Bayer AG - Annual Report 2006 - Overview of Sales, Earnings and Financial Position

Pharmaceuticals business decisively strengthened

2006 a record year for Bayer

Sales up 17 percent to €29 billion

Operating performance at an all-time high
EBITDA before special items climbs 21 percent to €5.6 billion
EBIT before special items advances 14 percent to €3.5 billion

Group net income rises 5 percent to €1.7 billion

Earning power expected to further improve in 2007

Overview of Sales, Earnings and Financial Position

Bayer had a very successful year in 2006, both operationally and strategically. In June, we decisively strengthened our pharmaceuticals business with the acquisition of Schering AG, Berlin, Germany. This is the most significant corporate transaction in Bayer’s history and gives us leading market positions in specialty pharmaceuticals. We successfully implemented our divestiture program with the sale of our Diagnostics Division and the H.C. Starck and Wolff Walsrode activities.

We improved the performance data of our businesses, in some cases substantially, compared to the previous year.

Sales of the Bayer Group grew 17.2 percent to €29.0 billion, from €24.7 billion in 2005. The total for 2006 includes €3.1 billion in revenues from the Schering business in the period from June 23, 2006. Adjusted for currency and portfolio effects, Group sales rose by 5.2 percent, with HealthCare and MaterialScience up 10.0 and 7.2 percent, respectively, and CropScience down 2.3 percent from the prior year.

Change in Sales	2005	2006
%
Volumes	0	+5
Prices	+7	0
Exchange rates	+1	0
Portfolio changes	+10	+12

EBITDA before special items rose by 21.3 percent to the record level of €5,584 million, from €4,602 million in 2005, yielding an underlying EBITDA margin of 19.3 percent in line with our 2006 target. HealthCare saw a 75.7 percent jump in earnings, with EBITDA before special items advancing to €2,613 million, from €1,487 million in 2005. The increase was due to a €774 million contribution from the acquired business of Schering AG, Germany, and gratifying business development in all divisions. CropScience posted underlying EBITDA of €1,204 million, a decline of 5.4 percent in difficult market conditions. Here, cost savings partially offset a price- and volume-related squeeze on margins. MaterialScience earnings nearly equaled the previous year’s outstanding level, with underlying EBITDA falling just 4.9 percent to €1,677 million. However, earnings were diminished by a sharp increase in raw material costs and by unscheduled production interruptions in the fourth quarter.

Bayer Group EBIT before special items, boosted by a €178 million contribution from the Schering business, climbed by 14.2 percent to a record high of €3,479 million, from €3,047 million in 2005.

EBIT in 2006 was diminished by net special charges of €717 million, compared with €533 million in the prior year. Of the net special charges for 2006, HealthCare accounted for €402 million, CropScience for €57 million and MaterialScience for €218 million. Special charges of €273 million (net) were related to the acquisition and integration of Schering AG, Germany, €200 million (2005: €109 million) to restructuring, €172 million (net) (2005: €451 million) to litigation, and €72 million (net) (2005: €27 million net gain) to other effects.

EBIT after special items improved by 9.9 percent to €2,762 million, from €2,514 million in 2005.

After a non-operating result of minus €782 million (2005: minus €602 million), pre-tax income was €1,980 million (2005: €1,912 million). The non-operating result contained a €236 million gain from the sale of our 49.9 percent interest in GE Bayer Silicones and net interest expense of €728 million (2005: €338 million), including €370 million in interest expense for the immediate financing of the Schering AG acquisition. After tax expense of €454 million (2005: €538 million), income after taxes from continuing operations rose to €1,526 million (2005: €1,374 million). The reduction in tax expense was due primarily to one-time income due to increased usability of tax loss carryforwards. Including the result of discontinued operations and after minority stockholders’ interest, net income of the Bayer Group improved to €1,683 million (2005: €1,597 million). Earnings per share came to €2.22 (2005: €2.19).

Gross cash flow increased by €799 million to €3,913 million (2005: €3,114 million) due to the gratifying growth in business and the inclusion of Schering AG, Germany. Net cash flow advanced by 21.7 percent to €3,928 million. The total net cash flow including discontinued operations was €4,203 million.

Net debt amounted to €17.5 billion at December 31, 2006, compared to €5.5 billion at the end of 2005. Thus, despite the purchase price of approximately €17 billion for Schering AG, net debt rose by only €12 billion, taking into account the Schering shares not yet acquired and an advance payment of €0.4 billion received on the sale of the Diagnostics Division. The purchase price payments received at the beginning of 2007 for Diagnostics and H.C. Starck, along with the expected proceeds from the divestiture of Wolff Walsrode, are intended to contribute to a further substantial reduction in net debt during 2007.

We also had a successful fourth quarter. Thanks to strong business gains in HealthCare, Group sales moved ahead 25.1 percent to €8.0 billion, of which Schering, Berlin, Germany, accounted for €1.5 billion. Adjusted for currency and portfolio effects, Group sales rose by 5.7 percent, with business expanding by 10.6 percent at HealthCare and 7.4 percent at MaterialScience. Currency- and portfolio-adjusted sales of CropScience were at the previous year’s level (+0.4 percent), with business at a low level in Brazil.

Underlying EBITDA in the fourth quarter climbed by 34.3 percent year on year, to €1,258 million, including a €352 million contribution from the Schering business. There was again a pleasing improvement in EBITDA performance of all the HealthCare divisions in the fourth quarter, while earnings of MaterialScience and CropScience declined. EBIT before special items amounted to €622 million, against €553 million in the same period of 2005. Net special charges came to €416 million, with Bayer HealthCare accounting for most of these items. EBIT after special items came in at €206 million (Q4 2005: €129 million). Including tax income of €130 million, Group net income was €311 million (Q4 2005: €46 million). Earnings per share for the quarter were €0.41 (Q4 2005: €0.06). Net cash flow advanced 26.3 percent to €1,493 million (Q4 2005: €1,182 million). The total net cash flow including discontinued operations was €1,578 million (Q4 2005: €1,309 million).