Basf Se S/Adr

Good afternoon, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the codings transaction BASF and Carlyle announced today. Besides analysts and investors, journalists have joined the call. In the first part of the Q&A, we will address questions from financial market participants. We will then move on to questions from attending media participants. During the media Q&A, we are happy to switch to German if preferred. Both audiences, please be reminded that on today's call, we will only answer questions related to the coding transactions. No other topics will be discussed. The conference call is being recorded. All participants will be in listen-only mode throughout. 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. 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 CEO Markus Kamid and CFO Dirk Elverman. Now, I would like to hand over to Markus.

Thank you, Steffi, and good afternoon, everyone. Welcome to this conference call and thanks for making yourself available on such short notice. As announced an hour ago, we have reached an important milestone in focusing our portfolio and unlocking value. BSF and Carlyle reached a binding transaction agreement on BSF's coatings business. Our goal is to jointly create a leading standalone coatings company. Our coatings business has everything it takes to win. outstanding market positions, deep technical expertise, and trusted customer relationships. And of course, a world-class team, the best in the coatings industry. The business is highly focused on automotive, including the collision repair aftermarket. In surface treatment, it also serves the aerospace industry and various additional industrial applications. These are large markets with high customer loyalty. In 2024, BSF Coatings, excluding the decorative paints business we already divested, generated sales of €3.8 billion, around €1 billion in surface treatment under the Chemital brand, around €2 billion in automotive OEM coatings, and around €800 million in automotive refinished coatings with the Glaserit, RM and other leading brands. Our agreement with funds managed by Carlyle in partnership with Qatar Investment Authority is a significant step in unlocking the value of BSF standalone businesses. The enterprise value of the transaction amounts to 7.7 billion euros. Subject to customary regulatory approvals, the transaction is expected to close in the second quarter of 2026. At closing of the transaction, we will hold a 40% equity stake and will receive pre-tax cash proceeds of approximately €5.8 billion. We stay invested with a minority share because we believe in coatings' future value creation and its upside potential, building on today's success to shape an even stronger future. The agreement with Carlyle is based on the principle of partnership. Their sector experience will help position BASF Coatings for long-term success. Carlyle will leverage its strong track record and extensive experience in successful carve-outs of industrial and chemical assets. Merging the strengths of BSF Coatings with Carlyle's capabilities will open new opportunities for the team to create additional value. This will drive accelerated growth and support the team to unlock its full potential as a standalone entity. For us, as a minority shareholder, closing the transaction with Carlyle in the second quarter of 2026 will be the next big step in implementing our winning ways strategy with speed and determination. Together with the successful divestiture of BSF's decorative paints business to Sherwin-Williams, which we closed last week, BSF's entire coatings division is valued at an enterprise value of 8.7 billion euros. With the two coatings transactions, we are realizing a significant premium compared with the valuation of the division as part of BSF Group. The implied 2024 EV over EBITDA multiple before special items of approximately 13 times is evidence of that. And now, Dirk and I are glad to answer your questions.

Ladies and gentlemen, I would now like to open the call for your questions. We begin with the financial market participants. If you wish to ask a question, please press star and enter 11 on your 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. Please limit your questions to only two at a time so that everybody has a chance to ask their questions. We will begin with Tom Rigglesworth, Morgan Stanley, and then move on to Christian Freitz and then Jeff Herr. So now Tom Rigglesworth, Morgan Stanley.

Thanks very much, Stephanie. Thanks for the opportunity to ask questions, Marcus and Dirk. My two questions. Firstly, in terms of your holding of the new entity, your 40% stake going forward, How do you see yourself realizing value? Is there a tenure at which point you would exit, or do you envisage holding that stake in kind of perpetuity? I'm just kind of interested to see how you see future value realization from that 40%. And my second question, if I may, is, The pre-tax proceeds of 5.8 billion, is that just for the stake for the 60% of BSF coatings? Because for 60%, that implies not a 7.7 billion EV. So we're all a little wondering how we get to the 5.8. Thank you.

All right. So I'll take the first part. And the second part, I trust that Dirk can give you some clarity on this. So, Tom, thanks for your question. The 40 percent holding is, of course, is a testament to our confidence in the business and also confidence in what the partner brings to the table and really confidence in the business plan and the value creation potential for this business going forward. Now, of course, the idea is that at one point and as normal with a investment fund or private equity company, there is, of course, going to be an exit at one point in time. And our, let's say, ingoing hypothesis is that we will also jointly be working on this exit at one point in time. But other than that, everything else is, I think, right now speculation. But you can trust that we and our partner are clearly aligned on the value creation plan and also on potentially creating the conditions for a joint exit.

Tom, hello, this is Dirk. I take your second question. You should look at the transaction as being a 7.7 billion transaction for the enterprise value. And it is an equity value of altogether around about 7 billion. Out of that 7 billion, 5.8 billion pre-tax will be paid in cash upon closing. And the equity stake that we have in the joint venture where we hold the minority position is worth, I would say, around about 1.2 billion. Now, there must be a little bit of rounding for the closing accounts approach that we have taken. But I think basically these are the elements, 5.8 cash, 1.2 billion paper, and the rest is the bridge to EV. Thank you both very much.

So now Christian Feitz, Kepler Chevrolet. Please go ahead.

Yes, hope you can hear me. Good afternoon, Markus, dear Stephanie and team. Congrats on the transaction. I also have a question on that 5.8 billion pre-tax proceed. Can you give us an indication of the estimated tax burden you will have on that? And my second question would be, Is there a contractual minimum timeline to divest these 40%? I know, obviously, Markus, you already talked about the rationale for the 40%. And if that 40% eventually is being sold, is that packed to any milestones, profitability goals, et cetera? Thanks very much.

Second question, Christian. Thanks for the question. Second question, I can, to both parts of your question, I can say no. Relatively straightforward and now text, Dirk.

And, Christian, for the tax, it is, I'd say, up to a triple-digit million number of tax leakage. Not sorted out in detail, of course, but that, I think, is the maximum we have to incur.

Okay. Thanks very much, and good weekend.

We move on to Jeff Hare, UBS. Please go ahead.

Yeah, good afternoon. Just kind of come back on the 5.8 billion. So if the equity value is 7.8 and you're getting 5.8, that means that's 82% of the 7 billion, not 60%. So I think there's some confusion as to why there's such a difference between what the implied 60% value would be and what you're actually receiving. I was wondering if you could just help us understand the difference.

Look, Jeb, this is a result of a negotiation, and this is how the transaction looks like. We, after a, I'd say, very competitive bidding round, came to a compelling conclusion with Carlyle, and it was the agreement that BASF will receive $5.8 billion in cash upfront. And so the rest is, if you will, then the residual amount, because I gave you the entire view for equity, which is 7 billion. Do not maybe try to find more rocket science in it. I think it was a competitive transaction. And here we go with the result.

Okay, thank you.

So now we have Gabriel Simons from Goldman Sachs. We will then move on to Tony Jones and then have Alex Vigil. But now, Goldman Sachs. Please go ahead, Gabriel.

Hi, all. Thanks for taking my questions. So I have two. The first one is on the planned increase in margins that you had for this division that you presented in the CMB of 2024. So you basically mentioned an increase of around 400 beeps. for the margin, so just wanted to understand how far ahead you are with that plan, how much upside is still left, and if this was one of the reasons why you decided to keep a stake in the business. And the second question is regarding the CapEx requirements, so still, given that you're still invested in the business, how much should we expect in terms of CapEx for the remaining portion that you still have? Thank you.

Again, Dirk, let me take these questions. I think it is fair now, just announcing the transaction. We are happy with the margin development. But from now on, and with regard also to CapEx going forward, I think we should not preempt it and speculate. BSF will hold, after closing, a 40% minority share, will be a financial participant in this joint venture project. And it will be up to the operating equity partner, which is Carlyle, also to strategically steer that. So I don't speculate on the CapEx with the business, how we bring it into this joint venture. I think we are confident and happy.

Thank you. Maybe, Gabriele, also, Markus, just to reconfirm, I mean, we have announced financial ambitions, also target margin ambitions for the coatings business. And I can only say, you know, through the first half of 2025, we are extremely happy with the performance of our coatings business, also relative to peers, as we have also indicated last week, especially since the announcement of the new strategy, the team has done an outstanding job of delivering both on the P&L as well as on the cash side.

All right, thank you.

We now move on to Tony Jones. Rochelle, please go ahead.

Oh, good afternoon, everybody. Thank you for taking my questions. I've got a couple left. Related to that, with your equity stake, would the cash restructuring charges be allocated across the new ownership structure? And then in terms of transaction terms and conditions, are there any assets or employees which are off limits from restructuring and any barriers to additional bolt-on transactions through the life of the new entity? Thank you.

I'll take the second part, Markus. I'll take the second part. There are only, let's say, very customary... conditions with regards to employee protection, for example, that are not out of the ordinary for such transactions. I don't want to disclose any details here, but there's nothing out of the ordinary involved in the transaction agreement. And your second part of the question was anything of limits. I don't I wouldn't think so, but no.

Tony, to your question on any extraordinary activities and encumbrances. So first of all, not again speculating. First of all, this is a going concern. We bring this business in good standing into the joint venture. And then again, it's up to the majority partner Carlyle also to set the strategic direction and everything that will be done within the joint venture will then also be shared in the joint venture. So it's a full joint venture structure. So in this regard, nothing unusual. It's a market standard transaction. Great. Thank you very much.

So we move on to Banco Santander. Alex Vigil, please ask your question.

Yes, hello. A key question for me is also the use of proceeds. I don't know if it's part of this call, but I would love to have your thoughts about the use of these 5 billion euros that you will cash in. And the second is, and some of my colleagues have something similar to you, if you see this 40% stake in coatings more as a source of dividends, more cash, or is more on the growth M&A side? Thank you.

As I said in my statements as well, I mean, we believe in the future of this business and we believe that in this combination together with Carlyle, we have significant additional value creation potential because of the strong market position that the business has in all of the three areas. global business units. So for us, it is a clear commitment to capturing part of that value. And of course, eventually also participating in a successful exit together with Carlyle. That's the driving force. That's why we stay invested. And that's why we also mentioned this here so clear as a commitment and as a clear commitment vision also that we see the strength of this business and as you know also I personally like this business very much. Second part of the question maybe to Dirk.

And just to clarify I mean there is also then in the still to be worked out financial policy certainly also right to retain dividends so this is not excluded but as Markus said this is not our first priority at this point in time. Now, coming to the cash proceeds, and this is exactly as we communicated a week ago in our capital market update. So cash proceeds will be used in line with our capital allocation framework. And this means that we will use cash proceeds certainly to strengthen our balance sheet, i.e. to deleverage. But also, as I mentioned last week, share buybacks may start earlier than 2027. Thank you.

Okay, now we have Chetan Udeshi, JP Morgan on the line. He will be followed by James Hooper and then Oliver Schwarz. But now, Chetan Udeshi, your turn.

Yeah, hi, thanks, and congrats on the deal. I just wanted to check one thing, Dirk. Did I hear you say the maximum tax outflow you said is triple-digit million, so it will be up to 100 million? Is that my understanding is correct? Second question is, I was just curious, you know, retaining the stake, it seems it's more from you, you know, as BSF management team that you actually wanted this minority stake rather than the buyers probably forcing you to do that. And I'm just asking this in the context of having done the same with Wintershall and Harbor Energy, you know, you were issued... You know, Harbor Energy's stake at value of 360p, and now the Harbor value stake is 200p. So I was just curious, why not take what you get right away? Or maybe you were probably, you know, it was required as part of the deal for you to keep the stake. I'm just curious, why not take what you get? Because with Harbor, you know, it's not been the right strategy so far based on the value of the Harbor share price. Thank you.

I'll take the second part and then Dirk again goes to the text question. If you have a negotiation on a deal like this, it's a little bit I don't know if it's so helpful to look back who asked for what. I think at the end of the day, it's a meeting of the minds. I think it's a really win-win situation for both partners here, because we believe in the business. We believe that this business has a good future, has a value upside. And of course, also from the other side, there was the appreciation that this also is, that BSF has a lot to bring in also as a as a shareholder into this joint venture. So I think it's more of a meeting of the minds kind of thing. It's, for me, a perfect combination of interests. And I don't think your reference to Haber is a very good one, to be honest. I think if you want to do a reference, my closest reference would be the exit that we had on the water and paper side with Solanus, where we had a very successful partnership with a private equity company at the time. We took a minority share and we participated in an exit that brought us multiple of the actually standalone value that we had in our water paper business. So that's kind of if you want, if you're looking for a reference and a model, that's the model that I would choose. And that's what we have in mind here. And so I think if you would ask Carlyle, they would probably see it the same way. It's a real win-win situation.

Chetan, I'm grateful for your clarification question on the tax leakage. I hope I said, or at least I meant to say, mid-triple-digit million amount in terms of tax leakage as a maximum.

That's both very clear. Thank you both. Thank you.

Thank you.

James Hooper, Bernstein. Please go ahead.

Hi, both. Thank you very much for taking my question, and congratulations on the deals. My first question is that, Marcus, you referred in your speech to a value creation plan. Has this been set between you and the other shareholders? And do you have a say in this? And I guess it kind of leads on to the question that some firms looking at it would be thinking of breaking up the businesses. Would this be something allowed by the plan? And then the second question is about governance and whether you're expecting lots of BFF management time to be spent there and what that looks like. Thank you.

Yeah, James, Markus here. Relatively straightforward. I mean, Carlyle, as a majority shareholder, certainly is the controlling party here, has certainly behind their their bid for the business, a very detailed value creation plan and business plan. This is not ours to look into or decide on. The value creation plan is theirs to deliver. And with regards to governance, we have agreed that in the future board structure of the joint venture, there is a certain share between BSF representatives and Carlyle representatives or Carlyle-nominated representatives. How big the board will be, I don't really know at this point in time. Maybe it's not even fixed yet, but the ratio will be the same, and that will be the governance. So we will appoint BSF people into the board of this company.

Thank you. So we now move on to Oliver Schwarz, Warburg, and we'll then have Laurent Favre, followed by Jaidi Pandia. But now, Oliver Schwarz, please.

Yes, thank you for taking my question. Just one remains from my side, and that is, after the closing of the deal, will this entity be recognized in BASF's balance sheet as an integral company accounted for using the equity method, or would it be a non-integral company, which basically implies whether it will be part of BASF's EBITDA or not.

Yeah, Oliver, Dirk speaking. I take this one. As of closing, that's for sure, BSF's minority stake will be accounted for as a financial investment under the equity method, and it will be reported in the EBDA before special items, probably in the segment of other, whether there is the distinction still of relevance for integral versus non-integral. We'll have to see after implementation of IFRS 18, but I think very clear where the category sits. Thank you very much.

Okay, so now Laurent Favre, BNP Paribas Exxon.

Thank you, Stéphie. I just have one clarification question. I'm really sorry, I have to go back to that 5.8, 7.7 bridge. Derek, you mentioned that the The equity value, your 40% equity value, would be around $1.2 billion. And that would imply, I guess, that the whole equity value would be around $3 billion. So am I correct to assume that the entity will have more than $4 billion of leverage, i.e. six, seven times leverage?

Laurent, Deb speaking on the leverage. This will certainly be a joint venture levered up according to market practice in such a combination case. You will probably have seen higher leverages also. um with a with a leading pe so um not not too concerned about it and for the equity i just do the calculation the other way around we concluded on an equity value of the 5.8 plus the 1.2 the rest comes naturally via this equity to ev bridges i said don't try to apply more rocket science to it And as for the leverage, as I said, I think customary for a deal of this nature.

Okay, thank you.

Jaide Pandia, On-Field Research, please.

Thank you so much. Just two questions. Firstly, it's a little bit overall auto's question for BASF's exposure to the auto and market. Will this meaningfully change your positioning in the auto and market? And strategically, you know, how are your customers going to react to this? Because BASF has obviously been a very strong and a reliable partner for the auto industry. So how does this strategically change your BASF positioning in the auto sector? And the second question is really around the goodwill that you're carrying especially around the Kenna Metal acquisition that you did a few years back. Can you just remind us what is the goodwill that is on the books for the coatings asset? And will there be any impact from the equity value that you've sold a business or the transaction that you've done today with? Thank you so much.

Thanks, Jetty. I'll take the first one. Of course, our, let's say, relationship to the automotive industry, as you have said, is deep, it's broad, and it's also characterized by a strong innovation partnership in quite a number of businesses, I have to say, from automotive fluids to performance materials, so everything, plastics, polyurethanes. to automotive catalysts and also, of course, the coatings business. So there's a lot of deep and very sound relationships we have with automotive OEMs and the Tier 1 ecosystem. Of course, there is a certain expertise, a certain, let's say, weight that also BSF Group has with all these different businesses. But if you really look at it operationally, there's also very little synergies between the business and the actual execution. And this is also the setup that we have discussed last year in the Capital Markets Day when we went in this direction of creating standalone businesses. And I can say a little bit bluntly, I don't think we've ever sold a pint of paint more because we have a nice automotive catalyst business and the other way around. I think it gives us depth and breadth and understanding for the automotive industry. And we carry a lot of, let's say, also brand recognition and reliability. So in this industry, and we actually believe that also with our continued investment into the new coating standalone company, we bring some of that also to this new company. And I can assure you that our customers, both on the OEM side, as well as the aftermarket and also the surface treatment customers, can continue to rely that BASF will support this company also with everything we have in regards to knowledge and experience in the industry.

And with this, I'll give it to the goodwill question. What I can give you is the book value by the end of 2024 for the coatings business that we are transacting here. This is 3.3 billion. So there will be apparently an attractive book gain coming here. How does this exactly? We still have to figure out because there are some netting positions. There is a goodwill part in it. I don't have a number here for you to disclose, but it is certainly by far the smaller part of the book value. So if you take the 3.3 billion as book value, I think you're good.

Thank you so much. Thank you.

Now we have one journalist on the line, Alexander Huebner-Reuters. You go ahead in English or German as you like.

Okay, I can do it in English. Just one more question on this valuation issue. Did I get this right? You will be getting 5.8 billion in cash at the closing of the transaction and will reinvest 1.2 in equity in this joint venture. Or didn't I get this right? And the second question would be, can you clarify how large the stake is that Qatar Investment Authority will take in the joint venture market? or are there only two partners, and this is an internal thing between QIA and Carlyle. And last question, the head of the coatings business, Mr. Kotari, will he stay on the board of BAS, or will he stay within the new company? Thank you.

So I'll take the question two and three, and Dirk, I would refer to you for the question number one. So first of all, the parties, so to say, that were mentioned also today. So our contractual partner is Carlyle, and Carlyle will be also the controlling partner in this joint venture. Now, on a higher level, Carlyle has partnered with QIA, and QIA is, so to say, in this, and a co-investor into a Carlyle fund that ultimately is a joint venture partner holder, so to say. So this is the construct. So we are dealing with Carlyle, to say it a little bit bluntly. and also the controlling party in the JV. Just to clarify, Anouk Kotari is a member of the board of executive directors. He has many more responsibilities than just overseeing the coatings division. So he's responsible for the entire industrial solution segment, the entire surface technology segment, and he also oversees our US business. So overall, he has a lot more things to do and we will not give him up so lightly.

Okay, thank you. On this question of reinvesting, so maybe here I should clarify a bit. What we are actually doing is that we are retaining this 40% stake. This is done in a kind of a rollover, and the more technical impression for this would be to reinvest. But we are not taking... Cash proceeds we are receiving also to reinvest into the business, but we are receiving the $5.8 billion in cash. We receive this equity stake, as we have a couple of times now commented on in the joint venture, and this is the way to look at it. It's more a retention, a rollover, and technically spoken, it's a reinvestment.

Okay, thank you.

Ladies and gentlemen, we are now at the end of today's short conference call. On Wednesday, October 29, we will present our third quarter results. Thank you for joining us today and goodbye for now.