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Executives

Alexander Rosar - Head of Investor Relations

Marijn E. Dekkers - Chairman of Management Board and Chief Executive Officer

Sandra E. Peterson - President of the Diabetes Care Division and Member of Executive Committee

Patrick W. Thomas - Chairman of Bayer Materialscience and Chief Executive of Bayer Materialscience AG

Werner Baumann - Chief Financial Officer and Member of Management Board

Jorg Reinhardt - Chairman of the Board of Management

Analysts

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

Jo Walton - Crédit Suisse AG, Research Division

Fabian Wenner - Kepler Capital Markets, Research Division

Ronald Koehler - MainFirst Bank AG, Research Division

Richard Vosser - JP Morgan Chase & Co, Research Division

Daniel Wendorff - Commerzbank AG, Research Division

Andreas Heine - Barclays Capital, Research Division

Damien Conover - Morningstar Inc., Research Division

Andrew S. Baum - Citigroup Inc, Research Division

Lutz Grueten - Commerzbank AG, Research Division

Sachin Jain - BofA Merrill Lynch, Research Division

Bayer AG (OTCPK:BAYRY) Q2 2012 Earnings Call July 31, 2012 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Bayer's Investor and Analyst Conference Call on the Second Quarter 2012 Results. [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

Ladies and gentlemen, good afternoon, and welcome, also on behalf of my colleagues, to our second quarter results conference call. With me on the call are Marijn Dekkers, our CEO; our CFO, Werner Baumann; and the representatives from our subgroups: Jorg Reinhardt from HealthCare; Sandra Peterson from CropScience; and Patrick Thomas from MaterialScience.

Marijn will start off with a very brief summary of the developments in the quarter. We assume you have all received and reviewed our stockholders' newsletter, the investment analyst briefing document and the conference call slides, so that Marijn can concentrate his introduction on the main points.

Before handing over to Marijn, I'd like to draw your attention to the Safe Harbor statement. Thank you. Marijn?

Marijn E. Dekkers

Thank you very much, Alexander. Ladies and gentlemen, good afternoon. It's our pleasure today to speak with you about our strong second quarter. You've seen we saw continued growth momentum and a strong operating performance in the second quarter. We delivered record sales and lower reported EBIT due to high special charges, but nicely improved adjusted earnings, and currency effects had a positive impact as well.

The strong operating momentum in our business was broad based. HealthCare delivered the best quarter ever, both in terms of sales and adjusted EBITDA. CropScience set a new record for a second quarter performance, and MaterialScience generated record quarterly sales and the highest adjusted EBITDA in the second quarter since 2007.

Against this background and based on our expectations for the remainder of the year, we are raising our guidance for the full year. So let me now elaborate on some of the key figures for the quarter. When talking about sales, I will concentrate on portfolio and currency adjusted data.

First, group sales rose by 5% to a record level of EUR 10.2 billion. All subgroups contributed to the increase, especially CropSciences, which continued to grow strongly. Reported earnings in the quarter were impacted by special charges of EUR 762 million. This sum included provisions of almost EUR 500 million for all litigations in connection with YAZ/Yasmin, of which we are currently aware and which we consider to be worthy of settlement.

Special items additionally comprised impairment losses of EUR 137 million recognized on intangible assets and restructuring charges of EUR 107 million. Reported EBIT decreased as a result by 41% to EUR 750 million.

Adjusted EBITDA, however, improved by 7% to almost EUR 2.2 billion, driven by higher sales at HealthCare, the continued strong business momentum at CropScience and a slight improvement at MaterialScience. In addition, positive currency effects of around EUR 70 million, primarily at HealthCare, contributed to the increase. And then core earnings per share rose 14% to EUR 1.47.

Now from a regional perspective, the strongest growth was generated in the U.S., where business moved ahead by 10% in the quarter, driven by strong business expansion at CropScience and solid growth at both HealthCare and MaterialScience. In the emerging economies, we achieved a 7% sales increase. These markets accounted for 36% of group sales. The highest growth rates were in Latin America and Eastern Europe. Emerging Asia grow by 6% with China posting a 13% increase.

On cash flow, growth cash flow in the quarter declined by 20% due especially to the high special charges. Net cash flow was down by 11%, particularly on account of significantly higher tax payments in the second quarter.

Net financial debt rose from EUR 6.9 billion at the end of March to EUR 7.9 billion on June 30. Cash provided by operating activities partly offset the outflows for the dividend and interest payments. In addition, the weak euro resulted in a higher disclosure of foreign currency debt.

So let's now move on to the performance of our subgroups, beginning with HealthCare. Sales of the HealthCare subgroup increased by 4%. FX adjusted to EUR 4.6 billion, driven by the positive developments at both Pharma and Consumer Health. From a regional perspective, business developed particularly well in the emerging markets.

At Pharma, sales rose by 4% due to good business with the majority of our key products. Sales with Betaseron improved 10%, from price increases and the release of provisions for discounts in the United States. Kogenate gained 4%, Nexavar and Aspirin Cardio both 8% and Glucobay, 3%.

As expected, business with our YAZ/Yasmin line of oral contraceptives was hampered by generic competition, especially in Western Europe and North America. Sales declined 6%. Revenues from Mirena increased significantly by 27%, mainly as a result of higher volumes and a major order in the United States. Levitra saw its sales down 17%, mainly due to weaker business in the U.S.

We are particularly pleased with the performance of Xarelto. We achieved sales of EUR 68 million in the quarter following market launches in further countries and the expansion of indications.

From a regional perspective, growth at Pharma was achieved mainly in North America, where business was up 12%, and in the emerging markets, especially China. Overall, in the emerging markets business moved ahead 9%. There were slight decreases in Europe, particularly in Western Europe.

Adjusted EBITDA of Pharma increased by 12% to EUR 809 million. Earnings benefited from higher volumes and from positive currency effect. This effect was partly offset by increased expenses for the marketing of new products and investments in business development in the emerging markets.

Sales in the Consumer Health segment rose by almost 4% in the quarter with our OTC Pharmaceuticals in the Consumer Care Division generating a 6% top line expansion; our Medical Care Division, a 1% top line expansion; and our Animal Health division, 3%. Also the Consumer Health segment developed especially well in the emerging markets.

Adjusted EBITDA of the Consumer Health segment came in at EUR 439 million, 1% above the prior year quarter. The positive earnings contributions from higher sales were largely offset by higher market investment. The good business in the Pharmaceuticals segment and positive currency effect resulted in an improvement of the adjusted EBITDA of HealthCare by 8% to EUR 1.2 billion.

So that was HealthCare. Let's now move on to CropScience. Sales of the CropSciences subgroup advanced by almost 13% in the quarter to EUR 2.3 billion, thus continuing the strong business momentum of the first quarter. We, once again, saw a particularly strong growth in North America due especially to the realignment of our marketing activities. Business in Europe and in Latin America, Africa and Middle East also showed a good development, while sales rose moderately in Asia/Pacific.

Crop Protection sales advanced 14%. Nearly all business units saw double-digit growth rates. The expansion of business with seed treatment products was particularly strong, following a moderate performance in the preceding quarter. Sales of Crop Protection in Europe rose by almost 11%, with the fungicide seed treatments and herbicides businesses posting excellent growth. Sales of insecticides remained level year-on-year.

CP sales in North America improved by a considerable 22%, where we achieved double-digit growth rates in all business units with insecticide sales expanding particularly strongly compared with the prior year. CP sales in the Asia/Pacific region grew by 4%. We significantly improved sales in Australia and India, while business in Japan and Thailand was down against strong prior year level.

Sales in the Latin America, Africa, Middle East region moved forward by 13%. We registered the strongest gains in Brazil, where business with seed treatment products doubled. Sales of insecticides rose sharply. Fungicides also developed positively, mainly in corn cultivation.

BioScience expanded sales by 21%. We achieved the strongest sales growth in North America due mainly to significant growth in volumes in broad-acre crops. Our cotton seed brands, Stoneville and FiberMax, posted particularly strong performance. Sales of our vegetable seeds business declined slightly.

Sales of the Environmental Science business unit moved back by 4%. This decline was attributable to weaker business with both professional users and products for private customers, especially in Europe and Japan. Adjusted EBITDA advanced in CropSciences by 17% to EUR 549 million, driven by higher volumes and higher prices. Progress made with our efficiency improvement programs also had a positive effect on earnings.

So now let's move to MaterialScience, where sales advanced 2% in the quarter to almost EUR 3 billion. This growth was the result of slightly higher selling prices and small volume increases. The Polyurethane business unit raised sales by 7%. All product groups contributed to this growth with higher volumes and prices. Volumes expanded primarily in Asia/Pacific and Latin America, Africa and Middle East, while we achieved price increases in nearly all regions.

The Polycarbonates business unit, however, posted sales down 10%. This was attributable, above all, to lower selling prices. Volumes were 3% down mainly as a result of volume declines in Europe. Sales in the CAS business, coatings, adhesives and specialties business unit, moved forward by almost 3%, driven by higher prices. Volumes came in at the prior year level.

Adjusted EBITDA of the MaterialScience subgroup increased by 3.5% to EUR 385 million, largely as a result of higher selling prices, savings generated by efficiency improvement programs and positive currency effects. By contrast, higher raw material costs had a negative impact on earnings.

So on the outlook. Following the good operating performance in the first half of 2012, we are also confident for the second half of the year. In addition, we are benefiting from a favorable currency environment.

Against this background, we are raising our sales and adjusted earnings forecast for the full year as I already mentioned. For the group, we are now anticipating a currency and portfolio adjusted sales increase of between 4% to 5% versus previously just 3%. We now plan to increase EBITDA before special items by a high-single digit percentage compared to our previous plan of a slight improvement. And core earnings per share are expected to improve at about 10% versus a slight improvement previously. Firstly, we are a little bit more optimistic about the developments at HealthCare. We now expect sales to increase by between 3% and 4%, and we plan to improve adjusted EBITDA by a mid- to high-single digit percentage to which positive currency effects will contribute.

Secondly, we are raising our outlook for CropScience significantly. We now anticipate organic sales growth of approximately 10% versus mid-single digit increase previously and adjusted EBITDA to improve by approximately 20% compared to a mid-single digit increase before.

For MaterialScience in the third quarter of 2012, we aspire to achieve currency and portfolio adjusted sales and EBITDA before special items at the level of the good second quarter. We continue to plan for currency and portfolio adjusted sales and EBITDA before special items in 2012 to remain level with the prior year 2011.

So before opening the Q&A session, let me just briefly summarize the main points again. First, we delivered record sale and very good operating performance in all subgroups in the second quarter, and we are optimistic for future developments and are raising our guidance for the full year.

So this concludes my remarks, and we would now be happy to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Mr. Jeremy Redenius of Sanford Bernstein.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

Jeremy Redenius from Sanford Bernstein. First of all, in MaterialScience, is there anything other than economic uncertainty in Europe that's prevented from raising the full year guidance? Because if we assume you meet your third quarter guidance, the fourth quarter would have to be almost as bad as last year's fourth quarter to not beat the full year guidance. And within MaterialScience, I'm also wondering, did BSF's downtime in Polyurethanes give you a onetime benefit? And second thing, CropScience, could you talk about how the Crop Protection business in Latin America is developing as we move into the third quarter, please? And then finally, in North America, the dry weather and damaged crop, have you -- do you run the risk of high chemical inventories as a result of that? And if so, what are the ways you could manage that?

Marijn E. Dekkers

I'll take the question, thanks, Jeremy, on the MaterialScience guidance, and then Sandy Peterson will talk about CropSciences and answer your questions. I think the situation is rather uncertain in the economy. And even though we are encouraged by the performance of MaterialScience in the second quarter, we chose to be careful and maintain our guidance at the previous level. We still have a half year to go, and now it is an uncertain economic environment as we can read every day in the paper. So prudence drove us to keep the guidance where it is at the moment. Sandy?

Sandra E. Peterson

Jeremy, thanks for your question. As it relates to Latin America, at the moment, we are through the period that we had in the earlier part of the year, having a drought in Latin America. We'll talk about the U.S., where obviously it's a very different situation. So all indications at the moment are that the Latin American marketplace should have a relatively normal season. The one wildcard in Latin America is, given what's going on with commodity prices in North America and the situation in North America, farmers are still making decisions and choices between soybeans, cotton and corn, but most of the trade-off, quite honestly, is between soybeans and cotton. So that may have some impact on the business at the back half of the year. But at the moment, our best sense is that the marketplace is still relatively robust, and we should have a relatively normal season in Latin America on the second half of the year. As it relates to your question about what's going on in the United States specifically, I'd say a couple of things. Obviously, the drought has had an impact on what people are actually doing today, the farmers are doing today, in terms of spraying fungicides on the ground. As you know, the season started early, so what that meant for us in particular is things like fungicide sprays and herbicide preseason actually got on the ground earlier than it would have in another kind of market environment. So we also have looked at the best estimate we have at the moment on consumption data, and the consumption data that we had indicates that earlier in the season than normal, we're seeing a lot of the stuff getting into the farmers' fields and getting on the ground. But the reality is we are not going to actually have a very good view and transparency to what is in the channel until towards the end of the third quarter, where we actually do a true-up on the season. And at that point in time, we'll have a much better sense of how much is left in the channel versus how much has actually been used in the marketplace and what products actually got on the ground and what didn't. So there is some risk of some fungicides being left in the channel. Whose they are and where they are is a question mark that we won't have real full visibility and transparency to until probably the very beginning of the fourth quarter, end of the third quarter.

Marijn E. Dekkers

Okay. Jeremy, Patrick will answer your question on BSF situation and the impacts on our business.

Patrick W. Thomas

Yes, Jeremy, as you know, these plants are shut down on planned basis and on when the plant fails, and I don't think the situation during second quarter was particularly unusual. I think if you look at the Polycarbonates business, and clearly we had a lot of extra capacity coming on stream, particularly from Saudi Kayan and Mitsubishi, which did have an effect in the Polycarbonate pricing arena. But on the Polyurethane side, I would say it's relatively normal in any quarter to have some of the assets around the world shut down.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

And, sorry, in Polyurethanes then as well, you said it was -- it looked normal from BSF, it was essentially planned.

Patrick W. Thomas

Yes, it was essentially planned, so I think the market had factored that in. I think other plants were running, which weren't running before. So I think on any one quarter, one of the competitors will have plants down.

Operator

Question is from Rashi Jane [ph] of JPMorgan.

Unknown Analyst

This is Rashi [ph] in for Cory Gasama [ph] from JPMorgan. I was wondering if you could share the mix of our geographic sales breakdown with us. Specifically interested in U.S., Japan, rest of Asia-Pac and important EU markets.

Marijn E. Dekkers

Yes, and we'll be pleased to do so. Mix of our -- we see in the United States 12.9% increase, which gets us to overall sales level of EUR 52 million in the second quarter of this year. Japan is 29. China is 19. We have France and Italy with EUR 12 million and EUR 11 million each, and we have for the first time a bit more significant volume also in Latin America with Brazil at EUR 5 million and Mexico at EUR 4 million. Overall, the emerging markets altogether have a sales volume of EUR 62 million in the second quarter of this year.

Operator

The next question is from Jo Walton of Crédit Suisse.

Jo Walton - Crédit Suisse AG, Research Division

You have identified 2 onetime items in the second quarter in the sense of a provision release for Betaseron and a large onetime order for Mirena. I wonder if you could, excluding those, give us some sense of the underlying position and whether there was, one would imagine, that both of those being positive flew straight through to the bottom line from the top line. Could you also please just update us on your plans of building infrastructure, where you're at in terms of getting ready for new launches, in particular EYLEA, which I see you'll be launching in Australia in the second half of this year. Should we expect to see a materially higher SG&A in 2013 than 2012?

Marijn E. Dekkers

Okay, thank you.

Werner Baumann

Yes, Jo, thanks for the question. Yes, you're right. I mean, we had 2 significant one-times for Betaseron and for Mirena, as Marijn mentioned. The underlying trends differ a little bit. For Betaseron, you could see a 10% growth in the second quarter, which doesn't reflect the underlying trend. We have been guiding for Betaseron for mid- to high-single digit decline this year, which is not going to be obviously the guidance anymore for the full year. We would now assume full year sales for Betaseron to be around flat. That doesn't change the overall, let's say, volume development for Betaseron, which is still negative in the mid-single digits. Nevertheless, we see a little bit of an improvement here. You may have seen Novartis' Extavia sales, which are negative in the second quarter. So maybe there is a little bit of market share regain for us, but I mean we'll have to see how the rest of the year develops. But overall, we would think that sales for Betaseron should be flattish for 2012 and then decline again into mid-single digits thereafter. Mirena has a very positive underlying trend that's not only in the U.S., but also in the rest of the world. Obviously, the significant deal that we could conclude in the second quarter did influence especially the U.S. numbers, but also the rest of the world is in the high-single digits growth. So overall, we think that the guidance of high-single, low-double digit sales for Mirena can certainly be met, and I would think that for the full year we should be in the double-digit range for Mirena. Now with regard to SG&A and infrastructure, yes, we have quite a number of launches coming up. I mean, you mentioned EYLEA. We would also, next year, think that regorafenib and Alpharadin could be launched. So overall there are, obviously, preparations ongoing. You will not see that much of an impact in 2012 because, as you know, EYLEA is a relatively limited sales force effort. It is certainly existing, but when you compare it to Xarelto, it's a totally different ballgame. But nevertheless, we are preparing for that adequately, which led us to the guidance that we had for this year, which indicates, for Pharma, just a small low-single digit increase in EBITDA. Margin-wise, it will probably not see a significant impact whatsoever. If anything, the margin overall also due to currency effect is probably going to stay flat. For 2013, it's a little bit too early to give a guidance, but obviously, we will make adequate investments in these launches to make sure that they are successful.

Jo Walton - Crédit Suisse AG, Research Division

Could I just -- so I understand that, the provision release for Betaseron, that reflects the fact that you didn't have to give discounts because actually Betaseron wasn't growing as much as you might have expected, or why was there a provision release?

Werner Baumann

Yes, we didn't have to give the discounts at a level that we expected them to be.

Operator

The next question is from Fabian Wenner of Kepler.

Fabian Wenner - Kepler Capital Markets, Research Division

First for Marijn and Patrick, in the strategy slides in May, you mentioned you want to leverage the gas-phase technology in TDI. I just wondered whether you can give us an update of how you intend to do that. I'm asking since SABIC, obviously, in February kind of announced a partnership with Mitsui and not with Bayer. Does that mean you basically are not thinking about leveraging through partnering? Is that excluded? Second question, for Werner, you retired about EUR 2.7 billion of debt in H1. And by year-end, your net debt to EBITDA is going to be around 0.7. That debt very comfortable for your A- rating, obviously, but do you see any opportunity to enhance returns from the current low interest rates? And last question, for Kamal [ph] maybe, can you give us an update on Alpharadin and maybe regorafenib as well?

Marijn E. Dekkers

Okay, thank you. The first question on TDI leverage, Patrick.

Patrick W. Thomas

Yes, thank you, Fabian. Yes, the new TDI gas-phase technology is, of course, up and running in China at the moment, and we're still learning more and more from the technology as we get the plant running at a faster and faster rate. So that is a success. And we're leveraging that primarily into Europe, where we've just got the first permit approvals for constructing a sister plant in Germany, which will then replace our 2 older facilities. That will allow us to improve our cost efficiency quite dramatically in our old 2 European operations by closing them and replacing them with the new technology. Second question you asked related to the joint venture that was announced between, I think, SABIC and SINOPEC in China, which was to look at polycarbonate technology or polycarbonate capacity. It's something we continuously evaluate, of course, but at the moment, we don't see any intrinsic benefits in partnering on one particular product stream.

Fabian Wenner - Kepler Capital Markets, Research Division

Sorry, Patrick, just to follow up on that. It's a partnership between Mitsui and SABIC for TDI.

Patrick W. Thomas

Sorry, I was on the other end of your collaboration, sorry. Yes, the TDI is a technology collaboration. So this is where Mitsui are licensing their technology, which I guess is relatively small scale. And they, I guess, are doing that for cash reasons, by licensing to SABIC. SABIC have stated for many years that they intend to try and acquire this technology.

Fabian Wenner - Kepler Capital Markets, Research Division

And something like that is out of the question for you?

Patrick W. Thomas

Yes, we would not license this TDI gas-phase technology.

Marijn E. Dekkers

Okay, and then, Werner, about enhancing returns.

Werner Baumann

Yes, Fabian, thanks for the question. This is something which we, of course, are thinking about as well. But first of all, I'd like to comment on your net debt projection for the company. You mentioned EUR 4.7 billion. That is a figure which is not familiar to me.

Fabian Wenner - Kepler Capital Markets, Research Division

EUR 2.7 billion, sorry.

Werner Baumann

At the end of the year, you said EUR 4.7 billion, we would reach in net debt or did I misunderstand you?

Fabian Wenner - Kepler Capital Markets, Research Division

Yes, I said net debt to EBITDA is going to be 0.7. Sorry for the...

Werner Baumann

Okay. Okay. So it looks like our net debt position at the end of the year is going to go below our 2011 level. That means that it's slightly higher than what we guided for at the beginning of the year. The reasons are certainly related to the business expansion specifically in [indiscernible]. We, traditionally, have a very high working capital tied up in the business, so that's the downside of that very, very positive tech development. We have, on top of that, our overall debt position. We, of course, also have to include the changes in our pension provisions, and only in quarter 2, given the very low interest rates we currently see, that the pension position has increased by EUR 1.3 billion. So if you look at our overall debt position, which is critical for our rating, you have to take the 2 into account. And it kind of sounds like a broken record, we do not have as much flexibility as you might think by just looking at our net financial debt. Yet still, we do have liquidity, which is building up based on our free cash flow generation, and as usual, there are multiple opportunities what we can do with the money. We can certainly -- we will look as part of our dividend guidance into increasing our dividend, which is going to stay within the 30% to 40% range of our core EPS. I don't see us delever much further but rather we might also look at generating high returns by selectively funding our unfunded pension obligations. Yes, that is something we are currently looking at.

Jorg Reinhardt

So, Fabian, this is Jorg. I'm going to take your questions on Alpharadin and regorafenib. Actually, there is not that much news at the moment to be reported on both products. As you know, we indicated that we are planning for a second half filing for Alpharadin, and that's still the case. In addition to that, we are preparing for a number of additional studies, which we want to start next year, where we will look at monotherapy and also combination therapies of Alpharadin at different stages of prostate cancer patients. In addition to that, for regorafenib, again also no significant news. The review process is ongoing. As you know, we got priority filing, so we would expect -- our priority reviews would expect the FDA for the colorectal indication to come up with the decision before the end of the year, and we would expect a European decision in the first or second quarter of next year. So overall, both products for the time being on track. Just for regorafenib, we can obviously only file in Europe once we have approval for colorectal, and we expect to file in the U.S. in the second half of this year.

Operator

The next question is from Norbert Bath [ph] of Vader Bank [ph].

Unknown Analyst

Norbert Bath [ph] from Vader Bank [ph]. Two questions concerning MaterialScience. First of all, raw material impact, you mentioned in Q2, still negative. Can you evaluate what the figure was? And am I right that going forward into Q3, there should be already a positive impact formed from declining raw material impact, is that right or can you elaborate on that? And second question is generally concerning China chemical market environment. I was a little bit surprised to still see volume up. It looks that in general, the Chinese market did not recover as it was expected at the end of first quarter. So have you a different situation there? Or can you elaborate a little bit on how the situation is there?

Marijn E. Dekkers

Okay, Patrick.

Patrick W. Thomas

Yes, if I take the numbers, Norbert [ph], from sequential quarters, then the raw material effect and energy price effect was about EUR 25 million negative sequentially quarter 1 to quarter 2, and I'd expect a positive benefit going into quarter 3 of roughly double that number. But a significant part of that will be in propylene. The main feedstock we're seeing price reductions on is propylene, and propylene find its way through to product price very quickly. So this is a margin that is passed on very, very quickly when you see propylene price rises. So roughly, I would say 60% of that improvement that I'm forecasting for quarter 3 will be passed through to the market on a relatively quick basis because of the pricing mechanisms for propylene oxide and for polyether polyols. On your question for China, I guess there's a couple of things that we see going on in China. First is the Chinese government is doing selective stimulus of the economy. We see a lot of infrastructure projects that were frozen being released, and that's positive from the point of view of the coatings business. The regional subsidies are coming into place for the appliance industry again. The appliance industry suffered a lot in quarter 1 and in quarter 2, and now we're seeing some of the regional governments promoting efficiency in the food chain and therefore refrigerated production. And we believe the next area that will get some stimulus, there's some talk of this, will be the automotive industry because of a high installed capacity and the desire to get more environmentally acceptable vehicles on the road. The sector that's not getting any support at all is the housing sector, but the infrastructure projects are certainly getting some support from a construction sector point of view, but domestic housing, not. I think there are discussions going on in the government and in the regions about further stimulus, but there's absolutely no doubt that the high level of discussion about the quoted 7.5% growth in GDP in quarter 2 suggests, even in China, that there's some suspicion that, that number may not be terribly accurate. And that's probably my best overview on China that I can give you.

Operator

The next question is from Ronald Koehler of MainFirst.

Ronald Koehler - MainFirst Bank AG, Research Division

Ronald Koehler from MainFirst. I actually have 3 questions. The first question is on currency effect. Actually, your currency effect in Q2, is around EUR 70 million was lower than the EUR 85 million you stated in Q1 despite that obviously the currency on the top line was much more beneficial. So a little bit explanation of that would help, and then obviously, hedging might be the explanation. So the question is, going forward, for the second half year, would you expect the positive effects on EBITDA to improve significantly based on today's currency rate, given that potentially hedging is rolling over or at least having a less limiting effect here? The second question is on Bayer CropScience in Brazil. Obviously, every eye is on Brazil, everyone is expecting a very strong season. The question is a bit what are your expectations, especially looking at your new products like Fox and others. So I guess you might continue to outperform the market as you did in the first half year, or what would be your, let's say, internal expectations in Brazil and a little bit in the outlook on pricing in Brazil would be also appreciated, given your discount strategy on your new products. Last question actually on Lemtrada copromotion. Could you give us any insight now as that's becoming closer to potential launch? What's your strategy here to work together with Sanofi? That's it.

Marijn E. Dekkers

Okay. So we'll start with the [indiscernible] and the currency effect also going forward.

Werner Baumann

Yes, Ronald, first of all, your assumption that some of the currency movement has been driven by hedging, I think, is correct, even though that's not the only explanation. The second explanation is driven by the business mix and the structure of our business, also the seasonality of our crop business. We reported positive currency effects for BMS and for HealthCare for the quarter, yet for CropScience, the net currency effect was negative bottom line, even though we saw a positive effect on the top line. So all of those factors weigh in. As we move into the second half of the year, yes, we will see based on quarter 2 and currencies, stronger currency support than what we have seen in the first half of the year. Giving you some sensitivities around currency, if currencies move by 1 percentage point across the entire basket of our currencies, that would translate into a EUR 30 million bottom line effect, EBITDA effect, by the end of the year for the second half of the year, yes. So 1% move of the entire basket result in a EUR 30 million variation on EBITDA level, and top line is about EUR 128 million, EUR 130 million.

Ronald Koehler - MainFirst Bank AG, Research Division

If I rightly understand, that is just for the second half year -- so a half year affect or...

Werner Baumann

No, that is for the second half, the sensitivities. If you take the last 6 months and you look at a currency variation of 1 percentage point based on quarter end second quarter closing rates, that gives you a positive or negative, depending on where currencies move, effect of EUR 130 million top line, EUR 30 million bottom line.

Ronald Koehler - MainFirst Bank AG, Research Division

Just to understand it, on a full year basis, it will be then twice as high.

Werner Baumann

Yes, full year basis, the percentage moves about EUR 60 million, that's correct.

Marijn E. Dekkers

Okay, good. So, Sandy, Brazil.

Sandra E. Peterson

So as you know, we had a very strong first half of the year in Brazil. We outperformed the market both second quarter and actually the half year. Our growth rate was about 30%. So we're confident we actually gained significant share in the first half of the year despite some of the challenges with the drought. Our expectation is that we'll be able to continue that positive momentum in the second half of the year. As you know, we are already in the process of doing a lot of pre-ordering of lots of our products, not just the fungicides, but also we've had very strong growth in insecticides and herbicides and seed treatment in Brazil. So our expectation is that we should have an equally strong above-market performance in the second half of the year. Our expectations is if you look at our portfolio in totality, both if you look at the seeds and trait business as well as the older chemistry, as well as the newer chemistry, that we should be able to continue to generate value by how we actually do pricing across that portfolio in the back half of the year as well.

Ronald Koehler - MainFirst Bank AG, Research Division

Does that mean actually that you expect pricing levels at, say, similar increases like in the first half year in Brazil or any major difference here?

Sandra E. Peterson

Our expectation at the moment, is actually we should be able to see better pricing in the second half of the year than we saw in the first half of the year just because of where the market is in the second half of the year and what the portfolio looks like in the second half of the year. And as you know, our first season of Fox was extremely positive, and there's very high demand for that product. So our ability to sustain very strong margins in that product we're more bullish about than we were at the beginning of the year.

Marijn E. Dekkers

Good. And then, Jorg, Lemtrada.

Jorg Reinhardt

Yes. Regarding Lemtrada, as you know, we have executed our copromotion rights for this product. And as you also know, we have a significant presence in the market with Betaseron, which we obviously want to build on. And we are discussing with Sanofi as to how best to do this in order to create value for both companies. That's all I can comment on at the moment. So the closer we get to the launch, maybe I can say a little bit more there.

Ronald Koehler - MainFirst Bank AG, Research Division

If I may, one add-on question. Your Bayer MaterialScience, the principal force majeure, it's now obviously lifted, but it was 4 weeks down. Was there any, let's say, more significant impact in Q2? Or will we see anything in Q3?

Patrick W. Thomas

No, there will be no effect in Q3.

Ronald Koehler - MainFirst Bank AG, Research Division

But there was an effect in Q2 or...

Patrick W. Thomas

There was a small effect in Q2, but not significant.

Operator

The next question is from Richard Vosser of JPMorgan.

Richard Vosser - JP Morgan Chase & Co, Research Division

Richard Vosser from JPMorgan. A couple of Pharma-related questions, please. First one, just on the emerging markets, I just wonder if you could comment on how sustainable that 9% growth is, what you're seeing across your basket of emerging market exposure and how you think that will develop going forward. Secondly, just on Europe, just how the pricing situation or price pressure you might think would develop in the second half. We're seeing from other companies the idea that some of the Southern European countries might put some more price pressure or more price controls in place. What's your perspective, please? And then finally, on Nexavar just how the adjuvant trial is progressing. Is it still reasonable to think of a readout back in the fourth quarter? Just your expectations there, please?

Marijn E. Dekkers

Okay, thank you, Richard. Jorg?

Jorg Reinhardt

Okay, regarding the emerging markets, as you have seen in the numbers, we had very healthy growth overall in that region again. Obviously, we see differences depending on the region. So traditionally, we are strong in China, and that continues to be the case. When you look at the rest of Asia/Pacific, obviously there are countries like South Korea where there is negative growth at the moment based on price decreases that happened in this country last year. When you look at Latin America, there is a mixed picture as well. I mean, Brazil has not been developing so dramatically positive over the first 6 months as many people would have expected. However, we are optimistic going forward. So overall, I would say that our expectation for our growth in the emerging markets is roughly at the level that we are at the moment. It may change a little bit country by country, but overall, we are relatively optimistic as we have been in the past. Regarding Europe, we have, as you could see in the number, we have a slight negative growth in Europe overall that is true for HealthCare overall, but it's also true for Pharma, Pharma a little bit stronger. We see negative impact of health care reforms in Europe. We would expect that to be at a level of around EUR 60 million for the whole year. Yes, we also see, especially in Italy, some further negative activities in the second half of the year. Spain, at the moment, is not so clear, but at the moment, we think that, that may have been it for at least this year. We also expect, like many of our colleagues in other companies, a single-digit negative, a small single-digit negative impact in Europe. However, you also need to see that, that is, to a large extent, compensated by new product rollouts, especially Xarelto, I mean, which we have not even launched, at least not really launched either in Spain nor in France. Yes, we have started to offer it, but obviously as you know, August is not a good month to launch any of these products in Southern European countries. But in September, we will put full pressure behind Xarelto, especially in Spain and France, where we have now also a price for those countries. So that should support our business in Europe overall. Regarding Nexavar, well, for the time being, I believe we'll still speak to the time lines that we have been giving before, but obviously the closer we get to the end of the study, the more precise we can be.

Operator

The next question is from Daniel Wendorff of Commerzbank.

Daniel Wendorff - Commerzbank AG, Research Division

It's Daniel Wendorff from Commerzbank. And 3, if I may, and starting off with a question on Consumer Health. And you guide for a high-single digit increase in adjusted EBITDA percentage-wise, but the Consumer Health segment, it was only up around 3.6% in the first half of 2012. So do I have to see the EBITDA margin in Q2 as more of an outlier? And if so, what was the reason for that? And then 2 sort of product-related questions, one on Betaseron. I was just wondering whether you could provide any more details on the price increase you experienced in the U.S. And then on Xarelto, could you potentially comment on the product uptake in the U.S. and how Xarelto is doing in particular versus warfarin, that's helpful.

Marijn E. Dekkers

Okay, thank you, Daniel. Jorg?

Jorg Reinhardt

Consumer Health, yes, you're right. I mean, we had relatively poor development EBITDA-wise in Consumer Health in the second quarter. That had to do with significant investments that we're currently making in our presence in a number of emerging markets. For example, in China, we intensified our efforts. China has not been really in the focus of Consumer Health activities over the last few years. We are intensifying that now significantly, obviously, also by adding capacities and improving our field force. We also have a focus on Brazil, where we keep on investing. And we have a strong business in Consumer Health in Russia, but also that needs further investment. So overall, you saw a peak of investment in the second quarter. That is a little bit of an outlier, otherwise we would not be able to get to the high-single digit overall guidance for the full year, which I think will be feasible and can be achieved. Regarding Betaseron, yes, I can give you some further detail on the price increases. Actually, we did have a price increase for Betaseron in 2011 already, which was in September, which was at the level of 5%. And then we had 2 price increases this year in January and in July at levels of 9% and again 5%. So that altogether leads to a significant, obviously, improvement of the performance. Xarelto in the U.S. obviously, you would have to talk to our colleagues of J&J who are very pleased with the performance of Xarelto, and we share their pleasure there. What we see, especially with regard to warfarin, is that the rate of growth, volume growth for warfarin comes down significantly since 6 to 9 months. Whereas in the first half of last year, warfarin volume was still growing, it's not anymore. And actually when you look at the last few months, warfarin comes down at a level of 8% to 10% month after month. So the volume is declining, which actually is a good indication that the only active compounds of Xarelto in products has been taking now more and more market share. We see for Xarelto itself that we grow market share in the especially cardiology business month after month and week after week. So overall, we are quite happy with that performance.

Operator

The next question is from Andreas Heine of Barclays.

Andreas Heine - Barclays Capital, Research Division

My question on MaterialScience. Could you explain a little bit why the trend in the Polyurethanes and Polycarbonates, if it comes to volume, is so different? And give some outlook what you see on the business trends in the third quarter and whether price increases in MDI and TDI are still possible. And on the CropScience area, you were mentioning that build was very successful in the U.S. Is there a special reason why you mentioned build in the U.S., but not in Asia, what I would assume is a good area for insecticides? And also on X-Pro and Prosaro, the active ingredients are not that new, but this formulation is probably very valuable. What is the reason that this is growing now so strongly all over the place and has not so much in recent years?

Marijn E. Dekkers

Okay, Patrick, BMS.

Patrick W. Thomas

Yes. Okay, Andreas, thank you for this question. This is looking at, firstly, the difference between Polycarbonates, Polyurethanes. In the Polycarbonates market in quarter 1 and quarter 2, we saw new competitive material coming into the marketplace, primarily from Saudi Kayan and also from Mitsubishi. We also saw traders de-stocking significantly because of concerns about the market in quarter 2, so we saw quite a lot of extra material coming in. Most of that material was going into the ODS, optical data storage and extrusion market. So there was quite a lot of disruption in what I'd call the commodity end of the Polycarbonates business. We followed a value-before-volume strategy in that case and remixed our portfolio, which you can see from the pricing movements in PCS [ph]. I think on MDI and TDI, there was limited capacity additions. There was some of the bottlenecking had gone on, but generally the markets remained fairly tight during quarter 2, and that's the reason for the difference you see in terms of the performance. In terms of trends looking forward, TDI prices went up significantly in quarter 2, and we would expect to see that hold during quarter 3. I think the same is true of MDI. There was significant price increases achieved during quarter 2, and we now are seeing rollovers into quarter 3 for those pricing levels. And I think there is some fundamental drivers of growth that we see intact in, particularly MDI, where now the Chinese are beginning to release some of the new building permits for using polyurethane as a building insulation material in several of the provinces in China, which is a positive breakthrough for us as it allows us to expand our Chinese market for MDI. So that's my overall outlook.

Andreas Heine - Barclays Capital, Research Division

Maybe one question on Polycarbonates. So the volume decline was more supply driven rather than that there is a decline in the overall demand?

Patrick W. Thomas

Yes, I think this was a combination of new material coming into the market finding a home at the bottom end of the market and us choosing to exercise a value-before-volume strategy.

Marijn E. Dekkers

Okay, Sandy?

Sandra E. Peterson

So on CropScience, a couple of things. As it relates to Belt, on a global scale in -- for the first half of the year, Belt actually, its growth rate was over 80% year-over-year. So we had strong performance in Latin America and Asia, but given -- but the vast majority in the first half of the year, particularly the second quarter, was the U.S. So it's not that it didn't grow in other places, it's just it had particularly strong growth in North America. And we will see in the third quarter continued positive performance of Belt as we are in the counter season in Latin America, as well as in Asia in the back half of the year. So it's -- Belt's doing fine in Asia. It's just North America, particularly the U.S., was particularly strong in the second quarter. As it relates to X-Pro and Prosaro, so X-Pro was launched last year for the first time in the U.K. and in Germany. It was launched this year in France, and it's -- so this is the first full year launch of that product in a number of markets in Western Europe. And so we're seeing the positive uptake of a new product in the marketplace, which has very positive impact on keeping disease down but, also having some positive yield impact. And in particular in the U.K., given how wet it's been this year, there's been a very strong infestation of fungal diseases, and so there's been a very heavy demand for that product, which seems to perform extremely well in the cereal marketplace. Prosaro actually is similarly in North America in particular our go-to-market strategy with that product has been very effective, and we're seeing very positive uptake of that product in North America as well. So in general, our fungicides are doing quite well across the globe.

Andreas Heine - Barclays Capital, Research Division

But this is a new mixture, is not -- and new active ingredients, it's just a more powerful mixture, okay.

Sandra E. Peterson

Yes, I mean, it's a new combination mixture with clearly some new impacts. And it's -- so it's a combination, both of these are combination products. But there are new registrations and they're new product launches in that case, yes.

Operator

The next question is from Damien Conover of Morningstar.

Damien Conover - Morningstar Inc., Research Division

It's Damien Conover with Morningstar. Just wanted to circle back to Betaseron, just with 2 questions. One, when you are looking at your outlook for mid-single digit declines after 2012, can you kind of parse that out between pricing and potential volume losses to new entrants BG-12, Lemtrada? And then a second question, just wondering if you've done any sort of pharmo-economic studies that look at the pricing potential in the U.S. to continue as we've seen pricing in the interferon market approaching 20% for several years with not much deceleration.

Marijn E. Dekkers

Jorg?

Jorg Reinhardt

Yes, it's correct that obviously overall [indiscernible] product is a mix of price and volume. What we see for Betaseron, when you forget the U.S. for a moment, is continued decline in volume in the rest of the world, and we see also in some of those countries pricing pressure. So we have a negative development for Betaseron still in 85% of our countries. But obviously, the U.S. being 50% of our overall sales levels for Betaseron has significant impact. So that's -- but also in the U.S., we see negative volume development with Betaseron. That differs a little bit quarter-by-quarter, but nevertheless volume comes down, and we would expect that to continue to be the case. So regarding pricing sensitivity, obviously, I mean, the industry has been benefiting to a large extent and over many years on the price flexibility that exists in the U.S. We will have to see how this develops. I believe for Betaseron and for the MS market overall, obviously, the new entrants did help to increase the flexibility that exists in this market. However, I believe that, that is coming to a little bit of an end. I believe that we are getting into situation where there is not as much flexibility in the price anymore than it used to be over the last 12 to 18 months. We'll have to see what is feasible for us going forward, but overall the guidance that we gave, which is a single digit, mid-single digit decline, indicates to you that we don't think that there is much of a pricing flexibility anymore going forward.

Operator

The next question is from Andrew Baum of Citi.

Andrew S. Baum - Citigroup Inc, Research Division

It's Andrew Baum from Citi. A couple of questions. One for Kamal [ph]. Many physicians have highlighted the lack of stability as being a potential concern for adopting the new antithrombotics. Could you just update us on your reversing agent and what are the clinical requirements in terms of end points in bringing such an agent to market? And then second, with regard to your U.S. Consumer business, could you outline what, if any, the withdrawal of Novartis' Excedrin has had on your Aspirin franchise in that market?

Marijn E. Dekkers

Andrew, Kamal [ph] is not on the phone ...

Jorg Reinhardt

But, Andrew, I'm happy...

Marijn E. Dekkers

But Jorg is happy -- Jorg is extremely qualified to answer your question.

Jorg Reinhardt

Let's start with the Consumer Health and Excedrin. Well, we have seen a little bit of a positive impact. On the other hand, not that much yet. Obviously, it's not only Aspirin, it's also Aleve that may benefit. We also have just recently launched a new pain medication that actually is pretty competitive to Excedrin, which we think may see some uptick now in the second half of this year. So overall impact so far has been very modest. Regarding reversibility and Factor X, I mean, as you know, we have been talking about a potential antidote here for a while. We are in the process of working out what exactly it would take. We have several approaches, which we haven't been talking that much in detail yet in the past, and we are still not prepared to do this. Obviously, it's a hot field with a lot of debate at the moment. But what I can say is that in addition to a more specific agent, there is also consideration to go for more, let's say, broader potential agent, but that is something where I think that in the first half of next year we have more clarity on.

Operator

The next question is from Lutz Grueten of Commerzbank.

Lutz Grueten - Commerzbank AG, Research Division

Lutz Grueten, Commerzbank. I want to come back to the first question of the conference call and want to phrase it completely the opposite regarding the guidance on MaterialScience for the full year. Effective numbers on the EBITDA line have been down after 6 months, and you're guiding for flat EBITDA adjusted on a full year base, which implies an increase in the second half. What makes you so confident in a softening environment overall? That's the first question. And my second question is regarding Bayer CropScience. And you mentioned efficiency improvements you have achieved in the second quarter and the first half. Could you give us a number here, which was achieved after 6 months, and could you confirm the EUR 150 million to come on a full year base?

Marijn E. Dekkers

Okay. I'll quickly answer that question because obviously you can look at this from 2 sides. The bottom line is, as I said, we kept Material guidance where it is because of uncertainty of the economy. The comment was made that Q4 last year was relatively weak, maybe some self-infliction there in terms of how we ran our capacity at the end of the year. So we think this is all going to sort of average out or we don't see any significant indications one way or the other to change our guidance at this point. Sandy?

Sandra E. Peterson

So as it relates to the efficiency question, as you know, at the end of 2010, we announced that EUR 265 million cost take-out program that was to be completed by the end of 2012. We are more than confident that we're going to hit that number. We're actually slightly ahead of plan in total and also in terms of this year's numbers. So we're tracking very well, and that's part of why we're seeing the positive performance on our bottom line.

Lutz Grueten - Commerzbank AG, Research Division

But there's no number you can give us for the first 6 months?

Werner Baumann

I can give you the number for the overall company, and that is that annualized by end of quarter 2, we have realized a little bit more than EUR 700 million out of the EUR 800 million overall for the company. So EUR 720 million out of EUR 800 million.

Operator

The next question is from Sachin Jain of Merrill Lynch.

Sachin Jain - BofA Merrill Lynch, Research Division

Sachin Jain from Merrill Lynch. Three questions for Jorg, if I may. Firstly, on the YAZ litigation, I think you've been quoted on the wires to say you believe you've provided for the large part of that liability. I wonder if you could just give us some comfort that you believe the bulk of claims are now in, any color on the rate at which you're receiving new claims now versus, may I say, 6 months ago? Secondly, on Xarelto ACS, just any updates as to how discussions with the FDA are going, any part of the market or should we write off this indication in the U.S.? And then thirdly, you commented on Xarelto AF in the U.S. and a continued market share pickup in cardiologists. I wonder if you could just provide some color in the PCP space and whether the Eliquis delay has had any benefit at all. The background to that question is at the New York analyst day, I think there was a suggestion that some PCPs may have been delaying, converting from warfarin in anticipation of Eliquis.

Marijn E. Dekkers

Okay, Sachin, Werner will answer your YAZ litigation question and then Jorg to the Xarelto question.

Werner Baumann

Yes, Sachin, thanks for the question. I'm more than happy to do so. The EUR 496 million provision we have taken covers the exposure which goes beyond our insurance coverage and the deductible that we had already taken. And it addresses all cases we know as of, Jorg, basically the close, which we consider worthy of settlement. And these are only the cases we are -- we have incidences of venous clots. It does not include 2 other classes, which we would not settle, one is gallbladder diseases and stones. We don't see, based on the studies we checked this, we don't see any relation to drospirenone-containing COCs. The other one is the arterial thromboembolisms, which we do not consider to be settled either. So these are the conditions under which the provision has been established. The provision also covers our ongoing legal and defense cost going forward for until the end of 2015. Now we come to the number of cases we received. We had quite a high number of these 3 cases in the peak. That has come down significantly. I'll call it somewhere in the area of maybe 20% to 2/3 we currently see versus the peak, and that is 30 to 35 cases per week. These are the claims, and out of these claims, we would then have to analyze how many of those relate to venous clots. So these are the number of claims, which are handed in, not necessarily the ones which cover venous clots.

Marijn E. Dekkers

Okay, Jorg?

Jorg Reinhardt

So, Sachin, regarding Xarelto, well, I think it's much too early to write ACS off in the U.S. as you just questioned. I'm actually quite confident that, that's going to go well at the end of the day. But I don't want to comment, and I can't comment on what exactly is ongoing at the moment. You can assume that our colleagues at J&J are working very closely with the FDA in addressing the questions that they have raised. And I can't give you the exact date of when the re-filing is going to take place, but I can reassure you that the colleagues are working very diligently in making this possible as quickly as possible. Regarding AF, yes, I've heard the same comment that people, especially the primary care physicians, might wait for another product to reach the market. If that would have been the case, then you might have expected some uptick, which is not the case, I think, neither for the [indiscernible], nor for us. Market shares with the primary care physicians are pretty stable for both compounds now since a number of weeks. Maybe there's a little bit of an improvement week after week, but it's still at relatively low levels. That's different than with cardiologists, where we are still gaining market share, and we have the major share of new patients getting on the drugs. But regarding PCPs, it's still at low levels.

Operator

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

Alexander Rosar

Okay, thank you, Sherry. In this case, also on behalf of my colleagues, I'd like to say good-bye, and thank you for being with us on the call.

Marijn E. Dekkers

Thank you.

Operator

Ladies and gentlemen, this concludes the Second Quarter 2012 Results and Investor and Analyst Conference Call of Bayer AG. Thank you for participating. You may now disconnect your telephones.

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