Basf Se S/Adr

Good morning, ladies and gentlemen. Welcome to BASF's conference call on the second quarter 2023 results. Today's presentation is being recorded. All participants will be in listen-only mode throughout. The presentation will be followed by a question and answer session. If you have any difficulties hearing the conference, please press the star key followed by zero on your telephone for operator assistance. Today's presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in Opportunities and Risks of the BASF Report 2022. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. With me on the call today are Martin Brudermüller, Chairman of the Board of Executive Directors, and Dirk Elvermann, Chief Financial Officer. Please be aware that we have already posted the speech on our website at bsf.com slash Q2 2023. Now I would like to hand over to Martin Brudermiller.

Good morning, ladies and gentlemen. On July 12th, we adjusted our full year's outlook and released preliminary Q2 figures. Today, the first time is Dirk. We will provide you with further details. Let's start with the development of global chemical production. Based on currently available data, global chemical production stagnated compared with the prior year quarter on account of weaker global demand. Among the large chemical markets, only China recorded growth. However, this was largely due to the low baseline resulting from the COVID-related lockdowns in Q2 2022. In Europe, chemical production again declined strongly compared with the prior year quarter. This was due to lower demand resulting from high inflation, front-loading of durable goods consumption during the COVID years, as well as elevated natural gas prices. In Q2 2023, gas prices were still around twice as high as the average between 2019 and 2021 and five times higher than the Henry Hub quotation for the quarter. In some cases, this has already led to temporary or permanent shutdowns of production capacities in the European chemical industry. In North America, chemical production also declined compared with the prior year quarter in an environment of weak demand for consumer goods. Lower demand and increased energy prices were also the main reasons for the decline in chemical production in Asia, excluding China, with the notable exception of moderate growth in India. Despite recessionary developments in Europe and the United States, and a subdued economic development in China, we do not expect a further weakening in demand at the global level of the second half of 2023. Inventories of chemical raw materials in most customer industries have already been greatly reduced. Let's take a closer look at the current and historical levels of indicators for inventories in the manufacturing industry by regions. On the slide, values below 50 indicate declining inventories, values above 50 indicate restocking. In Western Europe and North America, the indicators are already below their long-term averages. Furthermore, indicators in these two regions are now in the range of historical inflection points from destocking to inventory buildup. From this perspective, we should have likely reached the troughs. Inventory indicators for Asia-Pacific are above the long-term average, but have to be integrated in the context of somewhat higher growth momentum in industrial production. Overall, these observations and statistical data are in line with the current development of order entries in our operating divisions. Some customers are recognizing that they cannot expect purchasing prices to fall further. should also support gradual demand recovery combined with a cautious rise in consumer confidence. Moving on to BASF performance. Due to 2023, we face lower demand from our key customer industries except out of motive. Overall, BASF group sales declined by 25% to 17.3 billion euros in Q2 2023, mainly on account of lower prices and volumes. Negative currency effects also lowered sales. Compared with the extremely strong prior year quarter, EBIT before special items decreased by 1.3 billion euros and amounted to 1.0 billion euros. The decline was especially driven by the upstream segments. Dirk will go into more detail on the development of the segments. We are looking ahead. Therefore, I will give you an update on the projects we are undertaking worldwide to prepare BASF for the future. I will start with our new Forbundside in South China. By 2030, we expect the Chuncheng Forbundside to generate sales of between 4 and 5 billion euros and an EBITDA of between 1 and 1.2 billion euros. Project execution is on track. The first plan for engineering plastics successfully started up in August 2022 as planned and despite all COVID-related challenges. As part of the initial phase, first BASF products made in Changchang were already delivered to customers in the second half of last year. Plan for thermoplastic polyurethanes will come on stream in the third quarter of this year. In mid-2022, we started the construction of phase one. This is the heart of the verbund. It comprises a world-class mixed-feed steam cracker, several value chains for petrochemicals, intermediates and specialty chemicals for consumer products, as well as related infrastructure. This core complex is planned to start up as of end of 2025. Pre-marketing is ongoing. Several contracts for future sales have already been signed. We are building the new Forbund site in South China to serve the Chinese market. Further expansion and diversification of the value chains is already in preparation and is expected to go on stream from 2028 onwards. This will enable us to meet the growing demand of local customers also for products used in special applications. We are financing the investment with a combination of equity and a mix of various debt instruments mainly issued in China. Local bank financing is expected to be supported by Chinese and international banks. Overall, we are making the best use of cash generated by our existing Chinese group companies and minimizing cash injection into China. The new Changsheng for Bunzai will also be a lighthouse project in terms of sustainability. We aim to operate it with 100% green energy from right of the start of phase one production. Last week, we achieved an important milestone in this regard in addition to the already signed or planned PPAs with partners for onshore wind and solar energy. BSF and Mingyang have agreed to jointly construct and operate an offshore wind farm in South China. Mingyang is the largest private wind turbine manufacturer in China. It did hold 90% of the joint venture shares, BSF 10%. Majority of the power generated will be used to supply renewable electricity to BSS Forbund site in Shenzhen. The wind farm will have a total installed capacity of 500 megawatts. Subject to construction approval for the relevant authorities, the wind farm is expected to be fully operational in 2025, in line with the startup of the heart of the Forbund. This is the first Sino-German offshore wind park project in China involving development, construction, and operation. We are not only investing in China. We are also pursuing new projects in the United States. Already in January 2023, BASF broke ground on the third and final phase of the MDI expansion at our Forbund site in Geismar, Louisiana. We will increase production capacity to approximately 600,000 metric tons per year by 2026 to support the ongoing growth of our North American MDI customers. We are investing 780 million US dollars in this final expansion phase from 2022 to 2025. Including the first and second phase, this investment volume totals around 1 billion US dollars. This makes the MDI expansion project BSS largest wholly owned investment in North America. For future investments in the United States, we will evaluate incentive schemes provided by the Inflation Reduction Act. In June 2023, BSF and YARA announced a joint study to develop and construct a world-scale low-carbon blue ammonia production facility in the U.S. Gulf Coast region. Together, we are looking into the feasibility of a plant with a total capacity of 1.2 to 1.4 million tons annually. per year to serve the growing global market for low-carbon ammonia. The feasibility study is planned to be completed by the end of 2023. Approximately 95% of the CO2 generated from the production process is aimed to be captured and permanently stored in the ground using CCS technology. For BASF, the new capacities would partially be used for background integration. thus reducing the carbon footprint of our ammonia-based products. Therefore, this is another project that underlines BASF's commitment to drive the transformation of the chemical industry. Finally, some details about a project that is strengthening our position in the fast-growing market, our battery materials investment in Europe. At the end of June, we celebrated the opening of Europe's first co-located center of battery material production and battery recycling in schwarzheide germany the state-of-the-art production facility for high performance cathode active material and the battery recycling plant to produce black mass are important steps in closing the loop in the european battery value chain the cum plant has been gradually commissioned since the end of 2022 and is fully sold out for the coming years it will supply products tailored to the specific needs of cell manufacturers and automotive OEMs in Europe. Construction of the battery recycling plant to produce black mass has already started and production is expected to begin in 2024. With these investments in Schwarzheide, BASF is supporting the European market for e-mobility and at the same time enabling faster growth of our global business. We aim to build a battery materials business with sales of more than 7 billion euros by 2030. We strive for an EBITDA margin before special items of more than 30% excluding metals. Now I will hand over to Dirk to further details on our performance in financial regard.

Thank you Martin and good morning ladies and gentlemen also from my side. I will now provide you with further details of BASF Group's key financial figures in the second quarter of 2023 compared with the very strong prior year quarter. As Martin already mentioned, sales declined by 25%, primarily on account of lower prices and volumes. Prices declined particularly in the chemicals and material segments because of lower raw material prices and lower demand. All segments recorded lower volumes. However, excluding precious metals, the service technology segment increased volumes. Polio effects had a slightly negative impact on sales and were mainly related to the sale of the kaolin minerals business. Currency effects negatively impacted sales as well. EBITDA before special items decreased by 41% and amounted to 1.9 billion euros. 1 billion euros EBIT before special items declined by 1.3 billion euros. This decline was mostly due to lower earnings in the chemicals and material segments. Compared with Q2 2022, net income from shareholdings declined by 341 million euros to 92 million euros. This was largely due to lower earnings from Winter Saldea, which in the prior year quarter still included major contributions from activities in Russia. Net income of BASF amounted to 499 million euros compared with 2.1 billion euros in the prior year quarter. In quarter two, 2023, the tax rate was 35% compared with 18% in the prior year quarter. This increase is mainly related to the fact that deferred tax assets for tax loss carry forwards in Germany are currently not recognized for accounting purposes. Cash flows from operating activities significantly improved by €950 million to €2.2 billion in the second quarter. At the end of June 2023, the equity ratio was 47.1% and thus only slightly below the figure at the end of 2022. With that, let's now take a look at the segment performance in more detail. Almost all segments contributed to the decline in EBIT before special items. Chemicals and materials, which posted very strong earnings in the prior year quarter, were responsible for around 80% of the decline in BASF's groups EBIT before special items. In both segments, EBIT before special items decreased mainly due to lower volumes and margins. In industrial solutions, EBIT before special items also decreased considerably compared with Q2 2022. In this segment, lower volumes and margins were again the main drivers. Furthermore, the prior year quarter still included earnings contributions from the Kaolin Minerals business, which we divested in September 2022. Surface technologies achieved slight earnings growth, driven by the coatings division and the mobile emissions, chemical, and refinery catalyst businesses. Compared with Q2 2022, global light vehicle production grew by 15.5%, according to S&P Global. This strong increase particularly resulted from the base effect in China following the lockdowns there in the prior quarter. The 2023 outlook for the automotive industry, which is most relevant for our surface technology segment, remains favorable. For the full year, global light vehicle production is expected to grow by 5.3%, according to S&P Global. In the nutrition and care segment, EBIT before special items was considerably below the prior year period. The main reasons were lower margins and volumes. In the nutrition and health division, margins in the vitamins business were particularly weak given the historically low vitamin A prices. In the agricultural solution segment, EBIT before special items decreased slightly in the second quarter compared with the prior year period. This was mainly due to lower volumes. resulting from cautious buying behavior as crop commodity prices softened compared with Q2 2022. Higher channel inventories also played a role here. However, we had a very good start in Q1 2023, and our agricultural solution segment performed strongly when looking at the full season in the northern hemisphere. Finally, other remained a negative earnings contributor, but posted considerably improved EBIT before special items year on year, This was mainly due to a higher contribution from our insurance companies. I will now continue with our cash flow development, again focusing on the Q2 performance. Cash flows from operating activities increased by almost 1 billion euros to 2.2 billion euros. This was largely driven by cash inflows of 800 million euros from changes in net working capital. In the prior year quarter, there had been cash outflows of 1.7 billion euros. Payments made for property, plant and equipment and intangible assets rose by 43% compared with the prior year quarter to 1.3 billion euros. This increase was mainly related to our growth projects, particularly our investment in China. Free cash flow increased by 569 million euros compared with Q2 2022 and reached 905 million euros. Now turning to our balance sheet at the end of June 2023 compared with year end 22. Total assets amounted to 83.5 billion euros. This is a decline of 1 billion euros mostly due to lower current assets which decreased by 807 million euros to 36.6 billion euros. Lower other receivables and miscellaneous assets and reduced inventories more than compensated the higher trade accounts receivable. The increase in trade accounts receivable was mainly caused by the strong sales performance of our agricultural solution segment in the first half of this year. Non-current assets were almost unchanged at 46.9 billion euros. Non-current liabilities increased by 1.8 billion euros to 25.0 billion euros, in particular due to higher financial debt. Net debt increased by 4 billion euros to 20.2 billion euros, at the end of June 2023. The equity ratio at the end of Q2 was at 47.1%. In the following, let me summarize the measures we are implementing to improve BSF's competitiveness, particularly in Europe. As announced in detail at the end of February, we are executing a cost savings program with a focus on Europe and are adapting our verbund structures in Ludwigshafen. Together with the initiatives that were already underway in our global service units, we will reduce fixed costs by around 1 billion euros by the end of 2026. This is an annual run rate. By the end of 2023, we expect to be at a run rate of more than 300 million from our cost saving program with a focus on Europe. In addition to these programs, we are rigorously controlling our fixed costs and managing discretionary costs on a permanent basis. We also have a strong focus on cash management to support our free cash flow. We will continue to improve cash conversion and we will reduce our inventory levels. In the light of the current macroeconomic framework, we also have further trimmed our capex down for this year. Instead of the 6.3 billion euros announced as part of the full year reporting in February, we now expect capex of around 5.7 billion euros for the BSF Group in 2023. Before Martin concludes with the outlook, I would like to give you a brief update on the carve-out of the mobile emissions catalyst and precious material services business that was announced in December 2021. The carve-out now has been completed, best targeted within 18 months. This was achieved while maintaining business continuity for customers, partners, and employees. At the same time, the team ensured that the business performed strongly and won several new platforms. EISF Environmental Catalyst and Metal Solutions, abbreviated ECMS, is headquartered in Islin, New Jersey. It now operates its own legal entities using a dedicated IT system landscape and services. With global operations in 15 countries, more than 4,500 employees, and 20 production sites, ECMS is a global leader in catalysis and precious metals, offering a wide range of products and services. In the new setup, the team will focus on market opportunities in step with the more stringent light and heavy-duty emissions regulations. ECMS will also further pursue growth areas in circular solutions and the hydrogen economy. The business will continue to be reported as part of the catalyst division in the surface technology segment. And now I will hand back to Martin for the outlook.