior year. So it did have an impact on profile in the first quarter. However for the full year, we remain to target 15% for R&D. This was just a timing issue and in respect to Nexavar, I have explained the reasons for this sequential performance your issues specifically to China. As you mentioned in the past, we do not have reimbursements in China. So this is a self-pay market. We place the product inline with the obvious prices in Europe and the US. We are confident that we can continue to develop the brand strongly in China for both liver and kidney, but until we get a broader reimbursement, I think we have to be I think realistic about the levels of growth that we will get.

Operator

Mr. Rosar, there are no further questions at this time. Please continue with any other points you wish to raise. Thank you.

Alexander Rosar

Okay. Ladies and gentlemen, dear friends, we all thank you for being with us on the calls and your questions. Also, on behalf of my colleagues I am now saying good bye.

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