BASF 3 rd Quarter 2014 Analyst Conference Call October 24, 2014, 11:00 a.m. (CEST) Ludwigshafen

Transcription

1 BASF 3 rd Quarter 2014 Analyst Conference Call October 24, 2014, 11:00 a.m. (CEST) Ludwigshafen Third Quarter 2014 Financial highlights October 24, 2014 BASF with higher sales and earnings despite declining demand Analyst Conference Call Script (Full Version) Kurt Bock Hans-Ulrich Engel The spoken word applies.

2 Page 2 Cautionary note regarding forward-looking statements This presentation may contain forward-looking statements that are subject to risks and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. Forward-looking statements may include, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation and supply and demand. BASF has based these forward-looking statements on its views and assumptions with respect to future events and financial performance. Actual financial performance could differ materially from that projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, readers should not put undue reliance on any forward-looking statements. The information contained in this presentation is subject to change without notice and BASF does not undertake any duty to update the forwardlooking statements, and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations. BASF Q Analyst Conference Call October 24, Q3 2014: BASF with higher sales and earnings despite declining demand Business performance Q3 14 vs. Q3 13 Q1-Q3 14 vs. Q1-Q3 13 Sales 18.3 billion +3% 56.3 billion +1% EBITDA 2.5 billion +1% 8.2 billion +4% EBIT before special items 1.8 billion +9% 6.0 billion +5% EBIT 1.8 billion +8% 6.1 billion +8% Net income 1.0 billion (5%) 3.8 billion +3% Reported EPS 1.14 (5%) % Adjusted EPS 1.27 (1%) % Sales development Period Volumes Prices Portfolio Currencies Q3 14 vs. Q3 13 7% (4%) 0% 0% BASF Q Analyst Conference Call October 24,

3 Page 3 Kurt Bock Ladies and Gentlemen, good morning and thank you for joining us. Today we will present to you our Q3 results, which are solid amidst a noticeable weakening of markets especially in Europe. We will also brief you on our preliminary view on As promised to you earlier this year we will update you on how we see our strategic targets in view of the current economic environment. Let s start with Q3: [Chart 3: Q3 2014: BASF with higher sales and earnings despite declining demand] BASF operated in an increasingly challenging environment in the third quarter. Geopolitical tensions and an elevated level of uncertainty surrounding the global macroeconomic development significantly affected demand in the chemical markets. Especially in the Euro-zone macro indicators started to turn negative. The ongoing tensions between Russia and the Ukraine directly impacted the economy in these two countries and business sentiment in the region. In Latin America, Brazil is technically in a recession, after two consecutive quarters of negative GDP growth. On the positive side, North American GDP continued to expand somewhat faster than expected. In China the impact of economic stimuli weakened and recovery in Japan was modest. The oil price was impacted by weaker demand as well as dampened growth expectations. On a

4 Page 4 Sales analysis: BASF without Oil & Gas Chemical business: no volume growth, stable prices Factors influencing sales in Q vs. Q % 8% Volume 7% Price Currency Portfolio 6% BASF Group: Sales: +3% 4% 2% 0% 0% 1% 0% 0% 0% BASF Group w/o Oil & Gas: Sales: 0% -2% -1% -4% -6% -4% BASF Q Analyst Conference Call October 24,

5 Page 5 euro basis, the average price for Brent crude oil was 8 percent lower than in Q In Q3, BASF generated sales of 18.3 billion euros, up 3 percent. Volumes grew by 7 percent driven by higher gas trading volumes. On a Group level, prices were down 4 percent, but contrary to previous quarters we experienced no negative currency effects. To better understand what happened in Q3 we should take a closer look at our price-volume-currency development (slide 4). Without Oil & Gas we saw no volume growth globally; in Europe BASF s sales even declined by 4 percent. However, we were able to maintain our prices overall and therefore also margins. Currency has lost its negative impact, however, did not yet provide tailwind in Q3. EBITDA came in 1 percent higher at 2.5 billion euros. EBIT before special items increased by 9 percent to 1.8 billion euros, supported by considerably higher earnings in Chemicals and Oil & Gas. We saw a slight increase in Functional Materials & Solutions and stable earnings in Performance Products. Agricultural Solutions reported a strong earnings decrease due to lower volumes and higher fixed costs. EBIT before special items in Other improved significantly. The share price development led to the dissolution of provisions for our long-term incentive program. BASF recognized special items in EBIT of minus 32 million euros. This was partially related to restructuring measures especially in Performance Products.

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7 Page 7 EBIT amounted to 1.8 billion euros, an increase of 8 percent versus prior year. The tax rate was at 28.3 percent compared to 23.1 percent in the third quarter of In the prior-year quarter, the tax-rate was affected by a tax-free one-time gain from the divestment of the 15 percent stake in the Norwegian Edvard Grieg field. Net income decreased by 5 percent to 1 billion euros. At 1.27 euros, adjusted earnings per share were at last year s level (Q3 2013: 1.28 euros). In Q3, operating cash flow reached 2.1 billion euros, an increase of around 170 million euros. Free cash flow slightly increased to 820 million euros despite higher capex.

8 Page 8 Important corporate developments Recent transaction with Statoil Acquisition of participations in oil & gas fields in Norway Purchase price amounts to US$1.25 billion Increase of production to ~60,000 boepd in Norway Additional reserves and resources of ~170 million boe Strengthening of R&D platforms Future set up of global research platforms: - Process Research & Chemical Engineering, led out of Europe - Bioscience Research, led out of North America (from 2015) - Advanced Materials & Systems Research, led out of Asia (from 2016) Restructuring of Performance Products BASF to sell textile chemicals business to Archroma Paper Chemicals division to be dissolved, product lines moved to other divisions Strategic options for parts of kaolin business in evaluation Total earnings improvement of ~ 500 million by 2017 BASF Q Analyst Conference Call October 24,

9 Page 9 [Chart 5: Important corporate developments] We continue to take measures directed at further improving our portfolio and strengthening earnings. Let me highlight some of the most important developments since Q2 reporting. On September 12, 2014 we announced an agreement with Statoil of Norway that will strengthen our partnership and enhance BASF s earnings and cash flow generation in our core region Europe. Reserves and resources will rise by approximately 170 million barrels of oil equivalent, and our production in Norway will increase from currently around 40,000 boe/day to about 60,000 boe/day. The purchase price for the assets amounts to 1.25 billion US dollars. Closing is expected by the end of 2014, with the effective date of January 1, We continue to restructure our Performance Products segment. Four weeks ago, we published our plan to dissolve the Paper Chemicals division. The structural changes in the market for graphical paper require further adjustments to our positioning: We aim to enhance value chain synergies by combining the main product lines with the corresponding operations in our Performance Chemicals and Dispersions & Pigments divisions. These changes will be effective from January 1, Furthermore, we are evaluating strategic options for parts of our kaolin business. This adjustment allows to further optimize our asset base while maintaining our commitment to the paper industry. As announced just last week, we have agreed to sell our global textile chemicals business to Archroma. The parties have agreed

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11 Page 11 not to disclose financial details. Closing is expected to take place in the first quarter of Before we come to the business performance of our segments, let me briefly inform you about the next step that we will take to enhance BASF s innovation power. We are developing the organization of our research platforms and will bundle competencies, further globalize research and thereby strengthen our worldwide R&D Verbund. The new organization will be based on three global platforms starting January 2015: Our Process Research & Chemical Engineering will continue to be headquartered in Ludwigshafen. Our Biosciences Research will be managed from Research Triangle Park, North Carolina. And finally, the headquarters of Advanced Materials & Systems Research will be moved to our Innovation Campus Asia Pacific in Shanghai by These measures will strengthen our network with research partners and customers and make BASF s R&D even more effective and efficient. With this I hand it over to Hans.

12 Page 12 Chemicals Earnings growth despite flat volumes diates 4,201 (1%) Monomers 1,587 (1%) Petrochemicals 1,913 (1%) Q3 Q4 Q1 Q2 Q development Volumes Prices Portfolio Currencies vs. Q3 13 0% (1%) 0% 0% 6

13 Page 13 [Chart 6: Chemicals Earnings growth despite flat volumes] Sales in the Chemicals segment were on prior-year level, with overall flat volumes and slightly lower prices. Higher earnings in Petrochemicals driven by strong profitability in the cracker business were partly offset by lower results in Monomers, especially in Asia. EBIT before special items came in considerably higher. Sales in Petrochemicals reached the level of the prior-year quarter, on higher prices but lower volumes. Our North American business benefitted from the expansion of the refitted Port Arthur cracker. In Europe, the ongoing outage at our Ellba joint venture with Shell in Moerdijk led to a sales decrease. In acrylics, volumes remained on a high level globally, but prices were under pressure especially in Asia Pacific. EBIT before special items came in considerably higher due to the strong performance of our cracker products in North America and Europe. Sales in Monomers also were on prior year s level. We experienced higher volumes in MDI and polyamides. Volumes in polyols were lower due to the outage at Moerdijk. Margins for caprolactam remained on a low level, while for isocyanates they came under significant pressure in Asia Pacific. EBIT before special items decreased considerably. In Intermediates sales reached the level of the prior-year third quarter. The seasonal slowdown in most standard products was more pronounced than usual, but high-margin specialties sold well. EBIT before special items was up considerably, supported by fixed cost reductions.

14 Page 14 hemicals n h 3,919 (1%) Performance Chemicals % hemicals Dispersions & Pigments 1,003 0% 0 Q3 Q4 Q1 Q2 Q development Volumes Prices Portfolio Currencies s. Q3 13 0% 0% 0% (1%) 7

15 Page 15 [Chart 7: Performance Products: Sales and earnings stability during restructuring] In Performance Products sales were almost unchanged. Volumes and prices were flat but we faced slightly negative currency effects. EBIT before special items came in on prior-year level, benefitting from strict fixed cost control. The ongoing restructuring measures resulted in negative special items of 10 million euros. Sales in Dispersions & Pigments were stable. In Europe demand slowed, whereas in Asia Pacific we experienced good volume growth across most product groups. Total volumes came in slightly higher and prices were stable. EBIT before special items increased slightly due to lower fixed costs related to the successful implementation of our restructuring program. In Care Chemicals, sales were flat on lower volumes but higher prices. Especially volumes in hygiene were down due to aggressive competition and better product availability. In Q3 2013, the market was tight due to the outage of a competitor s SAP plant. Personal care specialties also saw a decrease in demand. EBIT before special items went slightly down. Sales in Nutrition & Health came in slightly lower. We saw higher demand for animal nutrition as well as aroma chemicals, but faced tough competition in human nutrition and pharma. Prices remained stable. The market environment for vitamins remained very competitive. EBIT before special items decreased slightly. Sales in Paper Chemicals decreased significantly driven by declining demand in the graphical paper market. Our fixed cost

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17 Page 17 reduction measures helped to maintain EBIT before special items on prior-year level. Performance Chemicals sales were up slightly, driven by significantly higher volumes in most of our businesses. Demand for fuel & lubricant solutions increased globally. Oilfield & mining solutions also developed positively. We experienced good demand for water solutions but competitive pressure remained high. We faced slightly lower prices and incurred portfolio effects related to the divestiture of our PolyAd business. EBIT before special items slightly increased.

18 Page 18 Functional Materials & Solutions Continued robust demand from automotive mance ls ts 4,527 +2% Construction Chemicals 565 (2%) Coatings % Q3 Q4 Q1 Q2 Q development Volumes Prices Portfolio Currencies s. Q3 13 1% 2% 0% (1%) 8

19 Page 19 [Chart 8: Functional Materials & Solutions Continued robust demand from automotive] In Functional Materials & Solutions, sales were up slightly, supported by continued robust demand from the automotive industry. We realized higher volumes and prices, but still faced negative currency effects in all divisions. EBIT before special items slightly increased due to higher contributions from Coatings and Catalysts. Sales in Catalysts increased significantly on higher volumes and prices. Volume growth was driven by high demand from mobile emission and chemical catalysts. Sales from precious metals trading grew to 685 million euros versus 657 million euros a year ago. EBIT before special items considerably increased driven by higher volumes. In Construction Chemicals sales came in slightly lower, as higher volumes and prices could only partially compensate the structural effect related to the divestment of our German wall systems business in Q While we experienced a positive business development in North America, demand in most European countries was subdued. Fixed cost reductions from our efficiency program resulted in a slight improvement of EBIT before special items. Sales of our Coatings division were slightly up due to higher prices. For OEM coatings and refinish coatings we saw good demand in Europe and North America, robust business in Asia Pacific and a decline in volumes in South America.

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21 Page 21 Industrial coatings developed very positively due to better business with coil and wind energy coatings. Sales in decorative paints slightly decreased, as higher prices could not fully offset lower volumes. EBIT before special items was up considerably supported by effective fixed cost control. Sales in the Performance Materials division were stable with volumes being flat. Engineering plastics and our specialties such as Cellasto and Ultrason developed positively due to high demand from the transportation industry. PU systems, however, saw lower demand for appliances and construction applications, especially in Europe. Prices were slightly down. Plant start-ups and higher R&D expenses led to an increase in fixed costs and EBIT before special items decreased significantly.

22 Page 22 Agricultural Solutions Strong earnings decline in seasonally slow quarter Q3 14 segment sales (million ) vs. Q3 13 1,200 1,054 (3%) 1, (75%) Q3 Q3 Q3 Q Sales development Period Volumes Prices Portfolio Currencies Q3 14 vs. Q3 13 (4%) 2% 0% (1%) BASF Q Analyst Conference Call October 24,

23 Page 23 [Chart 9: Agricultural Solutions Strong earnings decline in seasonally slow quarter] In Agricultural Solutions we experienced a disappointing business in this seasonally slow quarter. Excellent crop conditions led to good harvests for key crops globally, strongly pushing down crop commodity prices. Our sales decreased by 3 percent versus the very strong prior-year quarter, mainly due to lower volumes in North America and Europe. Nevertheless, we were able to increase prices in all regions. Business in Europe declined considerably. Lower prices for oilseed rape led to reduced acreage and consequently demand for oilseed herbicides declined. In North America sales dropped significantly, as excellent crop conditions and low commodity prices adversely impacted demand especially for our yield-boosting Plant Health products. Sales in South America were slightly up, supported by higher volumes and prices. Our recent launches Kixor and Xemium developed well, while there was tough competition in insecticides. In Asia Pacific sales slightly increased, thanks to higher prices across the region. EBIT before special items in Q fell considerably on lower volumes, a less favorable product mix and higher fixed costs. For the remainder of the year we see business momentum building up in South America and we currently experience no significant negative exchange rate impact on earnings. Market response to our Xemium -based fungicide solutions is positive. With our positioning

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25 Page 25 and strong product pipeline we are optimistic that we are able to continue our success story in Agricultural Solutions.

26 Page 26 Gas 3, % Exploration & Production 611 (19%) * development Q3/2013 Net Income Q3/2014 Net Income Exploration & Production Natural Gas Trading Net income * Incl. one-time disposal gain of 164 million euros from the divestment of a 15% stake in Edvard Grieg field Volumes Prices/Currencies Portfolio s. Q % (26%) 0% 4 Analyst Conference Call October 24,

27 Page 27 [Chart 10: Oil & Gas Considerably higher sales and earnings] In the Oil & Gas segment, sales grew considerably. This was driven by higher volumes in Natural Gas Trading. EBIT before special items significantly exceeded prior-year results attributable to higher contributions from Natural Gas Trading. Net income came in at 265 million euros, a decrease of 186 million euros. In Q3 2013, we had recognized a disposal gain of 164 million euros from the divestment of a 15 percent stake in the Edvard Grieg field in the North Sea. Sales in Exploration & Production decreased considerably due to lower volumes as well as lower oil and gas prices. The average price for Brent crude oil decreased by 8 percent to 102 US$ per barrel. In euro terms it was also 8 percent lower. Volume was about 10 percent lower. EBIT before special items declined by 14 percent to 310 million euros on lower volumes and prices. Contrary to prior year we did not have an offshore lifting in Libya. These missing contributions could not be compensated by higher earnings in Norway. Sales in the Natural Gas Trading business grew considerably due to higher volumes especially on the European spot markets. EBIT before special items recovered strongly after a relatively weak first half 2014.

28 Page 28 Review of Other Million Q3 14 Q3 13 Sales EBIT before special items (7) (105) Thereof Corporate research Group corporate costs Currency result, hedges and other valuation effects Other business (96) (53) 100 (90) (57) (74) Special items (20) (24) EBIT (27) (129) BASF Q Analyst Conference Call October 24,

29 Page 29 [Chart 11: Review of Other ] EBIT before special items in Other improved strongly from minus 105 million euros to minus 7 million euros, driven by a better currency result and the recent share price development which led to the dissolution of provisions for our long-term incentive program.

30 Page 30 Cash Flow Solid cash flow in Q1-Q Million Q1-Q3 14 Q1-Q3 13 Cash provided by operating activities 4,765 5,982 Thereof Changes in net working capital Miscellaneous items (739) (425) 374 (327) Cash provided by investing activities (3,625) (4,629) thereof Payments related to tangible / intangible assets (3,426) (3,038) Acquisitions / divestitures 355 (1,093) Cash used in financing activities (995) (1,300) thereof Changes in financial liabilities Dividends 1,661 (2,656) 1,304 (2,604) BASF Q Analyst Conference Call October 24,

31 Page 31 [Chart 12: Solid cash flow in Q1-Q ] Let me turn to our cash flow. Please be reminded, that we will summarize the first nine months of At 4.8 billion euros cash provided by operating activities was down by 1.2 billion euros. This was due to a cash outflow in net working capital of 0.7 billion euros related to the reduction of trade accounts payable as well as a planned build-up in inventories to prepare for maintenance shutdowns. Cash used in investing activities declined by 1 billion euros to 3.6 billion euros. While capex increased by 0.4 billion euros to 3.4 billion euros, cash payments for acquisitions decreased considerably. In the same period of 2013, we had incurred cash outflows of 1.1 billion euros for the acquisition of assets from Statoil as well as the acquisition of Pronova BioPharma. Free cash flow amounted to 1.3 billion euros in Q1-Q On a sequential basis we recognized a positive trend in cash flow: While in H free cash flow amounted to about 0.5 billion euros, we generated 820 million euros of free cash flow in Q3 alone. Coming back to the first nine months of 2014, financing activities led to a cash outflow of 995 million euros, compared with an outflow of 1.3 billion euros in the first three quarters of The cash inflow resulting from the change in financial liabilities amounted to 1.7 billion euros. This was mainly attributable to BASF issuing several bonds with a principal amount of around 1.6 billion euros as well as taking out bank loans. The repayment of a

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33 Page 33 bond with a principal amount of 1.25 billion euros had a counterbalancing effect. Net debt amounted to 13.9 billion euros, representing an increase of 1.3 billion euros in comparison to prior year. At 39 percent, our equity ratio remained at a healthy level. Kurt, now back to you for the outlook.

34 Page 34 Outlook 2014 Outlook 2014 We aim to increase our sales volumes excluding the effects of acquisitions and divestitures. Nonetheless, sales will decline slightly compared with 2013 due to the divestiture of the gas trading and storage business planned for autumn 2014 and negative currency effects. Despite the challenging environment, we strive for a slight increase in EBIT before special items. Assumptions 2014 GDP: 2.3% (previous: 2.5%) Industrial production: 3.4% (previous: 3.7%) Chemical production: 4.0% (previous: 4.4%) US$ / Euro: 1.35 (previous: 1.35) Oil price (US$ / bbl): 105 (previous: 110) BASF Q Analyst Conference Call October 24,

35 Page 35 [Chart 13: Outlook 2014] Coming to the outlook for 2014: While BASF s business in the third quarter was solid, we remain cautious regarding the development of the macroeconomic environment in the fourth quarter of We don t expect an increase of demand, assume ongoing economic volatility, and a more modest global GDP growth for the remainder of the year. Compared to Q2 reporting, we reduce some of our macroeconomic assumptions for 2014 as follows: - Global GDP growth is seen slightly lower now, at 2.3 percent - Industrial production is expected to grow by about 3.4 percent - We have reduced the growth expectation for the chemical production by almost half a percent, to 4.0 percent - We continue to see the average US$/ exchange rate at 1.35 for the full year - Regarding the oil price, we now forecast US$105 per barrel of Brent oil, down from US$110 per barrel. Despite the challenging environment, BASF strives to slightly increase EBIT before special items for the full year 2014.

36 Page 36 Update on key assumptions of the We create chemistry strategy Growth ( We create chemistry *) Growth (today s view) Global GDP Chemical production (excl. pharma) Industrial production 3.4% p.a. 4.9% p.a. 4.6% p.a. 2.6% p.a. 4.0% p.a. 3.4% p.a. * Rebased figures, new base year 2010 BASF Q Analyst Conference Call October 24,

37 Page 37 [Chart 14: Update on key assumptions of the We create chemistry strategy] Now I would like to update you on our We create chemistry - strategy and the respective financial targets, which we published in Our strategy is based on long-term trends growth of emerging markets and certain customer industries, the growing relevance of innovation, shifts in feedstock costs and industry dynamics to name just a few. We increased our investments in selected growth markets, intensified and globalized R&D, accelerated the pruning of our portfolio and sharpened the meaning of sustainability for BASF. We also laid out our operational excellence program STEP, which aims to achieve savings of 1 billion euros by the end of And we announced specific financial targets for 2015 and 2020 in terms of sales and earnings. We felt this to be necessary, also to allow you to hold us accountable. Today, well before starting the year 2015, we want to update you where we stand. With regard to our strategy, we are pretty much on track. The decision to further globalize our R&D platforms mentioned earlier is just one example of a series of initiatives and changes. Our portfolio optimization is ongoing, resulting in more than 20 divestitures since 2011, which we balance with selected smaller acquisitions, many of them technology-driven. Our operational excellence program STEP is ahead of schedule. By the end of 2015, we will most likely achieve improvements of 1.3 billion euros, 300 million euros more than planned.

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39 Page 39 And yet, it looks like we will achieve not all of our ambitious financial targets by We worked very hard to reach them. However, early this year we told you that hitting these targets would require an economic recovery in major markets, especially in Europe, and a margin improvement for some of our major basic products. It is pretty obvious that this has not happened; we have seen a further weakening. Comparing the previously expected GDP, industry and chemical production growth rates 2010 to 2015 with what we see today underlines this growing gap. The average annual growth of global GDP we now see about 0.8 percentage points lower than expected. Even more importantly, we now assume growth of chemical production to be 4 percent instead of 4.9 percent per year. This is still well above GDP and industrial production. We all know the reasons for this development: Reduced growth dynamics of emerging markets and a delayed recovery in Europe. Aside from lower demand growth which has adversely impacted our business, we have experienced margin pressure in some of our major product lines especially in China. To give you just one example: The margin of caprolactam in Asia today is more than 50 percent lower than in We did not project such peak margins into the future. However, the current margin squeeze is beyond of what we had anticipated. In Performance Products we have seen a typical commoditization in selected product lines. This is why we initiated an additional restructuring program, which will deliver about 500 million euros to earnings from 2017 onwards.

40 Page 40 Lower market growth and lower margins adversely impact 2015 EBITDA expectation EBITDA / EBITDA impact (billion ) Consensus average 10 EBITDA target Lower market 2015 growth Lower margins Divestiture gas trading and storage Additional contribution STEP Positive FX effects 2015 EBITDA (E) BASF Q Analyst Conference Call October 24,

41 Page 41 [Chart 15: Lower market growth and lower margins adversely impact 2015 EBITDA expectation] We have summarized these effects in one slide. Lower market growth and lower margins cost us more than 1 billion euros of EBITDA each. The planned divestiture of our gas trading and storage business was not considered in 2011 and will lower sales by approximately 12 billion euros and EBITDA by 500 million euros. STEP will generate additional earnings of 300 million euros. The other positive factor, amounting to around 400 million euros, is the exchange rate since we expected a weaker US dollar than we currently see. Most probably we will also see slightly lower growth going forward and we do not expect an immediate cyclical recovery. We now expect 2015 sales and EBITDA to be in line with current financial market expectations. Analysts currently foresee 2015 EBITDA between 10 billion euros and 12 billion euros. Clearly, we aim to achieve the upper range. However, we will as usual provide you with the outlook for 2015 at our annual analyst and investor conference on February 27, That day we will also discuss our updated long-term targets. Be assured that we will remain committed to growing our business profitably and further improving earnings resilience in the coming years. We are now happy to take your questions.