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Executives

Alexander Rosar - Head, IR.

Marijn Dekkers - CEO

Werner Baumann- CFO

Jörg Reinhardt - Chairman, Bayer HealthCare AG

Sandra Peterson - CEO, Bayer CropScience AG

Patrick Thomas - CEO, Bayer MaterialScience AG

Analysts

Tim Race - Deutsche Bank

Jeremy Redenius - Sanford Bernstein

Sachin Jain - Merrill Lynch

Richard Vosser - JPMorgan

Michael Leuchten - Barclays Capital

Andrew Baum - Citi

Thomas Gilbert - UBS

Christian Faitz -Macquarie

Florent Cespedes - Exane BNP Paribas

Damien Conover - Morningstar

Ronald Köhler - MainFirst

Bayer, AG. (OTCPK:BAYRY) Q1 2012 Earnings Call April 26, 2012 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analysts Conference Call on the First Quarter 2012 Results. Throughout today's recorded presentation all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to Mr. Alexander Rosar, Head of Investor Relations of Bayer AG. Please go ahead, sir.

Alexander Rosar

Thank you, Kele. Ladies and gentlemen, good afternoon and welcome also on behalf of my colleagues to our First Quarter Conference Call. As always, with me on the call are Marijn Dekkers, our CEO, and Werner Baumann, our CFO. HealthCare is represented by Jorg Reinhardt; CropScience by Sandra Peterson; and MaterialScience by Patrick Thomas.

Marijn will start off with a brief summary of the development for the quarter. As always, we assume that you have received and reviewed our documents.

Before handing over to Marijn I would also like to draw your attention to the Safe Harbor statement. Thank you. Marijn?

Marijn Dekkers

Thanks Alexander. Ladies and gentlemen, good afternoon. It's my pleasure to speak with you about Bayer's encouraging start to 2012. We delivered record sales and high earnings in the quarter. Our innovation pipeline delivered good progress and we again reported positive results from our key pharma pipeline line assets. We are increasingly confident for the rest of this year and confirm our 2012 financial outlook.

So, let me know elaborate some key figures for the first quarter. And when talking about sales outcomes in trade on portfolio and currency adjusted data. Group sales gross by 5% to the records level of €10.1 billion. All the sub-groups contributed to the increase particularly, CropScience, which experienced a strong start to the season. Reported EBIT grew sharply by 43% to €1.60 billion mainly due to lower special charges and the improved operating performance.

The special charges up €169 million versus €442 million in the prior year quarter comprised a partial impairment loss of €100 million recognized on the company in [Netred] also included restructuring charges of €39 million and litigation related expenses of €30 million.

Adjusted EBIDTA advanced by 9% to €2.4 billion driven by positive business development of health care and significant draw in gains at CropScience. In addition, positive currency effects of €85 million mainly at HealthCare and CropScience contributed to the increase.

Earnings of MaterialScience came in below the prior year period due to higher raw material costs but showed the expected increase against the weak fourth quarter of 2011.

Core earnings per share came in at a €1.68, an increase of 16% over the prior year quarter.

From a regional perspective, in the first quarter, we saw the stronger growth in the United States where business moved ahead by 10% in the quarter driven by the strong business expansion at CropScience and solid growth at MaterialScience.

In the emerging economies we achieved a 6% sales increase. These markets accounted for 33% of good sales. The highest growth rates were in Eastern Europe, Latin America, and Africa and the Middle East. Emerging Asia grew by 1%.

Business development was impacted by lower sales in Thailand and Taiwan.

Gross cash flow in the first quarter advanced by 22% to €1.6 billion due to the improved operating performance. Cash tied up in working capital increased markedly due to the expansion of business. Net cash flow was down by 66% year-on-year at €271 million. After investments of €256 million, the operating free cash flow came in at €15 million. Net financial debt fell since the start of the year from €7.1 billion to €6.9 billion mainly as a result of positive currency effects.

Let's now move to the performance of our subgroups. Sales of the HealthCare subgroup came to €4.3 billion, an improvement of 2% over the same period of last year. All divisions contributed to this growth.

Sales in Pharmaceutical segment rose by 2% to €2.5 billion. Growth was achieved mainly in the emerging markets especially China. There were slight decreases in some other countries particularly in Europe. The development of our key pharma products was mixed in the quarter. Kogenate came 2% due to higher volumes through tender business. As expected Betaferon were slightly down from previous year. Volume decline especially in North America were only partially offset by selling price increase.

Nexavar developed well particularly and advanced by 5%. Revenues from Mirena increased in all regions as a result of higher volumes especially in the United States. Avalox and Levitra were down 13% and 9% respectively because of a partial restructuring of distribution from general medicines products in the United States.

Aspirin Cardio advanced by 16% driven by the continued expansion of our marketing activities in China. Xarelto generated sales of €42 million following market launches in further countries and the expansion of indications.

Sales of our YAZ family of products were at the prior year level. The decline in Europe due to generic competition being offset by gains in other region.

Please allow me to update on the litigation surrounding YAZ and Yasmin. As of April 18, 2012, the number of lawsuits pending in the United States and served upon Bayer was about 11,900 involving about 14,000 plaintiffs excluding cases already settled. As of April 19, 2012, Bayer has reached agreements without admission of liability to settle the claims of 651 plaintiffs in the US for a total amount of about US$142 million. Bayer is only settling claims in the US for venous clot injuries, which is deep vein thrombosis or pulmonary embolism after a case specific analysis of medical records on a rolling basis. The number of such injuries cannot be estimated at this time however less than half of the cases served to date allege such an injury.

Based on the information currently available Bayer has taken appropriate accounting measures for anticipated defense cost and for agreed and anticipated future settlement. Bayer is insured against product liability risk to the extent customary in the industry. However, going forward and depending on further developments in the litigation, it is possible that the company’s global liability insurance program may not be sufficient or fully applicable to cover all expenses and potential liability, if any, resulting from this litigation. So it’s so much to the YAZ and Yasmin litigation, now go back to business in HealthCare.

Adjusted EBITDA of Pharma improved by 2%. Earnings benefited from higher sales and a decline in development costs which was mainly due to the completion of most Phase III studies for Xarelto as well as from exchange rate movements. This effect was partially offset by increased expenses for the marketing of new products and investment in business developments in the emerging markets. We remain optimistic for future developments of our Pharma business especially because of the continued of our pipeline.

At the end of last month we published the results of the Einstein-PE trials studying Xarelto as a standard therapy. As you know Xarelto was proven as effective and safe as the current standard drug regimen in treating patients with acute symptomatic pulmonary embolism and preventing them from developing a secondary venous blood clot. Xarelto demonstrated similar overall bleeding rates that was associated with significantly lower rates of major bleeding versus the current standard regimen. We have since filed for this indication in Europe.

At the beginning of the year we also presented full data for Regorafenib in patients with metastatic colorectal cancer. Since then we also reported that Regorafenib met its primary end-point of improving progression free survival in patients with metastatic and/or unresectable gastrointestinal stromal tumors. These very positive results show that we are on the right track.

Now, let's move on to Consumer Health. Sales of the Consumer Health segment advanced by 3% to €1.8 billion with all the visions contributing to growth. Business developed especially well in the emerging markets. Sales of the Consumer Care division grew by 2%. While sales of Bepanthen increased, business with Aleve and the One-A-Day line of dietary supplements matched the good prior-year level. Sales of Aspirin declined from the high level of the prior-year quarter.

Sales of the Medical Care division rose 4% driven by the positive development of our contrast agent and medical equipment business. The growth in our diabetes care business was largely attributable to substantial sales increases in all regions for our Contour line of blood glucose meters.

The Animal Health division lifted sales by 5%. The Advantage product line benefited from an additional distribution chamber in the US considerably raising sales once again began to shrink prior year quarter. The adjusted EBITDA of consumer health increased by 6%. The earnings improvement was mainly attributable to higher sales in all divisions while successful cost management kept expenses stable across all functions.

The performance of the HealthCare divisions resulted in an adjusted EBITDA of €1.2 billion for the subgroup as a whole, an improvement of 4% over the prior year.

Now let's move on to CropScience. Sales in the CropScience subgroup climbed by 14% to €2.6 billion. The season got off to an early and promising start in the northern hemisphere, especially in North America with moderate growths stimuli in Europe. Our sharpened focused on marketing and distribution is already bearing fruit. With good marketing conditions continuing, we grew all areas of the business.

Sales of the Crop Protection division advanced by 15% driven by all product groups and region. While our seed treatment business showed a moderate increase, the other business units registered double digit growth rates. Sales of insecticides benefited from our rejuvenated portfolio.

The herbicides business was mainly driven by our current portfolio. The strongest growth in fungicide revenues was achieved in North America and Asia-Pacific.

BioScience continues on its path of growth with a considerable sales gain of 17%. The largest increase was posted for our canola and cotton seed businesses. Our vegetable seed business saw a moderate start to the year with a moderate decline in sales against a strong prior-year quarter.

Sales of the Environmental Science business unit advanced slightly by 3%. This was due to sales increases for consumer products in the US and Europe. However, sales of products for professional uses declined due to phasing in tender business.

Adjusted EBITDA of CropScience has moved ahead by 32%. Earnings growth, mainly the result of an early start to the season and considerably higher volumes, was also helped by efficiency improvements, successful cost management and positive currency effects. In addition, we benefited from one-time gains of €22 million in connection with the divestments of active ingredients at crop perfection and from the earlier receipt of royalty payments.

So let's move to MaterialScience. There sales advanced by 3% chiefly due to higher volumes in all regions. Selling prices as a whole were level with the prior-year quarter. Sales of our polyurethane business rose by 5%, driven by both higher volumes and higher prices of MDA and polyurethane. TDI sales came in below the prior year quarter on weaker price. Volumes for TDI, however, were slightly higher.

Our Polycarbonates business unit came in 4% below the strong prior year quarter chiefly due to a global decline in selling prices in our granules product group although volumes increased.

EBITDA for MaterialScience before special items at €278 million was down to substantial 19% from the prior year quarter, but more than doubled against the fourth quarter of 2011. Earnings were diminished above all by a rise in raw material costs; higher operating costs also had a negative impact. These cost increases were partially offset by savings from the efficiency improvement programs.

Earnings benefited from increased volumes in addition we recorded one-time gains of €19 million on the acquisition of the remaining interest in the joint venture Baulé.

In view of the good start to 2012 we are increasingly confident for the rest of the year, as I already said. However, given the continuing global and economic uncertainties we are, for now, adhering to the guidance for the full year 2012 that we issued at the end of February.

For the full year 2012, we continue to forecast a sales increase of about 3%. This would result in group sales of approximately €37 billion based on unchanged exchange rate assumptions. We continue to plan a slight improvement in the adjusted EBDA and we also plan to slightly improve core earnings per share. Also the guidance for our subgroups stay the same.

For HealthCare we plan to increase sales by a low to mid single digit percentage and to slightly improve adjusted EBITDA. We expect market conditions for our CropScience business to remain favorable in 2012 and predict above-market growth. Following the strong start to the year, the guidance we issued in February, which is we anticipate the currency and portfolio adjusted sales and EBITDA before special items will advance by mid-single-digit percentages. But this guidance may be adjusted upon publication of our Q2 report depending on future business development.

For MaterialScience, we continue to plan for sales and adjusted EBITDA to remain level with the prior year. Compared with the first quarter of 2012, we expected improvement in sales and significantly higher adjusted EBITDA in the second quarter of 2012.

So ladies and gentlemen, before opening the Q&A session let me summarize the main points. The Bayer Group saw an encouraging start to 2012. We confirm our outlook for 2012 in our targeting higher sales and earnings.

So this concludes my remarks and we are now happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions).

The first question comes from Mr. Race. Please state your name, company name followed by your question.

Tim Race - Deutsche Bank

Hi there. Guys its Tim Race from Deutsche Bank. Three questions please. First of all on CropScience, just a very strong volume gains but limited pricing. Could you just talk about how you expect this to play out with the rest of the yearend with competitors? And just generally, are we actually see a market share gains obviously it is predominantly phasing, if you could talk around that? Just simply on MaterialScience we have seen prices rises in April, how are they sticking and the general level of visibility you have in the business right now? And then, maybe a question just on -- for, Marijn, just on the strategy. It seems every time I look somebody apparently very familiar with the market talking to the press about M&A. And so, if you look at your overall strategy, surely you must be very confident in the organic growth prospects of at least two of your division. So, when you look to the future do you see any case for need of greater scale in any of your businesses and what particular geographical presence or path technology are you missing? May be I'll leave at that.

Marijn Dekkers

Okay. Good. We’ll start with the CropScience.

Sandra Peterson

So, thanks for your question. The way we would describe the first quarter is we’re actually quite pleased not only with the volume growth but also our pricing performance in the first quarter. If you remember the way in which we deal with pricing is when we launched new products that usually launched at a price premium compared to the reference price that was there before. And we have seen that those few products that we launched last year and the ones that we’re launching this year have been able to sustain those higher prices and we are actually seeing higher demand for those new products than we initially anticipated, so that’s had some positive effect also on the first quarter.

so we’re actually feeling pretty comfortable with where we sit today with our pricing both on our BioScience portfolio as well as in our crop protection portfolio and we’ve been able to command and sustain those slightly higher prices.

Now, as we always say, it’s still little bit early in the year and we’ll have to see how the season develops particularly in the second quarter whether that will hold up through the second and third quarter or both.

As it relates to the early start of the season that’s been predominantly (inaudible) North American marketplace where the season did appear to open up somewhat early. It’s hard to actually calculate how much product moved into the first quarter versus the second quarter but there are a number of other effects including, as Marijn mentioned, our new products are doing quite well but also some of our increased focus on marking and sales execution not only in North America but across our business and in all of the regions we’ve seen some positive uptake in our portfolio.

But this is a volatile, cyclical business and part of what we need to see is how the second quarter fully plays out in terms of what actually gets planted and used through the second quarter to have a much better visibility on the full year.

Marijn Dekkers

Good. Thanks Sandy. Patrick?

Patrick Thomas

Thank you, Tim. A bit of our pricing. I probably have to talk differently about the different sectors little bit here. TDI pricing started to move up in Asia in the first quarter and is continuing in the second quarter. The price rise which was posted April 1st stuck there and we see the continued momentum into the second quarter.

The absolute level of price in TDI has led to some consolidation in the industry. We have mothballing of capacity in Japan and Korea and also closure of the unit in Brazil which is helping in terms of supply and demand balance. So, I’m positive on the pricing aspects of TDI looking forward, so I’m greatly confident that those prices will continue.

In MDI where the growth is primarily driven at the moment by US growth particularly for installation demand and for these new carb regulations were polyurethanes replace formaldehyde products in the wood industry, we have seen good growth and that’s helping with supply and demand and as such we see at the beginning of Quarter One price increases and I think the momentum is reasonably good following the low single digit drops during the first quarter.

And on polycarbonates, which is where we have the biggest price impact in Quarter one primarily due to the mix of sectors that we reserving with some good strong volumes. We have the main effect the Middle Eastern capacity coming on stream. That primarily affected Asia, because Asia is 60% of the market, so that's significant. There is no new capacity coming on this year and there have been delays to projects which have already been started and they are under construction. Therefore, we expect the pricing momentum to continue also in Polycarbonate during the second quarter and certainly looking at March and April sales data that would support that in this bold view.

Marijn Dekkers

Good, Tim, try and answer your question on the strategy. Those rumors could popup regularly of course we have the policy not to comment on M&A type of rumors. But I think what you said is correct, we are confident and hopeful that our organic growth momentum will accelerate in the next number of years. In Pharma, we have the new product pipeline Xarelto and Alea this year giving extra sales momentum and then lot of products in the next few years.

In CropSciences, we have a very nice portfolio that should lead to significant organic growth. And also in MaterialScience, we have spent quite a lot of money in capital investments over the last year particularly in Caojing, China, to built more capacity for both polyurethanes and polycarbonates. So we are well positioned there to continue to drive top line growth in MaterialScience as well. And that is really our key priority, drive organic growth for Bayer in the next years. Thank you.

Alexander Rosar

Kele, next questions please.

Operator

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

Jeremy Redenius - Sanford Bernstein

Hi, this is Jeremy Redenius from Sanford Bernstein. Thank you for taking my question. I have a few questions about CropScience and then one on MaterialSience. First of all, on the CropScience volume growth, is it -- possibly you could help us quantify the mix effects, the positive mix effects you saw this quarter. And then second, could you help us understand the nature of some of the cost reductions you're seeing as far as the nature of the portfolio rejuvenation to try and look for an example of what's happening there, and also if you can give us a feel for the size of the impact of those changes? And the finally for CropScience and MaterialScience both, could you give us a feel for the size of the raw materials and inflation impact this quarter? Thank you very much.

Marijn Dekkers

Okay. Sandy?

Sandra Peterson

Okay.. Jeremy, could you actually ask your first part of your question again? I didn’t quite understand what you were asking me.

Jeremy Redenius - Sanford Bernstein

Yeah, sure, sorry. You talked about the positive mix effects from selling newer products at higher prices in the existing products. I'm just trying to understand that. I understand you put that in the volume growth component of your sales growth. I'm trying to get a feel for how big that impact is.

Sandra Peterson

Okay, okay, now I understand. So let me just explain that point a little bit clearer. So when we actually, when we launched these new products, you won't see the -- if their launched after the first quarter and many of them were of last year, you actually won't see them in this first quarter's results in terms of the price effect. So what actually does, it actually does show up in the volume side of the business.

I can't give you an exact number of the mix effect of that specifically on the volume in the first quarter. What I can tell you which is what we said earlier this year is of those products that have been launched since 2010, we expect them on the, by the end of this year to cross the €1 billion revenue line, and we're clearly on track to be able to do that this year. So that’s something, but that the products that were launched between '10 and '11. But I can't actually give you the specifics on the mix effect in this exact first quarter.

The second question you asked was around the nature of cost reduction programs. As you know there, we undertook a significant series of cost restructuring initiatives that we started towards the end of 2010. We announced that they would have a full impact of about €265 million by the end of 2012 and those are fully on track.

Those actually go across many parts of our business. They go from things like cleaning up our portfolio, divesting or not downing certain products anymore, cleaning up our number of SKUs, our tax sizes. They go from taking things like taking cost out of parts of our business where we have lower growth in more mature markets and reinvesting some of that money in other regions and parts of the country.

We also, part of this is a huge amount of work to optimize our supply chain infrastructure, both our asset base and how we actually manage our supply chain and our inventories, and that had a very significant positive effect on our business performance in '11 and the first quarter of 2012. It also had a positive impact, a combination of increased volumes and the impact of those things have actually added another 3 points in our cost improvement in the quarter.

And as it relates to your question about raw material costs and whether it had any negative impact on our business in the first quarter, it didn’t because we are not as impacted by energy, oil prices in our business and we were able to completely compensate for any of those raw material cost increases in the first quarter.

Marijn Dekkers

Patrick, on material cost?

Patrick Thomas

Yeah, material inflation, if I look at the bridge coming from year-on-year its around $90 million impact from raw materials including energy. That means that this year we have budgeted around about $110 a barrel for Brent and we're now thinking here around about $115 a barrel.

Operator

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

Sachin Jain - Merrill Lynch

Hi, it's Sachin Jain from Merrill Lynch. Three questions, the first on Xarelto, I wonder if you could update on German market share and how you progressing on Pradaxa and then (inaudible) across Europe? And then related assuming the trends you disclosed, I imagine it have continued. Just any color as to why you believe European (inaudible) versus Pradaxa has faired better in the U.S? Second question is the follow on on the M&A angle. I know you won't comment on specifics but I just wanted to check my understanding of where your focus has been historically. I think you've commented that within HealthCare you're more interested in allied healthcare. So (inaudible) health, diabetes, consumer, versus pure pharma and also at more emerging markets in cure pharma. Is my understanding correct and does that remain the case? Thank you very much.

Jorg Reinhardt

So let me take the Xarelto question. Overall we're fully on track with Xarelto in Europe. In Germany, which is obviously the most important country for us at the moment, we continue to gain market share. We are now above 10% market share. We have good reception with cardiologists and also with GPs, and we are outperforming despite coming into the markets significantly behind products, we are outperforming them in the determined market.

Now, Germany so far is the most advanced country. When you look across the rest of Europe the picture is little bit more difficult. So, for example in the UK, we got a positive recommendation from NICE but we are still waiting for the final document to be shared and only after that the reimbursement procedure could start. So, we will probably have to wait another few weeks till we are finally reimbursed in the UK.

In Canada, it's little bit of same picture. We are negotiating with the different provinces, province by province regarding reimbursement prices and that take some time. So, the uptick in those both countries for the time being is slow but according to expectations.

We launched in Japan, you have seen this we launched last week. We got a price that is at par with the Dabigatran, we are actually quite okay with the price. Obviously, it's too early to make any projections but the first initial uptick and the response of the market has been very good. So in Japan again absolutely confident to achieve our objectives.

Regarding the other European markets France, Spain, Italy reimbursement discussions are being started. As indicated earlier, this will take a few weeks or months so but for all of these countries we would expect to be in the market and be reimbursed before the end of the year.

Now, you ask your Europe versus US. I mean, obviously regarding specific US performance you need to talk to our partner J&J. What we are seeing is that obviously the shifts of new patients out of Warfarin towards the new class of anticoagulants is less deep than what we might have hoped. We see that still for example in the overall market roughly 70% of new patients are being put on Warfarin. That is different with cardiologist that is only 50%, so the acceptance of the new products with cardiologist is higher, but still a significant part of new patients still goes on Warfarin. Regarding those who don't go on Warfarin, but I found Dabigatran or Xarelto we see an increasing shift for Xarelto week after week we are gaining ground as compared to Dabigatran. So, for example in the overall market the shell new patient's but we get is higher than the one that the Dabigatran gets. And among cardiologist we are very close to each other. So overall, we see an improving trend in the US, but obviously it takes longer than what we might have expected to convince physicians to put new patients on these new products. That trend is different is a little bit in Europe where we see a higher initial acceptance rates for the new product, so that's why we believe that overall the penetration in most of the European markets should be faster than what we currently see in the U.S.

Marijn Dekkers

Okay, thanks Jorg. I’ll answer the question on areas of emphasis for potential acquisitions. I think, we’ve said in the past that -- particularly in healthcare and crop sciences would be our areas of focus if we will be doing acquisitions in the future. And that is the still the case, but, you know to start speculating about what areas of healthcare and what areas of crop sciences I think is not appropriate at this point. Although, a lot of these decisions depends on, however a good acquisition target is available for a reasonable price that you can integrate successfully and create value on and that is really the most important screen for us when we would make a decision like that.

Operator

The next question is from Mr. Vosser, please state your name, company name, followed by your question.

Richard Vosser - JPMorgan

Hi, it's Richard Vosser from JPMorgan. Thanks very much for taking my questions, a couple please. Just going back on the crop science, and I was just wondering about the -- whether you can comment on the very strong herbicide growth whether it's related to market share gains, how sustainable you think that level of growth is going forward. And again, whether any demand is being pulled through into Q1.

Secondly, just following on from the relative question, just wondering whether the level of orthopedic surgery sales is pretty much flat or growing year-on-year, obviously there has been some sales in the U.S of orthopedics about €8 million, but just trying to get an idea of, I suppose the split between orthopedic and the stroke sales. If you could comment on that that would be -- on the dynamics, you are seeing there in orthopedic surgery that would be great.

And then, finally just on the margin development within pharma, again how much of the cost savings targets are through in the margin. How we should think about the margin development here -- throughout the remainder of the year. Should we think of more SG&A rises leading through on the Xarelto reducing the margins of the courses going forward? Thanks very much.

Marijn Dekkers

Sandy, on herbicides?

Sandra Peterson

So, on herbicides, generally speaking, this is not phasing effect, our portfolio in there besides is actually the broadest in the marketplace. And in particular, if you look at North America where we are seeing a significant increase in Weed-Resistance. Our portfolio is actually able to paddle a number of those issues that would come of our pre-emerging products as well as our liberty line of products.

And so we are saying that very significant interest and demand from our North American customers in that regards, but it's actually not just in North America, we are actually seeing strong growth in Asia Pacific and in Latin America, in particular on the first quarter and as the year progresses. You know, our current view is this should be a sustainable level of performance in our herbicide portfolio, because there are a number of challenges with resistance that are developing, also interestingly in Latin America as well as in North America. So we believe it's a pretty sustainable level of performance of this leadership.

Marijn Dekkers

Good. So, Jorg, orthopedic Xarelto and then margin development in pharma.

Jorg Reinhardt

Yeah, the widget -- so what we see first of all in the orthopedic indication, we see growing sales in all the markets that we have Google. We see also that these past indications did actually help to sell, also in the orthopedic indication. On average, we are at a range between 15% and 25% of sales that overall sales, at the moment works out other than -- are in the orthopedic indication, because this is a little bit country-by-country. And as you know with the difference of you are not totally sure whether the 10 milligram is really only sold by orthopedics. So, at the end of the day, that's the range 15% to 25% with growing tendency.

Now regarding margins, I actually have no reason to give you any other guidance for the remainder of year than what we have been doing before. In pharma, as we said we believe that we will see a slight decline of the margin, that will to some extent to large extent be compensated by a better performance in the consumer health indications, which would lead to a yearly overall slight increase in EBITDA for the healthcare division, that is actually unchanged.

I mean you saw in the first quarter, decrease by 0.5% in the march end for pharma which had to do with the investment obviously in marketing and sales especially the support of the launches on the costs in pharma we have a little bit better margin in consumer health. So overall the direction that we indicated in Meet Management that we gave you early in the year is still intact.

Operator

The next question is from Mr. Leuchten, please state your name, company name followed by your question.

Michael Leuchten - Barclays Capital

Hi, it's Mike Leuchten from Barclays, two quick questions please. Number one, as I look at your working capital and you eluded to that quickly, it's going up quite significantly on the back of high receivables. Now, I understand that's related to the expense of your business, but as the percent of revenues or receivable for days that seems to be going up, I was wondering whether you could elaborate on that.

And then secondly, just on yes – if you -- could you just repeat is that, is a decline in Europe as expected or less, or is it worse?

Marijn Dekkers

Okay, working capital, Werner Baumann will reply to that.

Werner Baumann

Mike, you are correct in assessing that, we see a slight erosion in our working capital and then into sales ratios. And it is to the largest extent driven by phasing effects and the significantly higher tie-up of money, specifically in receivables. We fully expect to bring that back to the performance level of last year and some years actually even improving throughout the remainder of the year. And that means performance in working capital management will be in line with last year maybe in some year it's slightly better.

Overall, resources tied up in working capital will cause the significantly higher, driven by our business performance you have seen in the first quarter and going on into the remainder of the year. Regarding, yes the decline in Europe is a little bit less than what we would have expected, it depends a little bit country-by-country, so for example in France, we have a decline by 33% which is pretty hefty in Germany it's only 6% or 7% so far. So on average, it’s a little bit less than the 30% for the whole of Western Europe that we had predicted, but that's off the first quarter. And we would expect this decline to accelerate a little bit for the remainder of the year, but it is certainly not worse than we would have expected.

Operator

Your next question is from Mr. Wenner, please state your name company name followed by your question.

Fabian Wenner - Kepler Capital Markets

Very good afternoon, it's Fabian Wenner from Kepler, could I ask a few questions please. The first one to Sandra, a follow-up on the sales evolutions of Crop Science, especially herbicide. If you put Q1 2011’s perspective to last year, obviously you were saying there is not necessary phasing, but this is structural effect in second quarter 2011 also saw good North American growth over the first quarter. Can you just explain what you think is happening when you speak to pharmas in particular, the early steps seem clear, but anything else you can tell us that makes us more confident on the sustainability of sales progression?, Thank you.

The second question for Marijn, on the broader -- MaterialScience price of the physician again, won't cover costs of capital this year. Do you see any progress in any of the value chains or do we have to accept that’s just the case, particularly improvement in TC pricing over the course of the year is something happening here and you see structural benefits convene. And the last question is just for your – on the pipeline update, can you give us a more insight into the time of your pivotal Nexavar studies in lung (inaudible) and adjuvant liver. Thank you very much.

Marijn Dekkers

Okay, Sandy?

Sandra Peterson

So your question has to do with the sustainability, it sounds like you are really specifically talking about herbicides, I can talk about it a little bit more broadly, but let me focus on the herbicide situation at the moment. If you look at North and South America as well as in Asia, there are a number of things going on. One of them is in North and South America as I mentioned earlier, we are seeing an increased resistance level to round up.

And we are seeing it in many different crops in parts of -- all of, in United States and actually into Canada. And as you know, we now have the ability with the LibertyLink trade to actually have an alternative that can be used in combination or individually to actually address some of those problems. Interestingly we are also seeing the same effect in parts of Brazil in the Montauk Ronjo region in particular.

And so we are seeing and now we also have crops that have gotten registrations whereas now you can use Liberty to help clean up those fields. And as the farmers in that region do double cropping in a year, it's a way for them to be able to still use the fields by planting, for example, cotton with Liberty Link trade in one season and planting corn in the other season and it really seems to help them.

So we are seeing a pretty robust demand for that part of our product portfolio, but we are also seeing in other parts of the world where older, some older chemistries are being unregistered or deregistered, that we are also seeing [Abasta] use in those context and in Asia Pacific. And that's part of why we are seeing a significant increase in our business there. But then we also have other products that I mentioned earlier that are used for pre-emergence on a number of different crops and those are working quite well and they are working quite well across a broad spectrum of issues.

And, what we are hearing from farmers in most of these markets is that, they need these products, they need to think about rotating crops, rotating different spray calendars to make sure that the weed resistant issue does not accelerate further. So you know at the moment and things seem to be sustainable and just a question of how the rest of the season develops on the herbicide side but its in combination with our broad acre portfolio which has done quite well in the first quarter which has a positive impact on hopefully our ability to continue to sell the complementary chemistry through the second and third quarter and into the end of the year. But that's sort of how things sit at the moment.

Marijn Dekkers

Okay. Fabian, I will answer your question, I think you directed it over to me about MaterialScience earning the cost of capital are better. Obviously very important for us in the MaterialScience is very focused on that. I think when you sort of look at what has happened in the last five to seven years, we decided to make very significant investments in a world scale land, green field plant in Caojing, China. I think the last time we added up all the numbers, we have invested almost EUR22.5 billion in capital in that facility, that's a lot of money. And it really started running and getting up to speed when the economic crisis broke out, so it's understandable that we have a few years here of difficulty earning the returns on the very significant investment.

But now we do have very good low cost capacity in place in key price. And as demand strengthens which it undoubtedly will as the development of the economy particularly in Asia where this plant this, and price has picked up again, we are confident that get back into the green zone of earning, our crops of capital are better on those investments. But in our pricing, particularly in polycarbonate in 2012 are an important variable there. And unfortunately you heard that prices were under pressure compared to the same period last year in Q1, but I do believe that we are confident that, that has gone to a readjust of the next few quarters.

Jorg Reinhardt

Regarding Nexavar, I am afraid I can't be much more specific on what you probably have said before. I mean all of these studies, the mission studies for lung cancer, the physician studies for BioVet Cancer, and the research study for liver cancer. All three of them event driven, all three of them are very close to completion. My personal guess right here now would be that it was in the next few months, I would say either this or next quarter we should be able to give you at least some top line results on these studies.

Operator

Next question is from Mr. Baum. Please state your name, company name followed by your question.

Andrew Baum - Citi

Hello, it is Andrew Baum from Citi. Two questions if I could. The first one regarding your Yasmin franchise, obviously you have become settle cases. My understanding is your existing provision only covers legal charges. Could you give some indications of provisions for the cases that you have already announced or already settled and those to come? And that question for Mr. Baumann relates to the tax rate. How confident are you in the potential for further improvement in your effective tax rate from current levels given that consensus current has you somewhere between 26% to 27% out post 2015?

Marijn Dekkers

Okay Andrew, Werner will answer both questions.

Werner Baumann

Yeah, I will try. So Andrew, the first question on YAZ Yasmin, we have settled and extends for roughly 650 cases that Marijn already alluded to $142 million. We have beyond that provided for defense cost for extended period to come and on top of that for the non-cases that we have had the chance to analyze the medical records, we have taken appropriate provisions in quarter 1, 2012. You don’t see it on the expense that in terms of special items, because we do have customary product liability insurance going against it here, so also let's be -- it’s a estimate it to the best of our ability, exposure we have, we have on the other side of the balance sheet on the excess of the balance sheet appropriate lanes reimbursement from the insurance company, you know.

So that’s what you see there. You had an incremental exposure for the cases we know that they are playing, but we don’t have the medical record and only if people went on and further analyze that was (inaudible), we are in the position to further advice. It also sets actually since Quarter Three, 2011 that right now we cover but we cannot exclude that our current crop liability coverage may fully suffice for the following year. Second, on your tax question, could you repeat it again with 2015 what you are interested?

Andrew Baum - Citi

I think looking at consensus expectations it seems that the market is factoring no improvement in your corporate tax rate from its current levels. Perhaps you might like to comment on those expectations.

Werner Baumann

First of all, we have certain guidelines for the current year and we have not given guidelines beyond that before but I can tell you that we do have a tax strategy in place where we are looking at optimizing our tax rate going forward and do certainly seem that 2012 should normalize it thus showing improvement compared to prior years. Yeah, and we are very confident that we do have some of the potential in Europe which we’ll be able to realize in the next year.

Operator

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

Thomas Gilbert - UBS

Hi, I’m Thomas Gilbert, UBS. I have three questions please. Can you slice the 85 million currency benefit up between pharmaceuticals, consumer health, and cost line space? The second question is for Sandra. You have growth in regions which where beleaguered by drought Latin America and Australia, is it fair to assume that if it was in these areas that the insecticide growth was particularly strong and is that sort of speculation is correct do you think that product has been applied or has it been stopped preventively? And as that question is bit of an obscurant for Patrick Thomas, in February 2008, you saw your TDI drop in Southern Europe and you basically were able to predict the financial crisis of the housing crisis in the U.S. so the export business in the financial sector fall to this, what are you seeing right now in that business.

Marijn Dekkers

Okay. The breakdown of the 85 million, Werner.

Werner Baumann

Let me start with the first 85 million. I’ll give it to you for HealthCare in aggregate. I’m not going to break it down further. It has been €39 million for healthcare overall, the majority of it actually accruing to pharma. Secondly, Crop Science accounts for 25 million and the remainder 21 million has been benefiting MaterialScience in the quarter.

Marijn Dekkers

Sandy?

Sandra Peterson

The question you asked regarding our performance in insecticide in the first quarter whether it’s driven by drought, let me just make a couple of comments to about our first quarter performance in insecticide.

First of all as you know, we cleaned up the portfolio and it really had an impact on our performance last year as we were exiting certain product categories and launching a number of new products. What you see in terms of our performance for the first quarter was adjusted for currency affects made with 15% increase and that increase is actually not come from -- did not disproportionately come at all from places like Southern Latin America or Australia where they are or significant drought. So what was driving that performance actually was the quality of the portfolio and across many regions like North America, Asia Pacific but not places like drought stricken parts of Australia and in Latin America but actually quite honestly places like Brazil, Chile and other places that its really not an impact from drought. So, we actually saw very strong performance in the first quarter obviously not as much as in Europe because the timing of seasonality and across our products and it really did not have a drought effect.

Thomas Gilbert - UBS

Thank you very much.

Marijn Dekkers

So Thomas, thank you for your obscure question, it’s a beautiful question. Searching for lead indicators is always quite fun. The trouble is with every recession the lead indicator is different but I will give a go at trying to correlate a lead indication.

If I look at NAFTA what I see is stronger growth in furniture and mattress segment which is obviously the TDI business and that is driven by bit of a tick up in the housing market. Either that people are just getting uncomfortable in their old beds and they are applying them anyway. So that would be a positive lead indicator --

Unidentified Company Speaker

Instead of a house.

Marijn Dekkers

Instead of house, sort of moving out. And then, if I look at TDI generally I see kick up compared to last year caused by again sales generally into the furniture segment. And I think if you look at last year's TDI growth its actually negative 1% and we probably expect something more like plus 5% this year and the principal drive 80% of that goes into the furniture industry which is always quite a good indicator. So, that’s as far as I can see into my crystal ball right now.

Alexander Rosar

Next question.

Operator

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

Unidentified Analyst

(inaudible) Yasmin, I have got two questions please. Firstly, on YAZ, if you look through all the plaintiff documents for some of the litigation you can see that not only all the claims to do with injury from the product, but you know potentially claims to do with marketing practices. Does your insurance cover you for anything other than product injury? Could you have more broader coverage should the litigation, you know develop more broadly and secondly on an emerging market field, if we look at other companies that have reported so far emerging markets has been really very disappointing. So you emerging markets hope looked pretty reasonable. I wonder if you could just give us your sense of what is happening in the emerging markets whether you are seeing more government interventions in pricing or whether you are confident that the double digit growth you have seen historically will remain.

Marijn Dekkers

Sure, on the emerging markets you are referring specifically to pharma I assume here.

Unidentified Analyst

Yes, I am.

Jorg Reinhardt

Okay, then let me start answering your question on YAZ Yasmin and product litigation, our product liability. All litigation claims we are aware of are covered to the best of our knowledge by our insurance policy.

Unidentified Analyst

Perfect.

Marijn Dekkers

Pharma?

Jorg Reinhardt

Regarding emerging markets it is a pretty mixed picture and I believe that may not different for much company by company, mixed picture meaning there are a number of companies that are really not do well in the first quarter (inaudible) is one of them. On the other hand, our performance in that area is to a large extend still driven by performance in China and that has been strong again which may have to do with the portfolio mixed very favorable for us, but still we see in more or less not accelerating, but also not slowing down performance in China, which compensates to a large extent what do you see in some of the other emerging markets.

So I believe certain (inaudible) slow down for the majority of the markets compensated by still strong China is what you are seeing there.

Alexander Rosar

Next question?

Operator

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

Christian Faitz -Macquarie

Christian Faitz from Macquarie. Thanks for taking my question. I have two questions if I may. First of all, in your release in the CropScience that you mentioned also that your EBIDTA was partly boosted by royalties. Can you give us an idea on what roughly royalties contributed to your earnings and my take is that these are mostly liberty link royalties? And on second, on MaterialScience, Patrick, can you give us an idea of what the volume trend would have been in Q1 ex the Caojing start up defect? Thank you.

Marijn Dekkers

Okay, Sandy.

Sandra Peterson

The royalty income is as you suggested it is related to trade income and I going to break down the specifics of you know what products and what technologies but the trade income is order of magnitude issued in the first quarter it is about the same as what our adjustment income was in the first quarter. So it is about the same order of magnitude. A little of $20 million.

Marijn Dekkers

Okay.

Patrick Thomas

And Chris, if you look at the first quarter then from a charging point of view sequentially called on quarter that was only really the new TDI facility and actually for a significant period in the first quarter we have that of on an inspection following the start up. So there wasn’t a dramatic effect, marginal effect across the year end of Caojing the volume numbers.

Christian Faitz -Macquarie

Okay. That's good to hear thanks.

Operator

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

Florent Cespedes - Exane BNP Paribas

Good afternoon gentlemen Florent Cespedes, Exane BNP Paribas. Thank you for taking my question. First, on Xarelto, could you tell us where are you regarding the development of an antidote to this Xarelto bleeding an issue quite often raised by cardiologist? And second question it is a follow up on China, could you give us the growth that you delivered in China in Q1 in HealthCare and is the price pressure, you observe for Glucobay in China is worse than expected, and do you see any risk for the rest of your portfolio in China like (inaudible)? Thank you.

Patrick Thomas

Let me start with antidote, which is of course a discussion that all companies and a consideration that all companies that are active in the field do have. I believe that if you can imagine different gratitude possible in terms of how specific an antidote, do you have to develop if any. I can reassure you that we are looking at different options that we have also folks that are out here, final decision as to what exactly you do has not been made, but it’s a consideration that is pretty much at the forefront of our scientists considerations at the moment. So without giving me your clear way forward I can not assume that we are thinking about different options that exist here.

Regarding China, when you look at pharma the China growth have been 15% so far in the first quarter. You are right that we had a Glucobay negative impact. Last year in terms of pricing which does impact on this years performance in China actually two thirds of our Glucobay sale are in China and obviously a price cut have been impact. But nevertheless, that cut we have over compensated by the good development of our rest of our portfolio. I mean, of course regarding China you always need to consider potential price cuts in the future, on the other hand its very very difficult to predict the development for each individual product there.

Overall, at the moment we still feel confident that our strong growth that we have been showing in China for the last few years will continue for the feasible future. Obviously, we do also introduce new products and also Xarelto for example is doing well in China, Nexavar is doing well in China. So, we are not only depending on the primary care portfolio but for the time being nobody came to belief that our growth table significantly slow down.

Operator

Your next question is from Mr. Conover. Please state your name, company name followed by your question.

Damien Conover - Morningstar

Yes, this is Damien Conover calling from Morningstar. Thanks for taking my questions. I just wanted to ask a follow-up question on the legal strategy with the birth control drugs. Just want to see if it can be characterized your strategy as something similar to how Merck with Biex kind of on a case-by-case basis? And then, settling towards the end, are you taking more way kind of bias approach whereas more of a kind of a class action strategy there? And then, also just shifting gears to ATX-101, just following up on the positive data there, I wanted to see if you could frame the opportunity there given that the cosmetic and neurotoxin and facial filler market is both at about a billion each, just want to see how you though ATX kind of fit into that market? Thank you.

Werner Baumann

Yeah, Damien, this is Werner Baumann speaking. Let me take the first question you asked on our legal strategy. Rest assured that we do have one but also hope you will understand that we can't disclose what it is as we are in the mid of the discussion here.

Marijn Dekkers

Jorg?

Jorg Reinhardt

Okay. Regarding ATX yeah, obviously it is a new a field for us here at Bayer. The results that we have shared recently are positive from efficacy perspective and actually that entails different investments driven by the physician driven by the patient and also some objectives measurements that you can make. So, it is a market where self-pay is dominant and patients are very willing to spend money in the field. If you can see by the significant market sizes that you were quoting for the other products there.

So, we see in principal an interesting opportunity. For us, as we know we have survived only for outside of US, so (inaudible) is running their program in the US. We will now share this data with the regulatory authorities, see what their responses are. But, our expectation is that the product based on a good efficacy results will be approved and then we will see what we can do with it.

Obviously, in the dermatology market we have those long status with our dermatology franchise that keep on growing by 5% each year, so its actually a very, very laxative environment for us in any case. But, this aesthetics market is an addendum to this dermatology market that we need to explore further and that's what we are going to do over the next twelve months. Overall, a very interesting opportunity.

Operator

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

Excuse me Mr. Trofimoff Cazenove, you may now ask your question.

Unidentified Analyst

Hi, guys, its [Rashi] on behalf of (inaudible) from JP Morgan. Thanks for taking my question. Just wondering if you could provide with a geographic breakdown of a Nexavar 1Q in Europe? So EU, AsiaPac and (inaudible) countries will be appreciated. Thanks a lot.

Werner Baumann

Yes. So I can be even more specific than just EU. I can give you a range of countries yeah (inaudible). We had in France for example sales in the third quarter was $11 million, in Italy $11 million, in Germany $9 million, in Spain $7 million. We have $16 million of sales in China and we have $26 million in Japan. And, in the US it was $48 million.

Operator

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

Ronald Köhler - MainFirst

Yes, Ronald Köhler of MainFirst. First question on Bayer science. And so, congratulations first for the good results but there was also one weak spot, have to ask that Seed treatment was still relatively weak. We have seen 24% growth at Genta. So it seems to continue to lose market share here. Will just turn around? How, I know you have some product launches here, will that let's say bring accelerating sales here? That’s my first question. Second question, Xarelto, Japan. You said you just launched it. I just wanted to confirm it's now fully reimbursed or should we see a kind of kick off similar to Germany or any kind of expectations here for the product and reimbursement here? Third question on R&D, specifically in pharmaceuticals. Can you tell us your R&D structures in pharmaceuticals for 2012 or at least give an indication how would you develop versus 2011? These are the questions, thanks.

Marijn Dekkers

Sandy, the first question on Seed treatment.

Sandra Peterson

So let me start with seed treatment. First of all if you remember in 2011 we actually saw 24% growth in our seed treatment business in 2011, and so we were obviously very pleased with that performance. If you look at the first quarter of 2012, in the Asia Pacific and all of the rest of the emerging markets, Latin America, Middle East and Africa we actually saw a more than 40% growth rate in the first quarter relative to last year in the first quarter. which clearly is, we're very pleased with that. Part of the impact in Europe and North America, some of the spacing, some of it’s a little bit timing, particularly in Europe of slight weakness in our first quarter performance in Seed treatment.

As you mentioned we have been launching a series of new products. Our (inaudible) products is now being used in soy beans and cotton and we’re seeing very positive uptake in that and then as you know we also just got regulatory approval for two new products that are in the same class. That are fungicides that are called Emesto and EverGol for both potatoes and canola. So we actually think that will continue to actually partly impact our seed treatment business.

So we are still feeling very comfortable about that business. We believe that the first quarter, slight decline in Europe and North America is somewhat being related and it's really not an issue in our mind. We are quite bullish about this business for us.

Ronald Köhler - MainFirst

Okay, thank you.

Jorg Reinhardt

So regarding Xarelto in Japan, yes I can concern that we are fully reimbursed beyond the market at the price of 530 yen for the 15 milligram dose which is roughly €4.60. So this is a very acceptable price. One needs to know that launching of new products in Japan, it’s a little bit different than in the rest of the world. There are certain obligations that you have to fulfill for the first year. So for example, patients have to come back after two weeks, so all prescriptions that are being made in Japan in the first year, they only last for two weeks which of course limits, let's say, a quick update of the product to some extent. Now that limitation ids being listed after a year and from thereon you have kind of normal behavior in the market. Nevertheless we consider Japan to be an attractive and important market for us and we have high expectations for that market.

Regarding R&D, yes I understand that maybe the first quarter looked a little bit low in pharma. That will change over the course of the year and I would expect us to be at the end of the year the same 16% to 17% range for R&D expenses that we have been given as a guidance for the pharma field since a while. So I expect us to be rather flat as compared to last year.

Ronald Köhler - MainFirst

Okay, If I may would like to add on the question BioMaterialScience. The first question Patrick is, is it possible to give you current utilization rate of the three major products and obviously we had __ say increasing debates about China and the development there? And could you give a little bit last impressions you have in China regarding the growth there?

Patrick Thomas

Yeah, I guess the utilization rates have varied hugely since the Meet the Management discussion we had both, the datas that I gave out there and it was pretty detailed by sector. And if anything, what has happened is we've seen a tightening on the TGI situation primarily because its mothballing of other competitors assets and also the closure of some assets.

In MDI, we’ve seen quite a number of facilities not performing fully and having unscheduled and scheduled shutdowns which has tightened the situation over there. And then in polycarbonate arena the volume have been high due to very good price. So from a polycarbonate point of view, the utilization rates are increasing and are expected in the second half the tightening again. The only question mark we have around polycarbonate is what's actually happening with the parts in the Middle East because nothing clear to whether it's fully occupied or not yet. I guess that’s probably the best update. The last part of your question, Ronald?

Ronald Köhler - MainFirst

China, what's your latest impression on the development on China?

Patrick Thomas

China is very complicated at the moment because of the uncertainties around government and what we find talking to customers in China and the people I've been talking with is that while there is uncertainty about the final results of the elections in October, the credit lines is still quite difficult, interest rates quite higher, this holds your cash, and generally people aren’t willing to make decisions. So that means very low inventory levels in the Chinese supply chain and project decisions. So government project decisions getting to third at the moment. Everybody is concerned about whether their going to spend money on infrastructure or not because they don’t know whose going to be at the top job. So there is unusual uncertainty mode. American elections always boost the economy, Chinese elections create uncertainty, and I think that probably characterizes the feeling of market.

Ronald Köhler - MainFirst

Which means you have some hope that after the election in October things will start to look better or?

Patrick Thomas

Yeah, absolutely.

Ronald Köhler - MainFirst

Okay, thank you.

Operator

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

Alexander Rosar

Yeah, ladies and gentlemen, also my good colleagues, I'd now like to say thank you for being with us on the call and your questions. We are now saying good bye.

Operator

Ladies and gentlemen, this concludes first quarter 2012 Results, Investor and Analyst Conference Call of Bayer AG. Thank you for participation. You may now disconnect.

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