Basf Se

XETRA:BAS

Earnings Call Transcript 2020-Q1

[Operator]

[Interpreted] Ladies and gentlemen, good morning, and welcome to the telephone conference of BASF SE. [Operator Instructions] The conference will be recorded for reasons of documentation and streamed live -- on the Internet live on the basf.com/pressconference. [Operator Instructions]Now I will give the floor to Ms. Schmidt, Head of Corporate Communications and Government Relations.

[Anke Schmidt]

[Interpreted] Well, yes, welcome, and good morning, ladies and gentlemen. We're very pleased that you have joined our telephone conference. And today, we are going to present the financial figures of BASF Group for the first quarter 2020.You will be speaking to Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans-Ulrich Engel, CFO of BASF.Before we start, let me give you a few pieces of instruction, as always. [Operator Instructions]And the floor is with Martin Brudermüller.

[Martin Brudermuller]

[Interpreted] Good morning, ladies and gentlemen. Hans Engel and I would like to welcome you to our press conference on the first quarter.I don't have to stress that this was not a normal quarter; and the same will be true for the second quarter, as for the entire year. The coronavirus has turned the world upside down. At our annual press conference at the end of February, unlike many of our DAX peers, we were already warning about the severe consequences of the coronavirus and we integrated this into our guidance, but even we did not anticipate a global pandemic of this scale. Around the world, all countries are facing the same challenges, some slightly later than others. Not only is the global economy suffering, so all societies or, more accurately, every individual is affected. In these times, we are learning how important health is and what price it has and how important it is to be considerate to others to keep your distance. That is also why we are not having an Annual Shareholders' Meeting today as we had originally planned. Instead, for the first time, it will take place virtually on June 18. This is a time of change and reorientation. It requires rethinking many processes. It requires reorganizing our ways of being together. And it is at the same time a time of solidarity and reliability, solidarity within the company and in society. That is why we decided early on to launch the "Helping Hands" initiative.In Ludwigshafen and at many other BASF sites, we are producing hand sanitizers, which is desperately needed everywhere. We produce around 175,000 liters per week worldwide, which we distribute for free to hospitals and other public health care facilities to protect these people who are doing incredible work right now. And this is why we also decided to donate more than 100 million protective masks to the Federal Republic of Germany as well as to the State of Rhineland-Palatinate. In total, BASF is committing approximately EUR 100 million worldwide to fighting the pandemic. We say thank you, and in solidarity we make our contribution to human health.And at BASF, the health of our employees is our highest priority. I will tell you more about this later on.Ladies and gentlemen, we want to be reliable to all our stakeholders also with respect to our dividend. We confirm our dividend proposal of EUR 3.30 per share, as we had announced in February 2020, and we will propose this to the AGM on June 18. We are very aware of the controversial discussions in German media about dividend payments. I would therefore like to clarify our position here. It is very simplistic to equate short-time work with government loans. Short-time work is a proven instrument of German labor market policy in the social market economy, especially in economically troubled times. Over the past 10 years, BASF has transferred around EUR 400 million in employer contributions to the German labor office, and BASF employees have contributed an equal amount. Since 2008, BASF has received less than 1% of this amount back in connection with registered short-time work. Currently, BASF has applied for very limited short-time work in some of our group companies, primarily in connection with production for the automotive industry. The German development bank KfW is giving government-backed loans to protect companies from insolvency when firms are no longer able to access sufficient financing on the capital market due to the coronavirus crisis. In this case, the German government expects that no dividends will be paid out. BASF has not applied for one of these emergency loans, and we do not intend to. We continue to secure our financing via the capital market. We therefore believe that the discussion about dividends, short-term work and state aid needs to be more nuanced.BASF's broad portfolio and financial solidity are especially paying off now in these economically challenging times. Hans Engel will tell you more about this later.Ladies and gentlemen, the macroeconomic environment is truly challenging at the moment. There is great uncertainty in the markets. This makes reliable planning nearly impossible right now. Let's take a look at the developments over the past few months. At first, growth forecasts were gradually scaled back. Then in March, they abruptly dropped into negative territory. Countries around the world have not yet presented all their preliminary figures for the first quarter, but the trend is clear. While outside China, January and February 2020 were still significantly less affected by the coronavirus pandemic, the impacts of the lockdown measures around the world became very noticeable in March. According to the currently available figures, global GDP declined by 1.7% versus the first quarter of 2019. This affected all of the major economic regions. At first, it was most striking in China and Europe. Severe effects in countries such as the United States will be seen in the second quarter. Industrial production declined even more sharply than GDP. Global chemical production also contracted significantly by 5.2%. Here too the decline was most pronounced in Asia.The hardest-hit sector was the automotive industry. Demand collapsed and supply chains were disrupted. Production lines are still shut down. In the first quarter of 2020, global automotive production was down by 24% compared with the same period of the previous year, and this came on top of a 5% drop in 2019.Ladies and gentlemen, BASF's diversified portfolio offers advantages, especially in difficult times. Not all of our customer industries are equally affected by the pandemic. Some industries are resilient; for example, pharma, detergents and cleaners or food. At the moment, they are even experiencing additional demand. Just think of disinfectants and cleaners or home and personal care products. We see this clearly in the incoming orders in our Nutrition & Care segment. Demand in the agricultural industry is also not really affected. Other customer industries, however, are intensely experiencing the consequences of the pandemic. They are hampered by the low demand from final customers. Moreover, there are production shutdowns and supply chain disruptions. The transportation and automotive sector is seeing the strongest declines right now. This decline in demand from our most important customer industry is currently hitting us hardest.This overview shows you our segments and their key customer industries. Here you can see how and where BASF is impacted by the effects of the crisis and will be in the coming months. Let's take a look at the development of our volumes. This impressively shows how well BASF has been holding up despite the strong economic headwinds. In Q1 of 2020, BASF Group sales volumes rose by 4%. All downstream segments contributed to this. The increase was most pronounced in 2 segments, Surface Technologies and Agricultural Solutions. Given that the auto sector accounts for a large share of business in the Surface Technologies segment, the increase here appears somewhat surprising. It is primarily attributable to higher precious metal volumes. The increase in the Agricultural Solutions segment, however, is consistent with the impression that this business is less affected by coronavirus-related demand declines. The Nutrition & Care and Industrial Solutions segments have also seen robust volumes growth, so far.With numerous internal measures, we are ensuring that BASF navigates safely through these difficult times. This is especially true for our employees. We activated our global crisis response team very early on, as did our divisions, regions and production sites. We constantly adapt our contingency plans to the latest developments and make sure they are closely aligned with each other. Our sites are primarily in charge of coordinating production-related measures. In this way, we ensure compliance with local regulations. However, the overarching objective at BASF worldwide is minimize the risk of infection. We therefore divided our production shifts into smaller teams, and we have switched to different shift times without overlaps among the shift teams. This reduces contact during client operations. In addition, we have stringent hygiene rules.Ladies and gentlemen, with the implementation of our corporate strategy since late 2018, we have been working on the right topics. These are also the right levers to overcome the current crisis: Focus on the customer. Reduce complexity. Create an agile and streamlined organization, and realize significant cost reductions. These are our focus themes. We are accelerating our ongoing Excellence Program wherever possible. Our customers are the focus of all our activities. Right now in particular, they want supply reliability, and this is why we are working even more closely with them. We want to immediately react to changes in our customer's demand. To do so, it is crucial to be able to quickly optimize and adapt our production network and inventories. Tools such as our own Verbund simulator support us in doing so.Because of the crisis, demand is at a low level. We are therefore adjusting our capacity utilization rate where necessary. We manage the capacity utilization of our plants in the global BASF production network in close coordination between the downstream and upstream businesses. This is because we must ensure continuous supplies even if there are different levels of demand along the value chain. Thanks to our integrated approach, we can quickly respond to fluctuations in demand. At the end of April, the average capacity utilization rate of our plants was still more than 60%. One helping factor is that most of our products are considered essential in many countries. At BASF SE, this is the case for more than 70% of sales. This is why we have only had a few government-mandated shutdowns worldwide.And wherever possible, we are strengthening supply chains; for example, with additional measures to secure supplies of important raw materials and to deliver our products to customers. In our logistics Verbund in Ludwigshafen, we have implemented strict hygiene measures and we have rented additional mobile sanitary facilities. We were thus able to considerably expand the space available for truck drivers and other service providers, which increased our handling capacity. In addition, BASF's key logistics units have been divided into separate teams, with strict rules about physical distancing. After all, reduced risk of infection translates into increased supply security.Ladies and gentlemen, especially now, securing our liquidity is extremely important. Throughout the entire company, we practice strict working capital management. In the coming months, we will further intensify this and adapt it to business development. This will be supported by increased cost awareness and the rigorous implementation of our Excellence Program. Short-time work may also be considered in individual business activities. As previously mentioned, we have currently introduced it at some of our sites in units that primarily supply the auto industry. At the moment, there are around 3,700 employees at 11 sites in short-term work in Germany, and in Europe about 3,000 employees. At BASF SE in Ludwigshafen, the number is significantly less than 100.In addition, we are scrutinizing our investment projects. We want to further reduce our spending on investments. Our target for this year is EUR 2.8 billion. We had originally budgeted EUR 3.4 billion, but we also want to explicitly stress that we are still committed to our long-term growth projects in Asia as well as the expansion in the battery materials business. The new BASF Verbund site in Southern China and the chemical complex we want to build with partners in India are key to profitable future growth in Asia. Both of these projects are currently in the feasibility phase. In Europe, BASF is active in building a value chain for electric vehicles. We will further expand our leading position in the battery materials sector. This will be driven by our investments in Harjavalta, Finland and Schwarzheide, Germany.Thanks to all these measures, we are in a good position to lead BASF successfully, not just through the coronavirus crisis. In terms of financing too, we have implemented a number of measures to improve our access to cash. Hans Engel will provide you with further details about this. He will also talk about business development in the first quarter and a change in our financial reporting.Hans, please.

[Hans-Ulrich Engel]

[Interpreted] Thank you, Martin. Good morning, ladies and gentlemen.So let me start with a change in BASF Group's reporting as of January 1, 2020, and adjusted previous year's figures. The aim is to increase the transparency of our reporting. And this is why our representation of the results of investments accounted for using the equity method will distinguish between those investments that are integrated into BASF's group business activities and those that are effectively operating independently of the BASF Group. One example of an investment that is in an integrated operation is our 50% stake in BASF-YPC at the Verbund site in Nanjing, China. The most important nonintegral investments are Wintershall Dea and Solenis. These investments are also expected to be divested in the short to medium term. The income from these nonintegral investments will no longer be presented in the BASF Group's EBIT and EBIT before special items under Other but instead under net income from shareholdings. Net income from shareholdings is a new subtotal within income before income tax. Integral and nonintegral investments will also be shown separately in the balance sheet. With this change, we ensure that our EBIT and EBIT before special items better reflect the results of our business. These will no longer be influenced by activities that we consider to be financial investments rather than part of our core business.Now let us look at BASF Group business development in the first quarter of 2020 compared with the same quarter of the previous year.Sales rose by 7% to EUR 16.8 billion. The reason for this, as Martin Brudermüller just mentioned, was the volumes were up by 4%. A rise was seen especially in our downstream segments and in Other. Prices increased by 1% due to significantly higher precious metal prices in the Catalysts division. Apart from Surface Technologies, all segments experienced lower price -- sales prices. Portfolio effects of plus 1% contributed to the sales increase, largely to the acquisition of the polyamide business from Solvay. Currency effects amounted to plus 1%. This was due to the appreciation of the U.S. dollar against the euro.Income from operations before special items was EUR 1.6 billion, down by 6% compared with the first quarter of 2019. Without the previously mentioned change of the reporting of nonintegral investments, EBIT before special items would have been around EUR 1.5 billion, approximately 14% below the prior year quarter. The decline in EBIT before special items was mainly attributable to significantly lower contributions from the Chemicals and Materials segments and from Other. Compared with the prior year quarter, the earnings of the 2 upstream segments declined by EUR 246 million to a total of EUR 383 million. Lower margins year-on-year in the ethylene and propylene value chains as well as the isocyanates and polyamide precursors had a considerable negative impact on earnings in these segments. In addition, fixed costs were higher. In the Materials segments, considerable growth in earnings in the Performance Materials division could only partially compensate for the decline in the Monomers division, but even in a difficult market environment we saw considerable improvements in our downstream segments. EBIT before special items in these 4 segments increased in the first quarter of 2020 by 13% to EUR 1.6 billion. The strongest growth was seen in the Surface Technologies and Agricultural Solutions segments.In the Industrial Solutions segment, EBIT before special items rose slightly. Here the dispersion and pigments division posted significantly higher earnings, mainly as a result of lower fixed costs. This more than offset the slight earnings decline in the Performance Chemicals division. The transfer of our paper and water chemicals business to the Solenis group as of January 31, 2019, was the main reason for the decline in earnings in the Performance Chemicals division. The Surface Technologies segment considerably increased EBIT before special items. The Catalysts division posted considerably higher earnings as a result of valuation effects in precious metal trading. In the Coatings division, earnings declined considerably because of lower demand from the automotive industry. The decrease in earnings could only be partially offset by lower raw material prices and lower fixed costs.In the Nutrition & Care segment, EBIT before special items increased considerably. This was primarily due to significantly higher earnings in the Nutrition & Health division. This division supplies customer industries which in some cases have increased demand during the crisis. We were able to meet this demand, thanks to higher product availability in comparison to the same quarter of the previous year. Earnings in the Care Chemicals division rose slightly due to lower fixed costs.EBIT before special items was slightly higher in the Agricultural Solutions segment. This was the result of higher sales and lower fixed costs. Due to the corona pandemic, we recorded earlier demand. In Other, EBIT before special items was considerably lower.Ladies and gentlemen, overall, the breakdown of earnings development by segment shows clearly just how much we benefit from our diversified portfolio. So we clearly have benefited from the diversified portfolio, especially right now. We serve many customer sectors, and they are affected very differently by the pandemic.Now that we have covered sales, I would like to present BASF Group's earnings development in the first quarter of 2020 compared with the same period of the previous year.EBITDA before special items declined by 2% to EUR 2.6 billion. EBITDA amounted to EUR 2.4 billion compared with EUR 2.8 billion in the same quarter of the previous year. EBIT before special items was EUR 1.6 billion, down by 6% compared with the first quarter of 2019. I already explained the reasons for this.Special items in EBIT amounted to minus EUR 184 million. In the first quarter of 2019, the corresponding figure was plus EUR 29 million. Special charges were related mainly to the integrating -- integration of the polyamide business acquired from Solvay in the Materials segment. Various restructuring measures also contributed to the negative special items. In the prior year quarter, income from divestitures led to positive special items overall.EBIT, therefore, declined by 18% in the first quarter of 2020 to EUR 1.5 billion. The tax rate was 26.6% compared with 25.3% in the prior year quarter.Net income amounted to EUR 885 million. This compared to EUR 1.4 billion in the first quarter of 2019. Consequently, earnings per share decreased to EUR 0.96 in the first quarter of 2020, as compared to EUR 1.53. Adjusted earnings per share were EUR 1.36 compared with EUR 1.70 in the prior year quarter.Now we come to cash flows in the first quarter of 2020. Cash flows from operating activities amounted to minus EUR 1 billion compared with EUR 373 million in the prior year quarter. Alongside the considerable decline in net income, this was primarily attributed to the EUR 1.2 billion increase in cash tied up in net working capital. Cash flows from investing activities amounted to minus EUR 1.8 billion, around EUR 1 billion below the figure for the prior year quarter. This was mainly attributable to the payment of the purchase price for the polyamide business acquired from Solvay. By contrast, payments from the -- made for intangible assets and property, plant and equipment were EUR 172 million lower year-on-year. The significant increase in cash flows from financing activities from EUR 620 million in the first quarter of 2019 to EUR 4.3 billion was primarily due to the creation of additional liquidity as a precautionary measure. Free cash flow declined from minus EUR 368 million in the prior year quarter to minus EUR 1.6 billion as a result of lower cash flows from operating activities.Now on the balance sheet end of March 2020 and year 2019. Total assets increased by EUR 5.4 billion to EUR 92.4 billion due to higher current assets. Current assets rose through higher trade accounts receivable as well as an increase in cash and other receivables. The increase in trade accounts receivable was primarily attributable to the seasonality of our agriculture business. Compared with March 31, 2019, our total assets was unchanged. Our noncurrent assets was nearly stable at EUR 56.3 billion. Net debt rose by EUR 3.3 billion to EUR 18.8 billion. One reason for this was the acquisition of the polyamide business from Solvay in the first quarter of 2020. The equity ratio amounted to 47% at the end of March 2020.Now let me briefly address our financing strategy and how we achieve a solid level of liquidity even in these challenging times. We normally operate our business with cash reserves of around EUR 2 billion. In times like these, it is obvious that we must work with an increased level of liquidity. As of March 31, 2020, our cash and marketable securities amounted to EUR 4.2 billion. This compared with EUR 2.3 billion at the end of March 2019 and EUR 2.9 billion at the end of December '19 -- 2019. For short-term financing, we utilize our commercial paper program with an issuing volume of up to $12.5 billion. Moreover, in recent weeks, we have taken our additional bank loans amounting to EUR 600 million, for example, from the European Investment Bank. At the beginning of April 2020, BASF entered into an agreement with several banks for a 1-year line of credit totaling EUR 3 billion, which is currently unused. We want to be prepared in the event that it becomes more difficult to access commercial paper markets.Last but not least, for the past 20 years, we have had a never-tapped credit facility of EUR 6 billion, which serves as a backstop for our commercial paper program. I will be happy to answer your questions on our financing in more details in the Q&A session.And now let me hand over to Martin Brudermüller again for the outlook.

[Martin Brudermuller]

[Interpreted] Ladies and gentlemen, at the moment, forecasts about the development of the global economy are extremely uncertain, if not impossible. Even economic experts are dramatically altering their projections on an almost daily basis. Due to the current severe effects of the coronavirus pandemic, we have now revised our forecast for the development of the macroeconomic environment and dramatically reduced our growth expectations. However, given the dynamic developments and the associated high level of uncertainty, today, for the first time, we are not going to provide the figures you're accustomed to. Instead, I will only make qualitative statements.The second quarter will be affected by a clearer and sharper decline than the first quarter of 2020. From today's point of view, in the best-case scenario, we expect EBIT before special items in the low triple-digit million euro range in the second quarter. However, at present, I cannot rule out the possibility that BASF Group's EBIT before special items may drop to 0 or even lower. One key reason for this is the global standstill in the automotive industry. Nobody currently can tell how long it will take until the entire value chain really gets back to running at high capacity again or how quickly demand for vehicles in various countries will pick up. For the current year, we expect automotive production to decline by at least 20%.As you know, automotive production is our largest customer industry. Various BASF segments supply to the automotive industry, in particular Surface Technologies and Materials but also Industrial Solutions to a smaller extent. Moreover, some of our other customer industries are also strongly affected by the pandemic. This cannot be offset by the ongoing strong demand in the Nutrition & Care and Agricultural Solutions segments. We therefore expect a considerable decline in demand in the second quarter.Ladies and gentlemen, under these circumstances, the members of BASF's Supervisory Board have decided to forgo 20% of their fixed compensation from April 1 until the end of 2020. Members of BASF's Board of Executive Directors will voluntarily waive 20% of their fixed salaries for the second quarter of 2020. Depending on how things develop over the course of the year, we will consider further steps.In the third and fourth quarters, we anticipate a gradual improvement. However, we do not expect a rapid recovery to pre-crisis levels. As of today, this cannot be quantified because too many factors are unclear. We expect that, by the end of July, we will have a clearer picture and more reliable data for the rest of the year. We want to then provide you with the usual quantitative outlook again.I do not want to close off without assuring you that the BASF team is working very hard and with confidence. We are collaborating closely with our customers in order to achieve the best possible result for BASF. Our diversified portfolio and our financial solidity are assets in these challenging economic times. We are looking ahead optimistically to BASF's future, and we expect to emerge stronger from this situation.Before we get to your questions, I'd like to take a moment to express my heartfelt thanks to Anke Schmidt for her outstanding work and her dedication to our company. After 24 years at BASF, Anke decided to take on an entirely new set of challenges which she found in her former hometown of Hamburg. As much as I am happy for Anke, I am sad to see her go because we have worked well together for many years, first in Asia and then in her current role. Dear Anke, I'd like to take this opportunity once again to say thank you very much, also on behalf of the entire BASF team.And now I will hand over the mic one last time to Anke Schmidt, who will moderate the Q&A session.

[Anke Schmidt]

[Interpreted] [Operator Instructions] And with this, we start the Q&A session, started by Bernd Freytag, FAZ.

[Bernd Freytag;Frankfurter Allgemeine Zeitung]

[Interpreted] Yes. So all the best to Ms. Schmidt. I have 3 small questions. So firstly, Mr. Brudermüller, on the dividend and the question of short-time work, have you ever considered to also distribute the dividend by giving shares? Because you could maybe also break down the debate and also strengthen liquidity a little bit, but you want to strengthen, as you said before in your presentation. Secondly, what do you think about the easing politics of our government? And what would you wish for? Would you like to have faster easing measures, or would you prefer the lockdown to be kept up for longer? And the third question goes in the direction of the investment in Guangdong. You said just minutes ago that both Guangdong and India are in a feasibility phase, so to speak, in their situation, but if I remember correctly, in November, you already had the -- well, the beginning of the building of your site there in Guangdong. So what about the crisis? And what effect might it have on time delay for these projects?

[Martin Brudermuller]

[Interpreted] Well, Mr. Freytag, thank you very much. Let me start with the easement or easing politics. So let me say I think the federal government has done a very good job. And if you compare it with other countries, also their view on Germany, we are very much praised for that. Of course, we are thinking about keeping up the economic power but still take care of people's health. And I think with the lockdown that we had, we have proven that the infection rates went down. That was proven, but the question for the future is -- and in a democracy, of course, you can discuss about it, which is the best way, is not to destroy everything by easing too freely. But on the other hand, it is very necessary to ramp up the economic activities again. So first of all, we need a change of mentality with the people, which happens. Most people know how they individually are responsible for the protection of the society, but also the companies learn to take measures how to produce under different conditions. I told you about some of our ideas. I think the companies can just prepare with protective measures and keep up both, the protection of the individual but also the restart of production. And this is why I think that it is a good idea to start production quickly again, to have it in a maybe gradual fashion. I don't know. The discussion about shop sizes is, of course, not easy to evaluate from the second row, so those who have the responsibility there have to decide. And it's always easier to just comment on that than to decide. We need a new political course, and I expect and hope that in the next days and weeks we will have a very targeted fashion of starting production again.Guangdong feasibility measures, yes, you are right. We started with 2 downstream plants. And that is probably also the event that you related to, where we started building, and there were TPU, the polyurethane production and engineering plastics that are at the end of the value-adding chain. And that can operate alone. We started with them, but the entire Verbund site and the scope study has not yet been finalized. And Mr. Engel will now talk about the dividend and shares.

[Hans-Ulrich Engel]

[Interpreted] Yes. Mr. Freytag, on your question on the dividend, whether we could just hand out shares instead of a cash dividend. Of course, we thought about it. We've talked about the [ scripped ] dividends or mentioned of choice for the shareholders and also an in-kind kind of solutions or shares as dividend, but our results after our discussions was eventually -- and after intensive analysis, we said that the liquidity of our cash flow is -- has enough buffer to be able not to have a dividend share, which would have been a lot of work, by the way, because the respective shares would have had to be created first. So that we said, okay, let's just leave it with a cash dividend.

[Anke Schmidt]

[Interpreted] Okay. Then I'll ask Siegfried Hofmann from Handelsblatt.

[Siegfried Hofmann;Handelsblatt]

[Interpreted] First of all, maybe continuing on the question with the dividends and liquidity. You said that in the first quarter you had a very weak cash flow development, so if you expect to have enough buffer, do you expect an improvement in the second half of the year? And obviously you expect to have enough cash inflows to pay the dividend. And the second question refers to Wintershall. Still it is an important shareholding of BASF even if it is not reported in your equity any longer. So how has the developed -- the business developed in the first quarter? And what do you expect for the entire year? And don't you also have to, well, maybe adjust the valuation because the company is still part of the balance sheet? And what does the fact mean that there is not going to be an IPO, as far as we have learned, with the net financial indebtedness that you've explained?

[Martin Brudermuller]

[Interpreted] Well, Mr. Hofmann, you might imagine that the dividend payments and the decision on that is based on extensive analyses. We thought about different scenarios what the BASF team can do. You know that we have the Excellence Program, for example. And we have, of course, seasonal effects with the Agricultural Solutions business. We have more cash committed, which of course, is that going to be released in the course of the year? In our control measures, we have avoided to build too much inventory, but we also have a lower business level just now, which leads to adjustments both in the inventories and also with the accounts receivables. And what's also important, in 2008 and 2009, during the financial crisis, we also looked back and checked what the BASF team did that time. How did they release cash from the working capital? And we were very successful there. And we do also remember which instruments we used, and we will use these instruments again in this crisis. So we have an improvement and expect an improvement in the cash flow over the next quarters. And you should also not forget our Excellence Program. We take out costs. And we'll check, of course, what's possible also on top of that. And all that will definitely improve our cash flow over the course of the year. And Mr. Engel will talk about Wintershall.

[Hans-Ulrich Engel]

[Interpreted] Yes. Maybe one more comment on the cash flow, first. Q1 is our cash flow weakest quarter, and this is because of the seasonality of our business. Our ag solutions business sells products from the inventories and so the accounts receivable builds up. And if you look the quarterly development in 2019, you can see that the EUR 373 million in positives in operating cash flow with a negative free cash flow. Also in 2019, here the first quarter was the weakest. Mr. Brudermüller already mentioned that the other quarters will be much stronger in terms of cash flow.On Wintershall and DEA, you could see in the reporting that Wintershall Dea in the first quarter 2020 had around EUR 160 million. That was our share in the net profit, minus EUR 160 million. That was our share in Wintershall Dea. Of course, this was not very pleasant, but with regard to the overall situation of the very low oil price, the equally low gas price, it is quite, well, understandable that the situation is such.You also talked about the value adjustments, Mr. Hofmann. Of course, this is something which we'll have to have a look at, but this is not just a snapshot but it is an estimate that is oriented along the long-term development of oil and gas prices. So we should check now where this takes us with our forecast. So we have seen turbulences. You can't really imagine how much. I, in my career in BASF, have never seen a day in which we had a negative oil price of minus 42% at its peak for a WTI barrel. So that is really astonishing. Just now it has balanced to a level of USD 10 to USD 20 per barrel, and we will just have to see and have to understand what the long-term development of the oil and gas price will bring about. Of course, one fact will play a role, and that is that since 2015 we do not have a sufficient compensation investment in oil and gas. This is easily forgotten, but the under-swing at the CapEx is considerable. Please remember that, year per year, we have a natural decline of 5% approximately. So 5% of the volumes are lost due to old fields.IPO. Well, not in this environment. That's clear. So what does that mean for net financial debt? The net financial debt at the first quarter's end was EUR 18.8 billion, and that was compared to EUR 19.4 billion net financial debt at the end of the first quarter of 2019. Of course, there's an increase compared to the end of the year by approximately EUR 3 billion, but that is the just-described seasonality of the business. And until the end of the year, this will definitely reduce, so BASF is still financially, based on a very solid fundament, not relying on the cash flows on the IPO.

[Anke Schmidt]

[Interpreted] Next question, by Ludwig Burger from Reuters.

[Ludwig Burger;Reuters]

[Interpreted] I'd like to briefly refer to this apparent contradiction. Of course, we know that the automotive environment is very...

[Unknown Executive]

[Interpreted] Mr. Burger, sorry. It's very, very difficult to hear you. Are you using your mobile phone? Okay. Let's try again.

[Ludwig Burger;Reuters]

[Interpreted] I'm referring to the contradiction: automotive industry very weak but the business with your catalysts, very strong in Q1. How can you explain this? That's my first question. Wintershall Dea, you just answered this question by my colleague. Well, that would be my question.

[Unknown Executive]

[Interpreted] Mr. Burger, let me answer. What happens in case of Catalysts? Well, Catalysts, here we have a precious metal trading business, which is about 50% of the sales we show for Catalysts. In the precious metals trading business, we saw that prices, especially for palladium and rhodium, skyrocketed in Q1. For reasons of comparisons: Rhodium in 2019 saw an increase from USD 3,000 per ounce to an average of between USD 10,000 and USD 11,000 in Q1, per ounce. Palladium developed from $1,300 to about $2,200 and $2,500, which of course then increases earnings, but these are book gains mainly for the precious metals. And with declining precious metal prices that we will see in the second quarter, this will be put into perspective again. So it will go down, but we have a second effect, a special economic situation in China when it comes to demand for automotive catalytic converters. Why is it? This is because of a new standard in China, China 6. And apparently, we are able to offer the right product at the right time, which then resulted in this gratifying result.

[Anke Schmidt]

[Interpreted] Now [ Elizabeth Duerstat ], please.

[Unknown Attendee]

[Interpreted] Two questions. Mr. Engel, you probably have an idea about the average oil price in your mind when impairment of Wintershall would be necessary. Maybe you can give us this figure. And my second question, we see that we will have an extended dry period. How is BASF prepared for low water levels?

[Hans-Ulrich Engel]

[Interpreted] [ Ms. Duerstat ], I have to disappoint you. I don't have a figure in my mind when it comes to the oil price. I intensely and actively observe the price development to find out what measures need to be taken to make sure that we safeguard liquidity for Wintershall Dea, but I'm quite hesitant when it comes to speculating about oil price scenarios.

[Martin Brudermuller]

[ Ms. Duerstat ], we had great weather during the lockdown. People were able to enjoy it on the balcony, in the garden, while working from home. In Ludwigshafen it's raining at the moment. And we took measures after we had the problem with low rainwater levels 2 years ago. We got ready. We have changed forecast tools now. And so 6 weeks ahead, we can give a forecast, and they will become more accurate the closer you get to the point. So according to the 6-week forecast, it is not expected to reach a critical level. And as a response of BASF, all the vessels that don't need high water levels were chartered so that these vessels can still operate when other vessels can no longer operate. By the way, we are on the way of developing a vessel type, a specific BASF vessel type that only needs low water levels. Cooling water-wise, we took measures. Our capacities were changed. And so we disentangled the whole thing in order to solve problems. And we don't expect any problems regarding low water levels, but let me say something else: The dry period in Europe specifically may adversely affect the ag business, but as every year, when asking the colleagues, somewhere in the world, it's too dry, too hot, too warm, too wet. So at the moment, we don't know what it will mean, especially when it comes to Europe.

[Anke Schmidt]

[Interpreted] Next question, Sabine Wadewitz, Börsen-Zeitung. Ms. Wadewitz, please.

[Sabine Wadewitz;Börsen-Zeitung]

[Interpreted] Three questions. A follow-up question regarding the dividend: Did I understand you correctly that you will not have to finance the payout of the dividend? Then liquidity development, you explained. Can you tell us what the terms and conditions are? And did you take up a loan before, or has this not happened for the first time? And you want to divest 2 parts of the company. Did you probably negotiate again about the purchasing prices of your buyers?

[Martin Brudermuller]

[Interpreted] Well, the 2 divestiture projects, Ms. Wadewitz, they are on time. And this cannot be taken for granted, of course, because just imagine what kind of meetings. And organizational issues need to be solved for this carve-out. Most of the things are taking place virtually at the moment. We have to develop new companies, establish new IT solutions, carve it out, switch over services to external service providers. So we have a team together with the buyers, and this is really a lot of work. We do not expect major delays here regarding the time line, so we will remain on time with the closing of the projects. There is no indication from any of the 2 buyers about problems in this regard. We are in close contact with the management of the 2 buyers. So from our point of view, we do not expect any problems here. And the CFO will answer the other 2 questions.

[Hans-Ulrich Engel]

[Interpreted] Ms. Wadewitz, yes. Regarding the dividend 2019, and this is the year we are paying for the free cash flow of EUR 600 million, we'll make sure the excess that we have here -- we'll make sure that we do not have to finance the dividend. If we look at the liquidity of the current year, the free cash flow we generate will cover the dividend we pay and we do not have to finance it in any way. Well, then you referred to the loan. This is not our first loan. We had loans in the past. Normally they are used to support certain innovative measures. If I remember correctly, in Q3, we closed the negotiations, and in Q1, we used the opportunities we had then. Ms. Wadewitz, please bear with me. I will not disclose detailed terms and conditions, but rest assured, all the liquidity measures we had in April and also in the first quarter, bearing in mind past interest rates, the terms and conditions are really good, which is clearly below 1%.

[Anke Schmidt]

[Interpreted] And yes, the question about divestitures was answered by Martin Brudermüller, okay. Thank you. So with this, [ Sabine Kuspert, euro ]. And then we will switch over to the English conference room.

[Unknown Attendee]

[Interpreted] Yes. I have one question on the corporate tax. So with regard to the uncertainties, could you give us [ an in look into ] how you work there in scenarios and detention? And how much do you have? And Mr. Brudermüller said before that you have a company-owned Verbund simulators and which you can optimize the capacity utilization of a Verbund site. Could you explain how that works?

[Martin Brudermuller]

[Interpreted] Well, [ Ms. Kuspert ], yes. I am -- first of all, we started with the measure that the Board of Executive Directors has a meeting on a daily basis, getting up-to-date globally. We look at the key figures. We also look at the colleagues which are -- that are responsible for the operation of the business, and then we implement the measures. So that, of course, goes downwards in the organization. The ODs have the same structures for their business, and we have business contacts with the essential key accounts. And the teams are looking at how on a short-term basis we can react to additional demand, how supply chains can be reactivated. And what's important for BASF is Verbund control. Just imagine, and I mentioned it before, that in the segment Nutrition & Care we have customers where we have a 2-digit volume demand, and that's particularly in all the detergent products. They are all based on ethylene products, so the cracker has to be ramped up to produce enough ethylene also for the downstream products. And then there's another area which is going down. And so everything has only to be arranged to look into the companies that are interested or switching to the business unit and optimizing the overall interest of BASF. And since we are very complicated with our Verbund and there is a whole lot of fragmentation, we have an EI -- AI optimized tool at BASF Verbund where we can feed all the data and then look what the optimal solution for BASF could be, which means that you transport maybe some things from one site to the next. And that is also a kind of art, to control such a Verbund. And in the past, we had some situations before, during the financial crisis, but also think back of the explosion in the harbor. And we could use the mechanisms there that were established. And these crisis teams and the central global crisis team is situated in Ludwigshafen. They can be activated within hours, and they gather all the information that is necessary.So we have well-established processes. And maybe one last comment on that: We keep realizing that BASF and the BASF team always works best during crisis. And that's exactly the moment when many, many good ideas come up. And people, well, go in one direction, speak with one voice and steer BASF very well through stormy waters. And I think this Verbund idea is an element why BASF can do such a good job and is maybe better than others in these situations. And let me add the beauty about it is that we now have customers that now in the crisis realized how good it is to cooperate with BASF because we do fill 1 or 2 gaps in the supply chains because other companies cannot deliver maybe.

[Anke Schmidt]

[Interpreted] Well then, let's switch to English questions just now, but afterwards we'll come back to the German.The first question now comes from Andrew Noel, Bloomberg.

[Andrew Marc Noel;Bloomberg]

Can you hear me?

[Anke Schmidt]

Yes, perfectly.

[Andrew Marc Noel;Bloomberg]

Great. Okay. I've got 3 questions, please. Could you provide some historical context to the cash situation that BASF finds it in, in terms of maybe in the financial crisis and given that you've got that sort of $10 billion ramp-up in investment for the new Verbund in China? That's the first question. Second question is a bit more [ opaque ]. I just wondered, is there something about the chemical industry that chemically -- companies that make them more loyal on the dividend front? I just saw Clariant this morning. They also maintained their dividend. And so I mean just a general point of view from you whether, I don't know, the complexity of the industry, you feel more loyal to on the dividend front or any other reason.And then just the final question is on the disposals. I'm hoping that you'll answer this because I think it's come up in other calls and companies have talked about it. Do you have MAC clauses in your construction chemicals and pigments agreements? And if they -- if Lone Star and DIC did come back to renegotiate, what would your answer? Would you -- would the door be open?

[Martin Brudermuller]

So Andrew, I don't know whether -- and I don't want to speak here for the whole chemical industry. I don't know whether they are more loyal to dividend promises. I can only talk about BASF. We have installed a clearly thought-through strategy. We had made in February a dividend decision based on also our performance in 2019. Hans has alluded to that, all in the different scenarios we have, we have enough liquidity to manage that. And in that respect, I think it is reliability and it is also keeping our promises also towards all the stakeholders. I mentioned this in my speech. It's about solidarity and responsibility. And I think as we talk also for a dividend related to the performance in 2019, I think we should keep that, and we are happy and able that we have the stability to do that. What -- on what comes in the future and how post-corona world looks like, that's we will be deciding when we see this in the future and when we have a clearer view and when we have macroeconomic scenarios. So I think it is the right decision. It looks like that several other companies see the same in our industry, but it is, I think, an individual decision of a company and also has to reflect its financial strength.I think, one quick word to the 2 divestiture projects, whether anyone will -- is renegotiated or they came back. There is none of this. I just mentioned this, very stable. We work through our carve-out plans. And we are basically in time manage that we have the one or the other delay because of virtual meetings. And then no, I think that's it what I have to say. There is nothing more to add.

[Hans-Ulrich Engel]

Andrew, I come back to your question on -- yes, on financing, liquidity. I mean we've taken, as you can imagine, a long and hard look also at the developments of BASF during the financial crisis in 2008, 2009 because that's one of the very few reference points that we have for a situation like the one that we find ourselves in. There is one interesting development which may be a bit counterintuitive, which is that a shrinking business, first of all, generates cash for you, yes, because what happens is your sales come down. Your accounts receivable will come down, yes. And as a result of that, automatically you generate cash from shrinking net working capital. At the same point in time, you adjust the way you run your plants. You bring your inventories down. You sell out of inventories, which is another cash generator for you. So that's something that is -- gives you a certain comfort in a situation like this. While you don't like to see your business shrink, you know that in the beginning this shrinking business will generate cash for you. What this all means long term, yes, remains to be seen. Martin already spoke about the Guangdong project, which is a -- as you alluded to, a USD 10 billion investment, but it's always important to keep in mind this is $10 billion investment over an extended period of time, i.e., over a time of 10 years.

[Anke Schmidt]

Okay. [Operator Instructions] And with this, I would hand over to Nigel Davis from ICIS.

[Nigel Davis;ICIS;Analyst]

One thing I wanted to ask was the -- are you seeing -- are you learning anything from what happened in China as China came out of lockdown, and that might apply to your businesses in Europe and possibly also in the U.S.? And also as you see this business racking down in -- at the top of the portfolio, when does that actually stop? When are you seeing a business being held up being maintained? Is that sort of anything more than nutrition? And also obviously, we saw it in the Catalysts business in the first quarter.

[Martin Brudermuller]

I mean learning from China, this is a long chapter. I mean first of all, it really looks like they managed it as a society very well, to keep the infection under control after this short period of escalation. Actually, I mean if you look on our business really ramping up, even the automotive industry, they start to produce again. It's not everything on the level as it has been before, but it is getting close to this. And I think they balanced very nicely overall the lockdown and the control of infections, but on the other hand, opening up, I think it is already to do a little bit with culture. And if you say what you can learn -- I mean I lived 10 years in Asia as well. People wear masks. And this is part of the culture to protect others mainly if you wear this mask. So if everyone wears a mask, you can also open up the public space much faster and still protect people from infection. And I think this is indeed something which maybe Europe can learn from. So overall, the China business is doing again fairly well. And to the second question, Hans?

[Hans-Ulrich Engel]

Yes. Nigel, can you do me a favor and repeat your question? It was difficult to actually hear...

[Nigel Davis;ICIS;Analyst]

Sorry. I think I wasn't particularly clear, but you've seen the -- obviously the buildup in fixed costs at the top of the chain in your Petrochemicals and Chemicals businesses. And where do you think that is going to stop? I mean are you still seeing -- and what's demand like further down the chain? Will that stop the decline in business?

[Hans-Ulrich Engel]

Okay. So on the fixed costs side in our upstream businesses in Chemicals and in Materials, please keep in mind the fixed costs in Materials now reflect the acquisition that we did on January 31, the Solvay business. That drives up the fixed costs in the Materials segment. And then we have an effect coming from an inventory adjustment in our Petrochemicals business as a result of the steeply declining raw material prices. We had to impair part of the inventory. That drives up then the fixed costs in Petrochemicals. Other than that, there is no fixed cost increase. Margins have come down further in Q1. That was fully in line with what we had expected and had guided. Our expectation was that margin would trough in Q1. Whether that is true now remains to be seen in the current situation. I hope that helps.

[Nigel Davis;ICIS;Analyst]

Yes.

[Anke Schmidt]

So then one last question from the English-speaking room, from Tom Brown, also from ICIS. And then we move back to the German-speaking room afterwards. Tom, please.

[Tom Brown;ICIS:Analyst]

Just a quick thing. I am -- obviously, since BASF covers so many markets, I wonder if you could give me any picture on what kind of disruptions in supply chains you've seen in Europe, so far. And any countries or sectors in particular? And how acute have that been? And do you expect those trends to continue into or intensify through Q2 and the rest of the pandemic and the opening-up period after lockdown?

[Martin Brudermuller]

Talking about supply chains. I mean this is all very much also individual from the companies because they realize now, and you don't have the transparency where they get their materials from. I think there is one maybe a little bit more concerning now, which is India, because India is in a total lockdown. And you know that India has a chemical industry deeply ingrained into supply chains and value chains globally. So there is a lot of intermediates manufacturing for pharmaceuticals and also for ag chem. And certainly there is a standstill in production. So I think that is hampering the -- one or the other plan of productions and volume planning, but beyond that I would say it is very much an individual company thing. And we see in China, as I said earlier, that supply chain -- most of the supply chains working relatively well in the moment. We also here in Ludwigshafen, most of the raw materials -- or all the raw materials we need are actually quite liquid and available. So I would say this is more a company issue than a general. But [ a little bit with ] India now. Second one, second question, I did not really get.

[Tom Brown;ICIS:Analyst]

Sorry. I'm -- I didn't ask one, but since you gave him a chance, I just wondered, with China, you say things are going back to normal and -- but obviously you've had concern about the impacts of reduced demand globally. And so in terms of that balance, I mean how much does that depress production in China? Or how significantly impacted will, do you think, your [ operating ]...

[Martin Brudermuller]

Tom, I think this is very difficult to answer. And this is also the reason why we have -- gave you the outlook just as we gave it a few minutes ago. I think we don't know how demand pattern is actually developing. There is a demand and, I would say, also a trust issue with people. I mean how quickly people go back and spend money which they have not spent in the last weeks, that has to do with macroeconomics. There is unemployment, so people might be more cautious in spending and say let's keep the money together and don't need to do the one or the other investment. That will be a global topic, I think. And that is then also basically translating into global value chains. I mean China is exporting a lot. I would expect, would be my rough guess, that export numbers of China are going down over the next months because all over the world people will buy less and pull less. So that will have, let's say, a dampening effect on China, but you also know that China is stimulating and it's like still a dry sponge with a lot of domestic demand. So it is also depends how quickly and how smartly the Chinese government is stimulating domestic demand by subsidies and all these schemes, but overall I would say this is a depressing factor and a slowdown factor also for China.

[Anke Schmidt]

And with this, we would now switch back to German.[Interpreted] Next question again from the German conference room. [Operator Instructions] So now I'd like to ask Hartmut Reitz of SWR to ask his question. Mr. Reitz?

[Hartmut Reitz;SWR]

[Interpreted] It's about short-time work. You roughly illustrated that it's not too bad at BASF. What do you expect for the next weeks and months? For Germany, for the site of Ludwigshafen, will you have more short-time work?

[Martin Brudermuller]

[Interpreted] Well, we want to use this instrument not very often. Especially in Ludwigshafen, the number of people in short-time work is below 100. Maybe the figure could go up a little bit over the next few weeks. Around 1,300 employees in Germany might probably be affected. So this could mean 250 more in Ludwigshafen, but we don't really know where we are heading here. But we have many other measures we can take, reducing overtime that was worked and use leaves. But we have some mechanisms from the last crisis where people were transferred within BASF from one plant to another one where there is higher demand. So this is why I mentioned in the beginning, when discussing short-time work, there are some industries where it is a very, very important instrument for many people. With BASF, it's one instrument but not the most important one, so figures are not too high and, I have to add, not only Germany. I mean we have some other European countries, Belgium, Great Britain, Italy, Norway, Sweden, Spain, Switzerland. These countries have issues here. Around 3,000 employees all over Europe have been furloughed. So short-time work in Germany does not mean they don't work at all. And sometimes, it's 10%, 20%, 30% of the time they have short-time work.

[Anke Schmidt]

[Interpreted] Next question to [ Bettina Espera ].

[Unknown Attendee]

[Interpreted] Yes. And on the shortened investments, so which projects have you canceled or put on ice? And one question on the Ludwigshafen site: The bonuses for the workforce, are they staying as planned, or will you reduce them?

[Unknown Executive]

[Interpreted] Well, [ Ms. Espera ], I won't give you any detailed projects. If the need goes down and you don't know how it's going to recover, you will have to look for every individual product, whether you need additional capacities. For the OpEx measures, we always have good solutions how we can win additional capacity. So we look through the portfolio where we can shift or transfer anything. That doesn't mean that we give up on projects, but they are just going to be shifted elsewhere. And we've analyzed where there are projects which are not safety relevant or have to be done due to safety relevance just now, and they were shifted. And then we have delay effects in the execution of some projects. We are going to be slower because the supplier will not be able to deliver. And you have other subjects that we have already mentioned which are those of BASF. So we did it with a lot of care. And of course, we will not cancel just like that. So if you shift or transfer, it might also cost more money later, so we also analyzed that. So it was an activity where all the ODs made their contributions.With regard to the bonuses, we're talking about a bonus for 2019. And most of the sites all over the world, they were already distributed and paid out, so nothing is going to be changed. And looking forward, we have a bonus system which is connected to the return on capital employed, ROCE. And we will see what will come from that from the performance of 2020, but once we have steered out of the fog, so to speak, and we have a clearer sight of the situation, we will decide upon that. So the old bonuses have already been paid out. And we will also have the dividend for 2019.

[Anke Schmidt]

[Interpreted] [ Olaf Lisman ] from [indiscernible].

[Unknown Attendee]

[Audio Gap] [Interpreted] with number of the site and yes, in Ludwigshafen. So where are we at, at the end of the year; with our situation at the end of the second quarter of 2020? So I'm interested in the figures here.

[Martin Brudermuller]

[Interpreted] [ Mr. Lisman ], I think we talked about this subject time and again, and you also keep asking. So at the end of the year, we will have a figure which is, of course, lower, clearly lower, than at the end of the year 2019. You also know that we have the Excellence Program with the 6,000 positions which we want to reduce globally, that we want to accelerate that. We do not want to shift it into the end of 2021, but we want to finalize it within the year 2020. This is where we do a lot of work just now. We do not employ people -- new people now. We can use retirement plans. We can use the natural fluctuation. And we also have some other people that will have some severance pay solutions. Not everybody has gone that have signed their contracts last year. So nothing really has changed so much after the last time we spoke. Ludwigshafen, of course, has a surge in share, but the other half really is out there in the world globally.

[Anke Schmidt]

[Interpreted] And then we have the last question for today from [ Sabine Gaibel ] from SWR. [ Ms. Gaibel ], please.

[Unknown Attendee]

[Interpreted] Well, I would like to wish you all the best, Ms. Schmidt, first of all. And I have one question which is still left. All the other questions have already been answered. So my question, for Mr. Brudermüller: Have I understood you correctly that for the second quarter you don't exclude a loss?

[Martin Brudermuller]

[Interpreted] Yes, we said it like that. That's not a basis scenario, but we think in scenarios. We told you a lower 3-digit million amount is what we see just now, but who can look into the future, how quickly some things might ramp up again, how quickly we can get out of lockdown in May, in June? We have some projections and forecasts, but it can also be worse, of course. And then it can happen that this small 3-digit million goes down to 0. Or in the extreme worst case, we do see negative earnings situations, EBITDA before special effects, in the second quarter. Yes, you understood that correctly. That's the worst case that can happen.

[Anke Schmidt]

[Interpreted] Okay. So that was it for today. And I would like to make or give you a few dates for the future, and then I would like to make a personal comment.The figures for the second quarter 2020 will be presented to you by BASF in a telephone conference on the 29th of July 2020. And we would love to have you with us again. The details of the virtual AGM which will take place on the 18th of June, here, the details you will find on the 22nd of May.And last but not least, let me say goodbye to you. Over the years, we had many interests, contacts and also talks. Of course, there were also some delicate and a little more difficult questions from you, but we were always professional in our interest and respecting each other. I like that very much. I enjoyed my work, and I would like to say thank you to all that. And I hope that we will talk again soon, so stay with BASF. And stay safe.

[Unknown Executive]

[Interpreted] Thank you very much, and stay healthy.