Basf Se S/Adr

Good morning, ladies and gentlemen. Welcome to BASF's conference call on the third 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 Q3 2023. Now I would like to hand over to Martin Brudermüller.

Good morning, ladies and gentlemen. Dirk Elbermann and I would like to welcome you to our analyst conference call on the third quarter of 2023. Let's start with the development of global chemical production. Based on currently available data, the chemical industry was under further stress in Q3 as all regions exhibited a decline in production versus the prior year quarter, with the exception of China. The development in China was driven by a recovering domestic demand for a broad range of chemical products in association with low sales prices, where As global chemical production in total grew by 4.8%, including China, it decreased by 4.4% without China. In Europe, chemical production slowed considerably compared with the prior year quarter. This was due to lower demand resulting from high inflation, increased interest rates, and a renewed rise in natural gas prices, as well as front-loading of durable goods consumption during the COVID years. In Q3 2023, European natural gas prices were still around 40% higher than the average between 2019 and 2021 and four times higher than the Henry Hub quotation for the quarter. Consequently, European chemical production continued to decline in Q3 2023 and shrank by 6.6% compared with the prior year quarter. In North America, chemical production also declined compared with the prior year quarter in an environment of weak domestic demand from industries and end consumers. Compared with the prior year quarter, chemical production was also weaker in Asia, excluding China. Subdued consumer spending and a strong import competition from China were the main reasons for this. Let's again have a closer look on current and historic levels of indicators for inventories in the manufacturing industry. On the slide, values below 50 indicate declining inventories, values above 50 indicate restocking. In our Q2 2023 conference call, we mentioned that these indicators were below their long-term averages and in the range of historic inflection points from destocking to inventory buildup for Western Europe and North America. The figures for Q3 2023 broadly confirm our expectations. The indicator for Western Europe improved marginally, signaling a slightly lower decline in inventories. The indicator for North America has moved further towards neutral. In Asia Pacific, the inventory indicator is continuing to edge up, pointing to increasing inventories amid the ongoing slow recovery of industrial production. Overall, These observations and statistical data remain in line with the current development of order entries in our operating divisions. Particularly in China and India, we see firmer demand while order entries are stabilizing in the other regions. We now move on to BSS performance. Overall, BSS group sales declined by 28% to 15.7 billion euros in Q3 2023, mainly due to lower prices and volumes. Prices fell particularly in the materials, chemicals, and surface technology segments, but we are able to increase prices in agricultural solutions. Sales volumes were considerably lower than in the prior year quarter across all industries, with the exception of automotive. In the surface technology segment, which supplies most of its products and solutions to the automotive industry, volumes, excluding precious metals, were fairly stable. In the course of the year, the sequential volume decline slowed down. In the third quarter of 2023, volumes declined by 3% compared with the second quarter of 2023. Compared with the prior year quarter, earnings in the agricultural solutions and surface technology segment increased, while the remaining segments recorded considerably lower earnings. Overall, EBIT before special items declined by 772 million euros compared with Q3 2022 and amounted to 575 million euros. This is in line with the average analyst estimates of 601 million euros compiled by VARA on behalf of BASF in October 2023. With that, to Dirk for more financial information.

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 third quarter of 2023, compared always with the prior year period. EBITDA before special items decreased by 34% and amounted to 1.5 billion euros. EBIT before special items declined by 57% to 575 million euros. I will go into the details at segment level on the next slide. Net income amounted to minus 249 million euros compared with 909 million euros in the prior year quarter. Besides the lower EBIT, this decline was driven by the overall negative earnings of Winter Saldea due to special items. In Q3 2023, Winter Saldea recognized impairments on assets in the Middle East and also booked provisions for restructuring measures relating to the adjustment of the company structure that they announced in September. BSF's cash flows from operating activities increased by 17% to 2.7 billion euros, mainly due to considerably higher cash inflows from changes in networking capital. This resulted particularly from reductions in inventories. Now let's take a look at EBITB4 special items in the segments in Q3 2023 compared with the prior year quarter. The agricultural solutions and surface technology segments increased EBITB4 special items compared with Q3 2022. The considerable increase in agricultural solutions mainly resulted from higher prices and a one-time effect from insurance payments. The slight increase in surface technologies was driven by considerably considerable earnings growth in the coatings division on account of higher prices and volumes. This more than compensated for significantly lower EBITB4 special items in the catalyst division. Overall, BASF's earnings reflected significantly lower EBITB4 special items in the chemicals, nutrition and care, industrial solutions, and materials segments. In the chemical segments, both divisions recorded significantly lower EBITB4 special items, mainly due to lower margins and volumes. In the petrochemical division, the unplanned outages of the crackers in Port Arthur, Texas and Nanjing, China, in September, additionally burdened earnings. In the material segments, the considerable decline in EBITB4 special items was driven by significantly lower earnings in the monomers division, particularly as a result of lower prices. Earnings in the performance materials division fell slightly, mainly due to lower prices and volumes. The industrial solutions segment recorded considerably lower EBIT before special items in both divisions, particularly on account of lower volumes and margins. EBIT before special items in the nutrition and care segment declined significantly. In the nutrition and health division, EBIT before special items was negative, mainly because of currently very low prices in the vitamins industry. This was partly offset by positive earnings in care chemicals. These were, however, also significantly below the level of the prior year quarter due to lower margins on account of lower prices. While earnings in the individual segments diverged from average analyst estimates, EBIT before special items at group level was in line with consensus. I will now continue with our cash flow development, again focusing on our performance in the third quarter. Cash flows from operating activities increased by €384 million to €2.7 billion. This is a remarkable improvement in view of the significantly lower net income. The cash flow generation was largely driven by cash inflows of €1.9 billion from changes in net working capital. This is an increase of €1.2 billion compared with Q3 2022. Lower inventories resulted in a cash release of 488 million euros, while in the prior year quarter, inventory build-up of 834 million euros had tied up cash. This reflects our high discipline in inventory management as part of our self-help measures in the currently difficult economic environment. Compared with the prior year quarter, payments made for property, plant and equipment and intangible assets rose by 215 million euros to 1.2 billion euros. This increase was mainly related to our growth projects, particularly our investment in China. In the third quarter, free cash flow increased by 170 million euros compared with Q3 2022 and reached 1.5 billion euros. Let's now take a look at our balance sheet at the end of September 2023 compared with year end 2022. Total assets declined by 1.9 billion euros and amounted to 82.6 billion euros. This decline was driven by lower current assets, mainly on account of lower other receivables and miscellaneous assets, reduced inventories, and lower trade accounts receivable. Overall, current assets decreased by 3 billion euros. Non-current assets increased by 1.1 billion euros, particularly because additions to property, plant, and equipment exceeded depreciation. On September 30th, 2023, net debt amounted to 18.9 billion euros. This was an increase of 2.6 billion euros compared with year-end 2022, but a decrease of 1.4 billion euros compared with June 30th, 2023. Compared with September 30th, 2022, net debt was slightly lower. The equity ratio at the end of the third quarter of 23 was slightly higher than at the end of the year 2022 and stood at 48.8%. Overall, this demonstrates BASF's financial strength. We have a strong balance sheet and good credit ratings, especially compared with peers in the chemical industry. We are also consistently working on our cost structures to improve BASF's competitiveness, particularly in Europe. As announced at the end of February, we are executing a cost savings program focusing on Europe and are adapting our verbund structures in Ludwigshafen. By the end of 2023, we will achieve the run rate of more than 300 million euros from our cost savings programs with a focus on Europe, as already indicated in our Q2 reporting. For the end of 2024, we now expect annual cost savings in non-production areas to reach more than 600 million euros. By the end of 2026, we anticipate savings of more than 700 million euros. These figures include measures related to Europe in the global business services and global digital services units. Additional measures in these two service units in other regions will contribute a further 200 million euros. Together with the 200 million euros savings from the adaptation of the verbund structures in Ludwigshafen, we are confident of reaching total annual savings of around 1.1 billion euros by the end of 2026. With that, back to you, Martin.

In the light of the current macroeconomic environment, we have significantly trimmed our capex for 2023 to €5.3 billion, €1 billion less than the figure of €6.3 billion announced in February 2023. In addition, we will reduce capex further by a total of around €3 billion over the next four years. For the five years period from 2023 to 2027, planned capex will be 24.8 billion euros, 4 billion euros lower than our original budget of 28.8 billion euros. While reducing the overall capex, we remain fully committed to our growth projects and our transformation towards climate neutrality. With the cut in capex, we are not only simply postponing projects and investments. We are reducing the number of projects, will implement alternative measures that involve lower capex, and take advantage of the subdued market environment to lower investment costs, as our procurement team in China is impressively demonstrating. On February 23, 2024, we will present the new capex budget for the planning period from 2024 to 2028. we are continuing to broaden the foundation for BSS' future profitable growth. In this context, let me provide you with an update on our Forbundzeit project in Zhangjiang. The project execution is on time and in budget. Last month, the second downstream plant for thermoplastic polyurethane, short TPU, successfully started up. We are stepping up our construction activities according to plan, and there are currently more than 15,000 construction workers on the site every day. The photo of the site shows the impressive progress that our team in China has achieved. We are taking advantage of the attractive financing conditions in China and are financing the Changcheng for Bunzai with a combination of around 20% equity and 80% debt. The equity is founded is funded by dividends from the BASF existing group companies in China. The debt financing will be based on the Chinese capital market and local bank financing. We are proud that BASF is able to independently execute such a megaproject in these challenging economic times. With that, back to you for an update on Windows Aldea.

We continue to pursue our strategic goal of selling BSS 72.7% share in Winter Saldea and are working on monetization options. Winter Saldea is currently in the process of legally separating its Russia-related business. The separation is planned to be completed by mid-2024 and marks an important milestone in the overall process. Significant federal investment guarantees are in place for the Russian assets. related claims are not accounted for as receivables in our balance sheet. They thus provide an upside potential. For the business year 2022, BASF already received around 290 million euros as common dividend from Vindasaldea. We do not expect any further dividend payments this year. Vindasaldea has adjusted its corporate strategy to reflect the changes in the energy sector and particularly its exit from Russia. Currently, Finder Saldea is reorganizing its company structure with the target of reducing administration costs by around 200 million euros per year. In the future, the management board will comprise three instead of five members. As part of the restructuring, the company plans to reduce around 500 positions. And now, finally, back to Martin.

Thank you, Dirk. Before we continue with the outlook, I will add a few more comments on our portfolio management. A few weeks ago, you may have noticed some media articles speculating about planned divestitures of parts of BASF Group during my term. Let me be clear about the specific businesses that were referred to. We have a clearly defined and known position on Wintersaldea, which Dirk just reiterated. We are very satisfied with the carve-out of ECMS, BASF's environmental catalyst and metal solutions, which was successfully completed in July. The standalone structure prepares the business for the upcoming changes in the internal combustion engine market. This allows strategic options in the future, but we have no intention to sell this business at this time. We are particularly satisfied with the currently very strong performance of our coatings division and have no plans to divest this business or any parts of it. As far as the Ellertissen site is concerned, we have confirmed that we are examining strategic options for this rather small food ingredients business that has only limited synergies with the rest of our portfolio. The optimization of our site footprint with around 240 production sites worldwide is generally an ongoing task. Now I will conclude with the outlook. In the fourth quarter of 2023, we expect global chemical production to further stabilize. However, in the current interest rate environment and in view of increasing geopolitical risks, the macroeconomic outlet remains extremely uncertain. In particular, rising raw material prices would weigh on demand and margins since pricing power is limited in the times of low demand. As announced in July, we anticipate sales of between 73 billion euros and 76 billion euros, as well as EBIT before special items of between 4.0 billion euros and 4.4 billion euros in 2023. We meanwhile expect sales and earnings at the lower end of this respective ranges. If chemical production does not further stabilize, there are risks from a further decline in volumes and a sharper than expected price reduction. we are maintaining the underlying assumptions for the global economic environment at the levels presented in July. Looking ahead, we do not expect an easy start to 2024. As soon as demand really picks up again, BASF will defend and expand its market shares with good competitiveness through leaner structures and good cost positions. In this way, we will provide powerful support to our customers worldwide. To conclude, I would like to state once again, an attractive dividend is of high importance for the BSF Board. This also holds true in challenging times. Therefore, our practice of keeping the dividend at least at the previous year's level remains unchanged. Our strong balance sheet, high equity ratio, and good credit ratings give us the necessary financial strength in this regard. Thank you, and now Dirk and I are glad to take your questions.

Yeah, ladies and gentlemen, I would now like to open the call for your questions. If you wish to ask a question, press star followed by one on your touchtone telephone. For the best sound quality, we kindly ask you to be sure to unmute your phone and use your headset when asking your questions. The first question now comes from Christian Feitz, Kepler-Chevreux. Please go ahead.

Thank you, Stephanie, and good morning also, Dirk and Martin. First question, can you specify and also quantify the insurance payment in agricultural solutions? And then my second question, if I might sneak that in, is how do you currently, and also perhaps with a few into 2024, see the underlying demand slash production volumes for the global automotive market? Thank you very much.

Christian, good morning. I start with the insurance payment. What I can say here, if we deduct the insurance payment from the Q3 results of agricultural solutions, we would have been more in line with average analyst estimates, which are slightly negative. So Overall, the slightly positive result that we get for EGG is on the back of this insurance payment. Insurance payment, as you might remember, related to a damage that was part of a third-party processing plant and reported negatively in EBIT BSI in 2022, and now this is turned back and compensated in this regard. On automotive, we stay positive. Automotive, besides EGG, these are the two businesses that really hold strong for us in the year 2023. And if you look into the stats in terms of units to be produced, you see that with a unit order of magnitude of 88.5 million units, this is a strong sector. And we are benefiting from that, particularly With our coatings division, coatings, again, very strong in terms of prices and volumes, had the strongest quarter in its history in Q3. And the other divisions also benefiting from the auto industry, a little bit weaker behind coatings, but overall a very positive picture for auto.

Thank you very much.

So the next questions are from Gunther Zechmann, Bernstein. Please go ahead with your questions.

Hi, good morning, everyone. Can I just ask on your revised CapEx budgets and the cuts, please, especially on the 2023 to 2027 one? a 14% reduction from original budget. So the question is, do you assume a lower chemical production now, and do you still hold on to your ambition to outgrow global chemical production, or would you be comfortable being diluted in volume terms if profitability is as low as it currently is in the upstream segments? Thank you.

Maybe let me also start with the China project because that's a big chunk of that. Let me clearly say that we are in budget here because the environment is actually pretty good for investments. First of all, the China inflation is very low. It was 1.9% in 2022 and it's only expect 0.7% in 2023. So there's no cost driving elements over there. And beyond that, also from the chemical side, From the contractor side, they are rather willing to make good contracts, favorable contracts for us to actually employ their people. And we also do not have the material price increase over there. So that's why our team made very, very good contracts over there. And let me really state here that we might even come below the budget at the very end with this whole project. So that's one contribution here. The second element is certainly that the utilization rate now globally with this demand crisis is rather low. And that means we have to first fill our plants again. I don't think that happens overnight. That gives us also some time to consider and to think when do we do expansions and what is the right staggering, which projects we might hold back longer. So that's a kind of a postponement part. But we will also look in the number of projects. We want to reduce the number of projects. And I think that's normally what engineers come for. They also all the time have steel and iron solutions. You can also solve some of the topics by measures that need less capex, organizational and alternative ones. And that is two elements that very clearly contribute to this. We will not refrain from our growth targets, very clear. So we will not let ourselves dilute, but we simply keep our discipline here. And I think in this environment, this is the right thing to do. And I would expect that that will really give a good development for BASF to be a little bit more tight here on the capital in the years going forward.

Very clear. Thank you.

Okay. So we move on to Sam Perry, UBS.

Hi, thanks for taking my questions. Two, please. Firstly, on inventories, you are around $1 billion lower than at the end of 2022. How much of that is a function of reducing your own volumes of inventory and how much marking to market for lower prices? And how much scope do you have to reduce this further by the year end? And then secondly, a more strategic question, and I acknowledge your comments in the opening remarks around dividend payout retention at these levels this year. If I think longer term, perhaps once you've managed to exit the Wintershall asset and noting that the dividend from Wintershall has historically not been an insignificant portion of the free cash flow, do you think there would be scope for a discussion around resizing after this? Thank you.

Maybe I start with the inventory question. So we have it both. We have a significant reduction in the inventory volume, so the OIVs. We also have certainly backwind from FX and prices, but a substantial part of the inventory reduction is coming from the volumes reduction. So we really started here a structural inventory improvement program, which is a rolling program that goes further and further. And we are intending to continue with that. Just to give you a glimpse of an idea, we were in the years until 2017 running our inventories at a level of $10 billion and still able to generate EBITDAs at a level of $10 to $11 billion. And I think this indicates, now we're currently sitting at 15.1 billion, that there is still room for improvement, and we will vigorously continue with that.

Yeah, over to Martin. Yeah, Sam, to the dividend. I mean, I will not give any indications further for the future policy, but there's no reason to now change anything in our policy. guidance for the dividend policy. And I think what is also clear, we are in a business that has a certain cyclicality. We all know that. And for that reason, it's also important to hold expectations here. We had also in the past, in the 2014, actually, a cash flow, a free cash flow that did not support the dividend payout. Also, by the way, in 2020, we And in 2014, we increased the dividend. In 2020, we kept it. So I think this is an important part to monitor this and to also manage this. And I think given the fact that we have a very stable and solid balance sheet, that we have a good credit rating, that we have a high equity rate, so that is all supporting that we can manage this. You also know that basically the top which comes on top of normal BSF activity is our China development. And this will then also add something on the CapEx side in 24 and 25, but then also return on normal levels. And I think we have to be clear that the China investment, where we are convinced that this is a very important one, supporting also the growth of BSF, is actually one source of the future growth. capability to pay a dividend. So you said something about the winter-sized dividend, which then might go out if we exit, but we add something with the new verbund side, which will encourage us and will also enable us to pay good dividends also going forward. So I think this is what I have to say about this.

Thank you very much.

So now the next questions are from Matthew Yates, Bank of America. Please go ahead.

Thanks, Stephanie. Morning, everyone. Martin, when you took over as CEO, one of your priorities was to get better downstream performance. I appreciate it's not been an easy environment at the moment, but to see the nutrition and care division loss making is quite a dramatic outcome for a business with eight billion of capital employed. What's the strategy here to improve the profitability of the business? Is it simply just a matter of waiting for the volumes to come back? or do you actually need to demonstrate some more market leadership in terms of your pricing strategy, especially around vitamins? And then the second question, if I can, again, Martin, perhaps for you, but I'm a bit confused on the strategy for the autocatalyst business. I mean, typically when a company carves out an asset as a separate legal entity, it tends to signal the start of the disposal process, but you were pretty vocal in your remarks that that wasn't the case for BFF, at least not at the moment. So what additional operational strategic flexibility does this carve out give you in navigating that transition in the combustion engine that you referenced? Thank you.

Yeah, Matthew, maybe from my side, a little bit to the downstream situation. I mean, the downstream is a mixed bag that is very clear. But if we look on X-Chemix, X, which is performing very well, I think we clearly improved the performance I think also the industrial solutions actually provide a very stable performance through difficult times. We talked about coatings that has its really super run now, even in this difficult time. So I think we have to really differentiate a little bit the few on our different downstream pieces here. The nutrition health, very clear, we are not confident with that. But if we compare in that case also the numbers of our major competitors, By the way, one also is releasing numbers today. Then I would say we have also very much a market topic here, particularly in the vitamins business, capacity topics, overcapacity topics, but also a very weak and soft market development. So we have actually already in July 2022 announced that we are restructuring the nutrition business. We have actually brought together the human nutrition and animal nutrition nutrition business units into one business unit, which is nutrition ingredients. So that's a repositioning ourselves as an ingredients provider. And you know that our very strong, also for integrated aroma chemicals, citral, vitamins business is actually going into both areas and markets on human and animal, and also the character nights with this. Let me also mention that we are very confident going forward because with all the investments we have done in vitamin A, both in capacity but also formulation side, we have a very clear indication that we, also in the past, but even better in the future, have the best cost position in the industry. Is that, let's say, a situation that improves tomorrow? It most probably will be some battle, but normally the strongest goes out from the yard as the strongest, and I think this will be also the case with BASF. So it is a repositioning, it is a a partial restructuring here, but I think we have good cards in our hands to go on with that business in a very strong part and in a strong way and contribute also to the downstream performance of BASF in future. And with that, for ECMS business and to Dirk.

I take the ECMS question. So first of all, we are very satisfied with the carve-out. It was completed exactly as we hoped for. And now we have their business fully dedicated. It's an excellent go-to-market organization, lean back-end structures, service structures, dedicated ERP systems sitting there. And we think it sits in the right place. It is very industry-focused. And I think important is here to understand this business is still very cash-generated, fully invested, highly profitable. and it has a long tail. I mean, it's a sunset business ultimately because everybody is clear that the combustion engines market will not last forever. What we believe that there is a quite noteworthy period still, and we are enjoying very much this business. Does it also create flexibility at the end if you have such a business carved out? This is certainly the case. But let me be very clear. So the first and foremost intention was really to profile the business better in the BASF group of companies and not to divest it.

Understood. Thanks a lot.

So now we come to Chetan Udeshi, J.P. Morgan. Please go ahead.

Hi. Thanks for letting me ask questions. I think the first question I had was you mentioned the impact from cracker outages in the U.S. and China. Are these crackers even profitable at these levels? I'm just trying to understand whether you actually lost any earnings because of these outages or actually it saved you from having bigger losses in your upstream business. That's the first question. And the second question I had was, you know, I see you are sort of implying Q4 to be sequentially down versus Q3, which is normal seasonality. But if you have to, you know, if you can give us some sort of feel of how you see the earnings development by different sort of segments as we think about Q4 versus Q3, I think it will be useful, especially given the number of moving parts on energy costs and, you know, clearly now the NAFTA prices are also going up, what it means for your upstream business. And last question is on your ag business. Of course, we've seen a few of your peers seeing significant earnings pressure. I think so far from Q3 perspective, you know, you've had very weak volumes but also much better pricing. Can you talk about what you see in Q4? Because I think your peers are talking about weaker LATAM prices. demand for the ongoing season in LATAM. How do you see that dynamic in volumes and pricing play out in Q4? Thank you.

Chetan, Dirk speaking. So maybe I take the first and the last question, starting with the cracker. Yes, indeed, we would have loved to avoid the cracker outages because both profitable. The one in Nanjing, China, which is already on stream again, So there the impact was, I'd say, limited also due to the short time of the outage. So this was a mid-single-digit million amount. The harder hit was the cracker in Port Arthur, which is now, as we speak, being ramped up again. And here we are talking a double-digit, mid-double-digit amount. So, yes, we would have loved to avoid that. Unfortunately, it hit us. But the good news is that the one cracker is on stream again and the other is about to be on stream again. On the X situation going forward, and you refer to the competitors who are also coming with not so good forecasts into the press. But I'd say if you take them, and I'm not now going one by one, there's always special situations why the performance is as it is. I think we this year have, in terms of portfolio, also in terms of timing, we had quite a preferable situation with strong pricing power overall with a very strong first half of the year. And now, obviously, in the second half, first of all, it's anyway the weaker half of the year. There's high seasonality in the business, as we know. And also we see now that the southern hemisphere, first of all, is delayed. It is coming later in than in the previous years, and it's also coming a bit weaker. So we also see that. But I'd say we are in a comparatively resilient situation compared to what you might have heard elsewhere.

Chita, maybe a couple of comments to Pew4. I mean, if you look on what is now missing and look in the order of magnitudes here, let me first of all say that the average of the Q4 since 2004 was around 900 million. We had only two years that was since 2004, actually twice where it was below 500. So that were the low ends. And this is the order of magnitude we need to close the gap to the lower part of the guidance. We are confident that we can reach this. This is why we keep the guidance. One element is certainly that everything you can do in-house, self-help measures, cost containment. We have a very high cost discipline. You see all of the discipline here with the inventory. So the troops are really aligned and do the utmost to avoid any surprises here. If you look a little bit on the market side, we clearly say this. We see that order entry is really stabilizing. we see a surprising uptick in China, I have to say. India certainly was anyway a little bit more resistant, which does not give too much effect because of the market size. But China is a significant part, and actually some of the plants over there are pretty much loaded again. And we will actually close the gap to volumes from last year, or most probably for the whole year, quite nicely. The problem is that the margins are not too high because of Also, let's say the supply-demand piece here. Dirk said already a little bit of automotive, which I think as an industry will also help us. We don't expect that this is now softening until year's end, and we certainly hope that we get maybe also a little bit of tailwind by the whole stabilization. So that's the ingredients, how we think we can manage Q4 to close the gap to the lower end of the guidance. I hope that helps you a little bit, Chita. No, that's useful. Thank you.

Now we come to Charlie Webb Morgan Stanley. Your turn.

Morning, everyone. Thank you for taking the questions. Maybe one just kind of following up on a few points there, but just around the oversupply situation you see more holistically across upstream chemicals and how you see that playing out kind of through 24. You obviously talk about demand returning, but when you look at kind of historical context of where supply and demand sits today versus the past, and the likelihood of your expectations around a demand recovery, is it the case that it's just demand that's going to get us there? And kind of over what timeframe do you expect that to play out? Or do you think now actually we need supply to come out of the market? And if so, are we seeing any signs of that? It feels like holistically Europe's now top of the cost curve, maybe wasn't in the past, and therefore perhaps should be the one taking capacity out. So just trying to get a sense on how that oversupply situation kind of resolves itself and your view on that, looking through into 24, into 25. And then just another one around China. Obviously, at the start of the year, we were more upbeat, and I think yourself, around China's growth prospects for 23. Obviously, that hasn't really materialized, perhaps at the pace that people had hoped, albeit you're citing some positives now towards the end of the year. Looking into next year, You know, do you think anything has changed versus the past in terms of the growth algorithm for China as it relates to chemical consumption? Or are you still very convinced that the kind of the growth consumption levels you've seen for chemicals in China is unchanged? Thank you.

Charlie, maybe let me start with the last one. Yes, we have expected that there will be more impulse from China in 2023, second half. That was how we started into the year. And I think we have to clearly say the world had to learn that also China cannot walk on water. So it is a little bit more difficult for them also to kickstart their industry. It has also to do with their growth model. I would expect that in the longer run they will change this in a way that is also more driven by green tech because currently too many apartments empty and certainly the value dropping for people who put their saving monies into apartments is not really helping. Then the whole infrastructure part, which was strongly built. You cannot build continuously airports and fast railway tracks and harbors. That also comes to an end. And the export is also going down by the weakness in the overall situation. So that is not helping China, and it's also not easy to solve this. Nevertheless, we look into this regularly and the fundamentals of China. Also, if you look in the per capita consumption, is so distanced from Western lifestyle that there is, even if you are conservative, at least for the next 10, 20 years, enough substance to make China grow and growing. And that is actually what we do. And I think we are lower on the rates over there, more in the 4% range than higher. And that all makes still a lot of sense for our investments over there. So with that, long-term, fine investment. but maybe in the short term a bit more bumpy than we actually thought. You talked about oversupply, not a totally new situation, and you know that it's very difficult to make statements here for the whole portfolio of chemists. You have to look into this by product lines. But also in the past, we had had situations where we thought the overcapacity is for a decade, and then actually... with a strong demand increase that was gone after two or three years. So I would confirm what you said. The major topic currently is really an extremely low global demand. And I have not seen it in my 17 years of board membership here in BASF, that really across all regions it was so incredibly low like now, and by that also including China. I think if you look into the lines, I would say there is – A very few ones where you have maybe a little bit more doubts whether this is getting in line again. But for the most of the chemicals we have actually, it is a bit more challenging. Some capacity is coming up. But I think nothing that would worry me now to fundamentally change our, let's say, timeline in investments and so on. So I think once the global demand comes back, I think – that will drive margins, that will drive the whole business, and will bring supply and demand at least overall over the portfolio closer together again.

Maybe just a really quick follow-up on that point. I mean, can you give us any sense where your kind of utilization rates kind of fit by region, just roughly? I mean, you talked about China loadings being pretty high. You're getting to a pretty good level. But, you know, how does that compare in Europe and how does that compare in North America?

I mean, I will not give you that by region. I would say currently on a global level that's between 60 and 70s. If you go to normal times, you are in the 80s somewhere or up to 80, slightly above 80. So that has a regional, let's say, difference here. But if I tell you that, and I was in China last week, that our team told us that some of our plants are pretty much sold out again in China, then this gives you an indication that they run quite nicely on steam. The problem is really margins and prices.

Thank you very much.

Okay, since we have a few more analysts on the line, ideally, please limit yourself to only one, maximum two questions. We will now move on to Jaideep Pandya on field research, and we'll then have Andreas Heine and Laurent Favre in the following. So now, Jaideep Pandya, please go ahead.

Thanks. First question is just on your interest costs. You have about $3 billion plus of debt to refinance in 2024 and 2025. So, Dirk, could you just give us some color what will be the interest costs or what could be the interest cost increase in 2024 as you refinance some of your debt? And then the second question sort of links back to the inventory point you made. If you think that you are still reducing inventories next year, should we then think that you will continue to sacrifice utilization for reducing inventory? And therefore, even if demand does go up, you should not get overly bullish, at least for your upstream business, for materials and chemicals. Thanks a lot.

Yeah, thanks for your questions. Maybe on the interest cost first. Yes, we are in a higher cost environment, but it's a mixed picture because on one end side, we are financing in the various regions. China, for instance, is a still low interest cost region. And all together, you also saw that we were able to keep our... debt level on the level of last year same time. So therefore, yes, the interest cost is going up. You see that in our financial result also, but the effect is limited. We are talking on the short-term time for the commercial papers. We are talking roughly 30 bps, and on the longer-term financing, we are talking roughly 25 bps, and this has an an impact on the financial results, I'd say roughly in a double-digit area. On the inventories, as I said, we vigorously will go forward to trim the inventories further without sacrificing because we feel that we are sitting on a too big bag of inventories. So what we are doing is rather structurally optimizing over time but there is no arbitrage saying cash is more worse than the earnings, but we really try to balance that out. And rather I see it like bringing inventory levels back to the healthy level rather than sacrificing anything else.

So the inventories are more on the finished goods or on raw materials? Or is it everywhere?

You have it everywhere. You have it on the raw materials, on the finished in transit, all categories we are looking into. Thank you.

So now we move on to Andreas Heinisch. Stiefel, please go ahead.

Yes, two very quick ones. The first is on the volume sequential decline. Is that what you think is a normal seasonal pattern, or is that... in some areas more pronounced, so maybe you can highlight where you see still a downward trend in demand. And lastly then, on inventories, you have shown the various indicators in industries. If I look on one from the chemical industry itself, from Civic, their inventories are seen as much too high, and the chemical industry is an important customer for B&S. How do you see within the chemical industry the inventory levels?

So the first one on the volumes for the sequential decline, I think it is important to understand without EGG, which is by its nature a cyclical business, sorry, a seasonal business, we do not have seen volume decline between the second quarter and the third quarter. So i.e. without EGG, which is a seasonal business, We have flat volume development, as was already indicated by Martin also in the Q2 call, that we see a bottling out in terms of the volume trend, and this is exactly what has happened. Inventories, we talk about our inventory management, and of course we are also seeing inventory efforts going on at our customers. And this is also explaining why we currently have this supply-demand balance where it stands and the margin pressure that we have. Ultimately, this is now going on for quite a while, and we see and believe, talking to our 82,000 customers, or at least many of them, that the destocking and tight inventory management, as it was done, is coming to an end. So we see that bottling out, and we'll eventually then also see demand again coming up. The magic question is when exactly is the tipping point. But for the time being, of course, this prudence in inventory management also in our sectors that we are servicing, of course, plays a role.

Okay. So with that, we move on to Laurent Favre, BNP.

Yes. Thank you, Steffi. Good morning. First question is on the rating. Dirk, you mentioned, you've highlighted that you've got a stronger rating than peers. I was wondering if you could remind us, why is it so important for a business such as yours to have a single A rating? And is the rating more or less important than keeping a stable dividend? First question. The second question is, well, I'm a bit confused on the Sanjiang side and the 4 billion cut in CapEx. Martin, you've mentioned that you may come under budget on that, so it doesn't seem to be the area where you've got the CapEx cut. So are you still, I guess, is it all about cutting everything else, or are you also implying there's a change in the startup for Phase 1 and Phase 2 of 2025 and 2028? So is some of the cut in CapEx just falling after 2027? Thank you.

Maybe I take the first question on the credit rating. Indeed, I can confirm that an A credit rating is important for us. We are also able in this challenging year to maintain the A rating. We are at A- now at Standard & Poor's and equivalent at Moody's, and we are at A- at Fitch. It is an evidence of our strong balance sheet that also Martin talked about, and so therefore, Also, of course, I think a sound justification for a strong dividend because what we try to do is really balance out for the equity and for the debt capital markets. And we are demonstrating here with the strong rating also the strength of our balance sheet. And second one, also the very strong cash performance that is taken into account by the rating agencies. So it is important for us. It is not the one leading indicator for us because, of course, we are looking into other things as well, but it is one of the cornerstones of our financial policy, and thus we are happy that we can also in difficult times preserve a strong A rating.

So, Laurent, maybe again a little bit on CapEx. I mean, first of all, We are very happy that we made great contracts at the right moment, I have to say, for Changcheng. As basically most assigned, there's not a huge risk anymore that things could get out of control. The only thing you have is the RMB euro exchange rates because we account everything in euro. So from that perspective, we feel really good when it comes to that project, and I think I mentioned that. We might even come out at the very end a little bit lower than we actually expected over there. We also talked about supply-demand and everything, and you know that if you have such a big project that you have the timing at the best time to enter the market, you can never really plan this. So I would say the phase two, which is then going to come, where we work on, we will look into this at a later time, and we then really also know what is the right product. Is there some products that go wrong? into a phase three. Others go from three to two. So we have not defined that final part. And we might take adaptions depending on the market situation. But that's too early to say. What we really want to do is that we take savings out through the whole portfolio, through all the businesses. I think you know that we have normally more projects than actually capital, which is good because all the investment projects are in a natural competition, also internally. And we will look then on the different market perspectives, how we stagger them, how we prioritize them. And I think one element is clearly also we have now to fill our capacities again and how fast Europe will come back, which is certainly the most challenged one in terms of competitiveness. This is also foreseen, and this is why we said the $3 billion, I think we have clearly the intention to take out in the next years, because that is also the years that are still challenging with finalizing the Chan Chang site. So I don't talk about the end of the period, but really on one that contributes to BASF performance in 2024 and 2025. So I think I'll leave it with that because I think further I cannot go. Thank you.

We have one more financial analyst on the line. That is Peter Clark from Societe Generale. So now your final questions.

Yes, thank you. Can I follow on that, Martin? I know you're giving us a profile again next February, but I'm writing thinking obviously with the China plant, even if it's coming in a bit light against the regional expectations. Next year is the big year for capex spend in terms of this profile. So 24 is still the bigger year of capex spend when we look at the 23-28 timeframe. Thank you.

I think clearly say yes, that is absolutely the case, like you said it.

Thank you.

Ladies and gentlemen, we are now at the end of today's conference call. Let me take this opportunity to draw your attention to an event we will host in Ludwigshafen on Thursday, December 7. The BASF investor update with our CEO and CFO will begin at 2 p.m. CET and at 6 p.m. participating analysts and investors will be invited for dinner with further board members. Taking 2018 as a starting point, Martin Brudermuller and Dirk Elvermann will provide an overview of what strategic measures have been implemented to date and what action items are in the pipeline. Among other topics, Martin Brudermuller will give an update on BASF's carbon management program. Should you have any further questions today, please do not hesitate to contact a member of the BASF IR team. Thank you very much for joining us today and goodbye for now.