Basf Se

XETRA:BAS

Earnings Call Analysis

Moderate Performance Amid Challenges and Optimistic Future Outlook

In Q1 2024, BASF's sales decreased by 12% to €17.6 billion, mainly due to lower sales prices, despite a 0.5% increase in volume. EBITDA before special items fell by 5% to €2.7 billion, and net income dropped by 12% to €1.4 billion. However, free cash flow improved by €426 million to -€1.5 billion. BASF expects EBITDA before special items for 2024 to range between €8.0 and €8.6 billion, and free cash flow between €0.1 and €0.6 billion. They remain cautious but optimistic regarding future performance, particularly due to anticipated demand and cost-saving measures.

Financial Performance in Q1 2024

In the first quarter of 2024, BASF reported a mixed financial performance compared to the same period last year. Overall sales decreased by 12% to EUR 17.6 billion, largely due to lower sales prices across almost all segments. Despite this, EBITDA before special items amounted to EUR 2.7 billion, a slight decrease of 5% from the previous year. The decline in earnings was primarily driven by lower sales prices, which were influenced by the decrease in raw material prices. Net income also dropped by 12% to EUR 1.4 billion.

Segment Performance

Different segments of BASF experienced varied results. Segments such as Chemicals, Materials, Nutrition & Care, and Industrial Solutions saw increased EBITDA before special items, driven by higher volumes and fixed cost reductions. However, Agricultural Solutions and Surface Technologies reported declines in EBITDA. The Agricultural Solutions segment's drop was mainly due to lower volumes and the Surface Technologies segment faced challenges from lower prices of precious metals in the Catalysts division, partly offset by higher earnings in the Coatings division.

Cash Flow and Financial Position

BASF's cash flows from operating activities improved significantly, by EUR 502 million to minus EUR 530 million. This improvement was primarily due to improved inventory management and lower payments from accounts payable. Free cash flow also saw an improvement of EUR 426 million, standing at minus EUR 1.5 billion. Capital expenditures rose by 9% to EUR 943 million, led by investments in the new Verbund site in South China. BASF maintained a solid equity ratio of 47.2% at the end of March 2024, despite net debt increasing to EUR 18.2 billion from EUR 16.6 billion at the end of December 2023.

Regional Performance and Market Conditions

Regionally, BASF experienced varied performance. In China, growth was strong driven by recovering domestic demand and exports, albeit with low sales prices. In North America, chemical production was flat, while in the European Union, production saw a modest increase. The overall volume recovery, albeit slow, continued from Q4 2023 into Q1 2024. However, the company remains cautious about confirming a fundamental turnaround in industry dynamics.

Outlook for 2024

For the full year 2024, BASF maintained its outlook, expecting EBITDA before special items to be between EUR 8.0 billion and EUR 8.6 billion. The company also forecasts a free cash flow between EUR 0.1 billion and EUR 0.6 billion. This guidance assumes expected cash flows from operating activities to be between EUR 6.6 billion and EUR 7.1 billion, minus expected capital expenditures of EUR 6.5 billion. Additionally, BASF anticipates CO2 emissions to be between 16.7 million and 17.7 million metric tons in 2024, with targeted emission reduction measures to counteract any increase from higher production volumes.

Strategic Direction and CEO Transition

Martin Brudermueller, the outgoing CEO, highlighted the company's strategies including cost control measures and investments in key regions like China. As BASF prepares for a leadership transition, strategic directions will be further refined by the new board. However, the fundamental focus remains on trimming structures, enhancing efficiencies, and positioning closer to customers. The upcoming strategies will aim to continue evolving from the groundwork already laid down, despite the numerous crises managed over the past years.

Earnings Call Transcript 2024-Q1

[Stefanie Wettberg, executive]

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the third quarter 2024 results. Throughout today's recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be actual. Such risk factors include those discussed in opportunities and risks of the BASF report 2023. BASF does not assume any obligation to update these forward-looking statements contained in this presentation above and beyond the legal requirements.

With me on this early morning call today are Martin Brudermuller, Chairman of the Board of Executive Directors; and Dirk Elvermann, Chief Financial Officer. Please be aware that we have already posted the speech on our website at basf.com/Q12024.

Now I would like to hand over to Martin Brudermuller.

[Martin Brudermueller, executive]

Good morning, ladies and gentlemen. Dirk Elvermann and I welcome you to our analyst conference call. Today, we will provide you with details regarding our business development in the first quarter of 2024.

Let's start with the development of chemical production by region. Based on the currently available data, global chemical production grew by 5.4% in Q1 2024 compared with the prior year quarter on account of a strong growth in China. As in previous quarters, the growth in China was driven by recovering domestic demand and exports. However, this volume growth in China was still associated with low sales prices and is influenced by positive base effects.

In North America, our chemical production was essentially flat. While in the European Union, production increased slightly compared with the weak prior year quarter. And in Asia, excluding China, production decreased slightly. To sum up, the volume recovery continued, but slowly this trend is also seen in a sequential comparison as volumes increased slightly in Q1 2024 compared with Q4 2023. Still, we cannot yet confirm a fundamental turnaround in industry dynamics. For this, we will need to see the current positive trend continuing in the coming quarters.

We now move on to BASF's performance in the first quarter of 2024 compared with the previous -- the prior year quarter. Overall, BASF Group sales were 12% lower at EUR 17.6 billion. This was mainly due to lower sales prices, which declined across almost all segments. Prices predominantly decreased on account of lower raw material prices.

In Agricultural Solutions, we were able to slightly increase prices. Currency headwinds dampened sales in all divisions. Volumes of BASF Group increased by 0.5%. Excluding pressures and base metals, volume increased by 2.1% compared with the prior year quarter.

In terms of earnings development, we had a solid start to the year. EBIT before -- EBITDA before special items amounted to EUR 2.7 billion. This is slightly below the figure of the prior year quarter and slightly ahead of analyst consensus. Higher earnings in the Nutrition & Care, Materials, Industrial Solutions and Chemicals segments more than compensated for the decline in other Agricultural Solutions and Service Technologies.

Let's take a closer look at the volume development by segment. Volumes in the Chemicals, Materials, Nutrition & Care and Industrial Solutions segments increased, while Agricultural Solutions and Service Technology recorded a decline. Higher volumes in our upstream businesses led to improved utilization rates at our major plans and positively impacted profitability.

Excluding precious and base metals, the Surface Technologies segment recorded a volume decline of only 0.9% on account of the -- distribution. Volumes in the Coatings division increased, and Agricultural Solutions volume declined mainly to lower sales of herbicides and fungicides compared with the record prior year quarter.

And with that, I hand over to Dirk for more financial information.

[Dirk Elvermann, executive]

Thank you, Martin. Good morning, ladies and gentlemen. I will now provide you with further financial details for the first quarter of 2024 compared with the prior year quarter.

As Martin already mentioned, EBITDA before special items decreased by 5% and amounted to EUR 2.7 billion. EBIT before special items declined by 9% and came in at EUR 1.8 billion. Net income declined by 12% to EUR 1.4 billion.

In Q1 2024, the tax rate was 20% compared with 17% in the prior year quarter. Yet as cash flows from operating activities improved by 49% to minus EUR 513 million, free cash flow was minus EUR 1.5 billion compared with minus EUR 1.9 billion in Q1 2023. I will comment on the cash flow development in more detail on one of the next slides.

BASF's equity ratio remains very solid. It amounted to 47.2% at the end of March 2024.

Now let's take a look at the development of EBITDA before special items by segment compared with the prior year quarter. BASF Group earnings performance was driven, in particular, by the significant decline in earnings and other, which was primarily attributable to higher bonus provisions as well as higher expenses from the long-term incentive program and lower contribution from BASF internal insurance companies.

Agricultural Solutions and Surface Technologies also recorded a decline in EBITDA before special items. In Agricultural Solutions, this was mainly due to lower volumes. The decline in earnings in the Surface Technologies segment was due to lower precious metal prices in the Catalysts division. This was partially offset by the increase in earnings in the Coatings division.

All other segments, Nutrition & Care, Materials, Industrial Solutions and Chemicals, increased EBITDA before special items, in some cases, significantly mainly due to fixed cost reductions and higher contribution margins predominantly driven by higher volumes. For a detailed explanation of the earnings development by segment, please refer to BASF's quarterly statement Q1 2024 published this morning.

I will now continue with more detail on our cash flow development. In the first quarter of 2024, cash flows from operating activities improved by EUR 502 million to minus EUR 530 million. Changes in net working capital led to a cash outflow of EUR 3.2 billion compared with a cash outflow of EUR 3.6 billion in the prior year quarter. This positive development was due to lower payments from declining accounts payable. Change in inventories were almost stable. Overall, this, once again, demonstrates our strong focus on inventory management and cash generation.

Compared with the prior year quarter, payments made for property, plant and equipment and intangible assets rose by 9% to EUR 943 million. This increase was mainly attributable to the construction of our new Verbund site in South China.

In Q1 2024, the free cash flow improved by EUR 426 million to minus EUR 1.5 billion. Typically, BASF's free cash flow is negative in Q1 and recovered in the course of the year. This is mainly due to the seasonality of the cash flows from operating activities in our Agricultural Solutions business.

Let's now turn to our balance sheet at the end of March 2024 compared with year-end 2023. Total assets amounted to EUR 81.7 billion. This is an increase of EUR 4.3 billion, mostly on account of higher current assets, which increased by EUR 3.4 billion. This increase is mainly attributable to the previously mentioned seasonality of our businesses particularly in the Agricultural Solutions segment, which resulted in higher trade accounts receivable compared with year-end 2023.

Higher additions to property, plant and equipment were the main driver for the slight increase in noncurrent assets compared with year-end 2023. Net debt increased to EUR 18.2 billion at the end of March 2024 compared with EUR 16.6 billion at the end of December 2023. At 47.2%, our equity ratio at the end of March '24 was at the same level as our year-end 2023.

And with that, back to you, Martin.

[Martin Brudermueller, executive]

Thank you, Dirk. Now I will conclude with the outlook.

BASF outlook for 2024 and the underlying assumptions remain unchanged. As published in the BASF report 2023, we expect BASF Group's EBITDA before special items to rise to between EUR 8.0 billion and EUR 8.6 billion in 2024. Our forecast for BASF Group's free cash flow is between EUR 0.1 billion and EUR 0.6 billion. This is based on expected cash flows from operating activities of between EUR 6.6 billion and EUR 7.1 billion minus expected payments made for tangible assets and property plant and equipment in the amount of EUR 6.5 billion.

CO2 emissions are expected to be between 16.7 million -- billion -- million tonnes and 17.7 million metric tons in 2024. We anticipate additional emissions compared with the previous year from higher production volumes based on rising demand. We will counteract this increase with targeted emission reduction measures.

Thank you. And now I'm glad to your questions.

[Stefanie Wettberg, executive]

Yes, ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions] The first question will be from Sam Perry, UBS. We will then have Christian Faitz and then Matthew Yates. Sam, UBS, please go ahead.

[Samuel Perry, analyst]

Two, please. Firstly, on Upstream volumes clearly recovering from low levels. Where are utilization rates currently? And how far away from the point at which you think you might be able to drive some pricing?

And then secondly, on ag, can you talk through the moving parts on the margin improvement year-over-year here? Just quite surprised to see stepping up year-over-year when volumes are down significantly and only low single-digit pricing. Is there any sort of cost phasing or something else in there? And if so, any implications for Q2?

[Martin Brudermueller, executive]

Yes, Sam, I can take your questions. First on the upstream. Utilization rates are recovering for now. And we came from a low level in 2023. We are now, again, crossing the 70s. There is still obviously further room for improvement, but allowed by the fact that we had our crackers in Europe all running, you can already infer that there is higher demand certainly than we had in 2022.

On your next question, the volume development certainly as expected. Let's remind us, we have the second best first quarter of the ag. It is lower compared to the strongest first quarter that we had last year, but it is still the second best. So volumes down as predicted. And the better margins predominantly come from the mix. As we have less sales in the chemicals part, so the herbicides and fungicides, but this is a -- pricing-wise, then compensated by higher sales in seed, which, you know, in our case, are predominantly canola, soy and also cotton. So product mix makes a difference.

[Stefanie Wettberg, executive]

We move on to Christian Faitz, Kepler Cheuvreux.

[Christian Faitz, analyst]

First of all, Martin, all the best for your last day in an operating function like BASF, and obviously, all the best for the future post BASF. Many thanks for all the good interactions we had throughout these years. And all of you, I wish a successful and in particular, short AGM.

My one question is you saw a decline in emission catalyst volumes. How the volumes in automotive OEM paints? I assume they were likewise negative. Would you see volumes in your automotive OEM activities normalizing at some point this year? And also, was there a particular reason why you saw a considerable increase in automotive refinish?

[Martin Brudermueller, executive]

So Chris, first of all, thank you very much for the nice words and particularly the vision of a short AGM. We are looking forward to that one.

I think when we look on the Automotive business, we have also to take really into account the best in the ICE development. So we have really seen particularly in China, where the best development is quite impressive, that our volumes for the catalysts have been significantly down. That was the major impact which we actually had was the Chinese market.

Overall, we had a much better development in the Coatings division. It was only slightly down. The volume side was more or less a rollover from the business before. So it is basically the change between the best in the ICE, which, however, I have to say that is developing slowly slower all over the world than expected. But Coatings business is much more robust in this situation.

[Stefanie Wettberg, executive]

So the next one is Matthew Yates. We will then have Jaideep Pandya and then Chris Counihan. So now Matthew Yates, Bank of America, please go ahead.

[Matthew Yates, analyst]

Sorry to ask such a short-term question. But you noted in the release that there was some benefit from the Red Sea disruption in Q1. Should we think of this as just a onetime benefit and the environment so far in Q2 is not as good? Or are you seeing a continued positive development of the order book in recent weeks? And if I can just squeeze in a second one maybe for Dirk. On Wintershall, why is the disposal price of the weaker infrastructure assets not been disclosed?

[Martin Brudermueller, executive]

Martin, I think this is the opportunity maybe to give it a little bit a summary again. So let me really say we have been happy with the development in the first quarter, particularly also on the volume side, but you saw also that we are a little bit cautious yet to see whether this is a solid foundation that is things really improved because I think there are some effects that actually helped in Q1. And that is for sure that the inventory level was extremely high on years change. So I think people get a little bit more confident and with that, also starting to order a little bit more. They want to be prepared that, let's say, the inventory situation is more normal. And there is indeed this effect, which we see in some of the businesses that they reconsider their supply chain strategies because there have been interruptions from the long sea journey of materials, and they have to go around the longer journey. So they are worried about that. And I think they ordered higher volumes also of some of the suppliers from Europe, and we clearly benefited from that.

So with that, also, I would be cautious to take this in the baseline because I would expect that this is a problem that is not over tomorrow, but I would also not expect that this is a long-term problem because I think somehow, the world is arranging with this. For that reason, we are also a little bit cautious. We are very positive, I have to say, but we are very cautious still to say whether this development with all these special effects will continue in Q2 and Q3. So disposal for Dirk.

[Dirk Elvermann, executive]

Yes. Matthew, the disposal price for -- is not as closed for the simple reason that confidentiality has been agreed. So -- but what I can say is that we are very happy with this second year now after the Harbour deal now that the deal with safer, which is actually the German government. And as I cannot disclose the trial, let me at least guide you a little bit by saying the book value of WIGA transport is at EUR 1.05 billion, and we would certainly rather say higher than lower than the book value.

[Stefanie Wettberg, executive]

Okay. So now we have Jaideep Pandya, On Field Research.

[Jaideep Pandya, analyst]

The first question really on Nutrition & Care. Could you just tell us like what are the main moving parts here in terms of sort of volume dynamic, pricing dynamic that you see in both the subsectors? And what is the BASF-driven cost realignments that you have done maybe on the capacity or on the product mix?

And then the second question/comment is, first of all, thank you to Martin for all the good times and all the comments. And also well done on being so bold as a CEO of the largest industrial/chemical company in Germany.

And the question to you really is, what is the one thing that you would tell Marcus as he comes in to replace you?

[Dirk Elvermann, executive]

I'll start with a small question on Nutrition & Care. So the -- first of all, we are happy with the result in the first quarter for Nutrition & Care, which turns very positive. It's biggest EBITDA improvement contributor in Q1. This is carried, I have to say, by a volume increase in all section. So it is aroma, it's pharma, and it' also the nutrition part. The results very much carried by the highly improved aroma business.

What we are still seeing in the nutrition part is low price levels. But as you know, we have addressed those -- in regard of vitamin A, now with a new highly scaled plant that moves up quality wise, but also in terms of cost competition to the right point here. And so in a nutshell, Aroma, high contributor; pharma, very much okay; nutrition, still suffering from prices, but we're getting our [indiscernible].

[Martin Brudermueller, executive]

Jaideep, thanks for your -- I mean, first of all, let me really say that BASF is in the very best hands with Marcus and the Board team. Marcus was 25 years with the company. He exactly knows all the details of the company. So my one recommendation to him would be don't get distracted from the outside by politics and media, but go along with what needs to be done to develop the group, and to stay firm because I think there's a very clear path forward what needs to be done, and really do what needs to be done and not get distracted. That would be my advice.

[Jaideep Pandya, analyst]

Great. Good luck for everything in the future.

[Martin Brudermueller, executive]

Thanks, Jaideep.

[Stefanie Wettberg, executive]

So now we have Chris Counihan, Jefferies. We will then have Chetan Udeshi and then Tony Jones. But now first, Chris Counihan, Jefferies, please go ahead.

[Chris Counihan, analyst]

And I also pass on my thanks and best wishes for the future. I only have one question. Thanks for providing the segment cash flow now. I'm looking forward to this going forward. I just had a longer-term question on this one, Martin. Given you spearheaded the ramp-up of the China Verbund project over the next 5 years, obviously, you have staged ramp-up of production. What year would you expect that project to become free cash flow positive for BASF?

[Martin Brudermueller, executive]

Maybe I'll start on that. Normally, cash flow is [indiscernible], but this is a little bit of expectation about China. I mean, maybe, first of all, if you say -- if you start a project like that, you have to have the long-term development in the focus. That you really hit the right timing when you start up such a plan that this is the best market moment, I think you cannot plan for this. We saw this also when we opened Nanjing. So I think the fundamentals are more important than really focusing on the team.

So I would say we expect that we load the plants very quickly. Nevertheless, there's one or the other area over capacities, but not so much on our lines. So I do expect that in '26, we will be positive and have a good contribution from that already because the plant -- the products are really products broadly used in the industry. A lot of that stuff is imported today, and we substitute this with local production. That's why we are really positive, and I think we will have a good contribution already in 2026.

[Stefanie Wettberg, executive]

So now Chetan Udeshi, JPMorgan.

[Chetan Udeshi, analyst]

Just wanted to follow up on previous question on second quarter. I think Dirk, last time, you were, to some extent, sort of happy to confirm Q1 consensus. Just looking at the consensus today for second quarter. Would you say you're still happy with the consensus because, to some extent, you need that level of earnings to come to the full year guidance, one would -- one would say, but just looking for that confirmation if you can.

And second, just a related topic. We've seen a lot of volatility in Chinese pricing throughout Q1, a slight increase and then big collapse, if you will, in the second half of Q1, especially in March and early April. Can you just confirm what you see in China? Is this still a recovery mode? Or are you starting to see the trends actually start to worsen because that would be the implications based on what we see from the pricing side.

[Dirk Elvermann, executive]

Chetan, I'll start with the quarter 2 question. And indeed, I think the confirmation for Q1 that we had provided was quite accurate. So now, obviously, the question about Q2. So what do we see? We see that also Q2 follows the trend in Q1, talking to all our business. There is not the feeling that there is anything now falling off the cliff, but it's rather a continuation.

Is it a further recovery? That is, I'd say, too early to say because whenever we are talking about demand patterns, we still are in the phase of saying this is mainly restocking, still cautious buying behavior. Yes, there is some demand, but it is not really completely changing out of the positive. So I would rather say it's a continuation of what we see in Q1. So it's solid. And this is also the reason why, in terms of our guidance, we completely stick to it. We see for Q2 exactly this continuation and this is fully in line with our guidance. So not worsening, not improving dramatically, but holding the line.

[Martin Brudermueller, executive]

About China, I mean, I think if you look at Q1, basically, the worldwide growth or the global growth of chemicals has been carried by China again because about 10% growth over there versus this 5.4%. So it's basically pulled along from there. But we also said there's still relatively low pricing level. I mean the plans are quite fill, I have to say. But there is not the pricing power, which also shows you it's getting more dynamic, but it was under booming.

And I think if you look at the confidence level of people, they still are cautious in terms of the buying behavior. I wanted to say, it's not super happiness with the Chinese government overall. So people, like every human being, holds back a little bit money that you can see also in the retail area. You see that on the car production, which is not really growing dramatically over there.

So it's coming back, but it's also there not in the way, let me say, now in the next quarter, that is booming in China is pulling the world again. And I think this is one of the reasons adding to what Dirk just said, that we are a little bit cautious, but we are definitely out of the hole in China. That is very clear, and the load of our plant is on a relatively high level.

[Stefanie Wettberg, executive]

Okay. Now we have Tony Jones. We will then have Laurent Favre and then Sebastian Bray. But now Tony Jones, Redburn Atlantic.

[Tony Jones, analyst]

All the best, Martin. Only a few months ago, Martin, you talked about the need to review your production network, particularly in Germany, given high cost and low growth. How are you thinking about this now with the strongest start to the year? And a quick one for Q2. Maybe you could give a little bit of color about how you see the divisional outlook as we go into the second quarter.

[Martin Brudermueller, executive]

I'll take the first one, Dirk, you take the second one. I mean overall, let me say, I think our decisions that we have taken already to shut down plants and to trim the Fubon to basically competitiveness framework and also to the demand in Europe, I think it was all right decisions. But there will be more to come because I think we will have a fundamental topic in Europe because base chemicals will be for good because of structurally higher energy costs, less competitive. So we have to trim it more to the European demand. In our case, in BASF, we will trim it more to our own internal consumption and sell less to the market because you have also to take into account that the base candidates are the CO2-intensive products. That means we produce them, we sell them to the people, and then we have to reduce with high cost for CO2. That doesn't make sense anymore. That's why we will really use that to fuel basically our chains with the raw materials. And there's a little bit more to come, and this is what the new Board will do when they talk about the target picture of [indiscernible], which is basically revised and renewed, I have to say, with the current framework. So I would expect that, particularly in the upstream area, the European chemical industry will be weaker in software and this lower participation in global share than it has been in the past. So that will be our work, and there's still a little bit to be done, but I think we are very happy with the first step.

[Dirk Elvermann, executive]

Yes, Tony, and just speaking -- talking a little bit about the divisional outlook going forward. So starting with Chemicals and Materials, as I said already that the first quarter was okay, was good. And we have also benefited here from the one or the other special effect. Rest of World already mentioned, one of the other turnaround for outage of the competitor, which we benefited from.

Now second quarter of fundamentals, I would say, more on this unchanged, but now also we will have some turnaround. So I'd rather see that flat. Then for Industrial Solutions, I think full year, we are forecasting here a considerable increase, have nice a trend in both businesses is a volume to a large extent right now like dispersions and for instance, benefiting from that. So positive trend going forward.

Surface Technologies comprising of Catalysts, the Batteries, but also the Coatings business here for the entire segment, the site was on prior year level, depends also a little bit on development of the precious metals prices, which are, again, at a very low level, as we appreciate.

Nutrition & Care, we see a positive trend also going forward with the measures that we have taken now gaining traction. And Agricultural Solutions, we said early, after a record year last year, this will be lower volumes, while certainly, price is also getting more under pressure. But as I said, we have a more favorable mix now with higher portion of seats in our sales. So I'd rather say slight decrease and nothing dramatic happening there. So that would be my short summary of the outlook.

[Stefanie Wettberg, executive]

So now we have Laurent Favre, Exane BNP.

[Laurent Favre, analyst]

Yes. I guess, comments to not Christine and the others from and it's certainly been a fun ride. My first question to you, Martin, is regarding what you -- I guess what you told Jaideep. You said that there's a clear path forward for BASF. And I guess for years, the path has been to go more downstream, and there was a lot of M&A, and I guess that was before 2018. And when we look back to 2018 and we think about your time as CEO, obviously, there's been a lot of mess to deal with decarbonization, COVID, et cetera, and the investment in China. My question to you is, what is that clear path going forward in terms of upstream versus downstream because it's certainly not clear to me.

And the second question for Dirk as you've gone through all the -- all the business lines. On the other line itself, I understand there was a higher provision for the LTIP mark-to-market in Q1. Is there also a provision for higher bonuses that we should assume will be sent back to the divisions later this year?

[Martin Brudermueller, executive]

Laurent, first of all, let me say, I will not communicate the strategy of the new Board team. That will be happening in a couple of months when Marcus and his team will tell you how they it, basically, what they have on their minds for the next years. I mean it will be a kind of an evolutionary thing. This is very clear. That is, I think, what was always BASF. There's also some considerations they have, which differ from what I had. I mean I can only say when I started 2018, I had hoped for different 6 years than we actually had that we handle from one crisis to the other was really not what I had in mind, also not presenting the numbers in 2023 as they are. I hope we have a better result here, but life is as it is.

I think what is important that my team, which is very much also, to a large extent, Markus' team, we have been working on trimming the structures of BASF. And I think this is the basis also for going forward that we really have been looking how we get closer to the customers, how we get more efficient, how do we get cost out, how we differentiate between the businesses. And I think this is my pride, I have to say, that we got along with all these targets despite of the crisis. So we have not made compromises on that, and that includes also the decisions to close down plan. So I think that's a great basis, but have a little bit more excitement for what is coming then as the new strategy update for Marcus and the team.

[Dirk Elvermann, executive]

Laurent, your question to others, you seized right. So provisions in -- due to bonus accruals, due to -- or to take them results proportional, but there's also the longer-term elements in it, the LTI part. And then there are some things like the captive insurance payments. There was one that is booked here in others. And then it's typically also to a minor extent, some consolidation effects. So that will be the 4 buckets that you'll find another.

[Laurent Favre, analyst]

But that is this bonus provision just in line with, I guess, the guidance that you provided externally? Or have you added to the bonus provision based on the better start to the year in Q1?

[Dirk Elvermann, executive]

In line with guidance, Laurent.

[Stefanie Wettberg, executive]

Okay, now Sebastian Bray, and then we will then have 2 more analysts. That's Peter Clark and Andreas Heine to conclude. But now Sebastian Bray, on that.

[Sebastian Bray, analyst]

I have one on the equity shareholdings income in the Chemicals segment. This seems to have fared less well than the segment as a whole. What happened to the contribution from shareholdings accounted using the equity method in chemicals?

And just as a follow-up to questions that have been made on April trading. I can see the composite freight rates have dropped substantially since the peak of the Red Sea crisis in early Q1. Are there any observable trends toward customer propensity to start resourcing material from China at or that hasn't been observed as we moved into April and into Q2?

[Dirk Elvermann, executive]

Starting with the equity results. This is our joint venture in Nanjing. This talk of BYC, and this is bringing in lower results this year. A little bit also in line with the overall performance of the Chinese chemical markets, nothing outrageous, but in line a little bit with the development. Will the results get better? Again, definitely the case.

On the Red Sea, I'm not sure whether I fully got your question. I understand incoming materials from China that are still to be expected?

[Sebastian Bray, analyst]

Sorry, just to clarify, my question was the freight rate, the cost of shipping from China has declined substantially since the height of the Red Sea crisis. Are there any changes in the combined behavior of European customers observed yet on this basis? isabel

[Dirk Elvermann, executive]

So there is an element of a cost decrease in it, is that also a matter of negotiations in procurement. Yes, yes, that's the case. Sometimes costs to be passed on under this is really -- I would not see that a clear pattern. This is a mixed picture, I have to say.

[Sebastian Bray, analyst]

All the best, Martin.

[Martin Brudermueller, executive]

Thank you.

[Stefanie Wettberg, executive]

So now Peter Clark's turn.

[Peter Anthony Clark, analyst]

Yes. Yes. Yes. And well done on a very tough job. But 2 follow-ups really. The restocking question. Obviously, you've seen some restocking on the chemical production growth and what you said in Europe. Just wondering how you feel about any risk of destocking going forward? I've heard all your comments about no real changing trends. But clearly, inventory levels are still much lower than they would have been, I guess, a year ago in '23, where we have that phase of aggressive destocking.

And then looking at the cost-cutting side, encouraging to see most segments you point to the lower fixed costs. Obviously, a lot of work being done there. And that momentum is continuing, and it should build from here. So just your confidence that we're going to keep reading about the lower fixed costs on the segment line as we go through '24 and into '25 as this momentum built on the cost cutting.

[Martin Brudermueller, executive]

Peter, I'll take maybe the first one. I mean, if you look at the volume growth in Europe, which was in the first quarter, quite solid, that does not fit to the overall industrial, let's say, strength over there. We have said since about half a year that we see a kind of flattening out of building a foundation in the bottom. We reached the bottom. I think it's very clear.

If you look at the PMI in Europe, which increased a little bit from 46% to 46.5%, it's still below 50%. So that means the shrinking really comes to a halt, but we are not yet in the European territory into a positive mode. That's why we are cautious. That looks a little bit different in some of the other regions, I have to say, for example, particularly in -- also in South America, you are positive -- you are already positive in China. It's on -- 51.1% in March now, so it increases above the 50%. So you see that the dynamic's coming back, but it's also not really fully dynamic and vital as it was before.

And with that also goes the inventory policies. It has been extremely low over the recent months. And as I said, also with the supply chain constraints, people look that they are a little bit more in a healthy territory. But it's not that they fill their stocks because they need the raw materials for ramping up their production [indiscernible]

So that's why we are still cautious. We are cautiously optimistic, I have to say, but we are cautious.

[Dirk Elvermann, executive]

Yes. And on your question on the cost savings. I mean, the estimate is completely right. Now we see the cost savings kicking in, and this will now accelerate because at the beginning, you always have the onetime costs offsetting the savings. And now going forward, we'll enjoy the run rate of the already achieved savings efforts. We are adding more cost-saving measures to it. To frame the numbers one more time and you know that from our Q3 call already, we expect annual cost savings in nonproduction areas of EUR 700 million by the end of '26. And then we have a further EUR 200 million coming extra from our global services and digital and business services, and another EUR 200 million from the adaptation of the carbon structures in Ludwigshafen. This is what we already have talked about, and then comes the extra effort on the top side. As we mentioned in key takeaway, we are fully on track with the cost saving measures. The onetime costs are, to a larger extent, realized already. So going forward, you will see that cost savings in our P&L.

[Stefanie Wettberg, executive]

So now we have Andreas Heine, Stifel. That's the last participant asking questions.

[Andreas Heine, analyst]

Yes, being the last, and I obviously also would like to thank you, Martin, for this decade-long discussion I had, and your very straightforward comments, which are always very helpful.

Two questions. The first is on Agro on the second quarter. So you were talking about the positive mix in the first quarter by the seed business growing. The seed business is most seasonal. Actually most of the business is done in the first quarter. So I would assume that the picture looks in the second quarter much different before than the year-on-year comparison levels off in the second half. So is it right that this crop protection in the second half will come through and volume decline to a much more extent than what we have seen in one, the first question.

The second is actually on the oil price, which is now in the 90s. That will obviously impact upstream first by getting through the value chain. Do you see with the utilization rate you have right now already enough pricing power to push the higher raw material costs from the higher oil price in the upstream business on a short notice?

[Martin Brudermueller, executive]

Maybe Andreas, thanks also for your words. I'll maybe start with the oil price. I think what the major worry is that this very cautious dynamics that's coming back in worldwide economy is actually hampered by high oil prices because that takes cost off -- on and makes everything a little bit more tight. I said earlier, we have not yet really fully pricing power back. So it is still a play on raw material prices also. The raw material prices are going down, and they have also been tracking down the prices.

We could relatively well secure margins, but with the raw materials within [indiscernible]. So we don't see that yet, but the logic consequence would be that raw materials going up. And with that, we have always to pull the prices up. Whether this is over proportionately the case that we can expand the margins, I don't know. It's not very probable. But let's see how sustainable that is. I think there is a component in that, which is definitely from the Middle East crisis.

Whether this is normalizes, then the overall assumption that this is not ending in a war, I think it will also help to keep the oil price, at least at a level of it's not going further up and then giving more confidence. So a little bit early to say what this is, but there is the normal mechanisms, which you know very well, and [indiscernible] goes into March and we will see it has to do with the demand.

[Dirk Elvermann, executive]

Yes, on your Ag question, and first of all, say, you know that the typical pattern of our Ag business. It is front loaded. Q1 is typically the strongest. And indeed for Q2, due to the seasonality, I would not expect now a big contribution from the Ag business in Q2. We certainly see some buying behavior over from the distributors a little bit closer to their actual demand. So in this regard, there is certainly still something also to come in the second quarter, but this is not -- if you compare to last year, this is not compensating by farmers what we have not achieved in ag in the first quarter compared to the second -- to the first quarter 2023.

What we believe though is that there is a business to come also in the second half of the year, so the Southern Hemisphere for which the team is already preparing. So all in all, business development in the second quarter should not surprise us also for the Ag business yet.

[Stefanie Wettberg, executive]

Yes. Okay, ladies and gentlemen, before we close, I would briefly like to hand back to Dirk.

[Dirk Elvermann, executive]

Yes. And finally, I would like to take on what many of you have already said and expressed. And I expressed my warmest thank you to you, Martin, as our Chairman of the Executive Board of BASF. After 36 years of BASF, Martin, you will retire from the Board of Directors at the end of today's Annual Shareholder Meeting.

You joined the Board in 2006 and became our CEO in 2018. Since becoming CEO, you have presented BASF results over 24 quarters. I think it is fair to say that you have enjoyed the open and sometimes tough exchange with analysts and investors. And vice versa, they value, I think we can say that, your insights into the chemical industry and the macroeconomic nature.

Martin, I know you personally for 15 years, and I would like to thank you wholeheartedly for your support, in particular, since I took over as CFO last year. It has been both an honor and a pleasure to work with you and to serve with you on the Board.

[Martin Brudermueller, executive]

Yes. Thanks, Dirk.

[Dirk Elvermann, executive]

And maybe one more. You will continue to remain active in the business world following today, for example, a designated Chair of the Supervisory Board of [indiscernible]. But I hope, however, that you find also a little bit more time -- extra time for yourself, for your private life, for your family and with, all the [indiscernible].

[Martin Brudermueller, executive]

Yes. Thank you very much, dirk, really rewarding words. Always difficult to keep emotions under control at the very end. I would like to take that opportunity, first of all, to thank you all. I have always found that these exchanges have been very, very interesting. They have been effective. They have been also fair. And I have to say also, to a certain extent, amicably, you have to do your job and we have to do our jobs, but I enjoy very much the physical meetings we had where we got all the close into a dialogue, and we have some wine tasting next to it. So I really like that.

I have to say I have to live -- to learn to live without BASF. It will take me a little bit of time, but it's definitely also a life outside of chemical markets, and I'm looking forward to this.

I would like to also take this opportunity to thank my team, particularly Stefie, and all the guys, which you cannot see sitting here also in the room, who have actually always have to prepare and to give you the best possible information where you can do your job. So a great and big thank you to all of you, and certainly also with you, Dirk, who has come to do the last meetings over the last year together with you.

So all the very best. Thank you very much. All the very best to you personally and certainly also to your careers. And with that, stay healthy and maybe we meet somewhere else again. Thank you very much.

[Stefanie Wettberg, executive]

We are now at the end of today's conference call. Should you have any further questions, please do not hesitate to contact a member of the BASF IR team.

Today, I clearly last [indiscernible] because others will work on now also the Annual Shareholders Meeting that will be held starting at 10:00 today. We are again hosting the meeting in person at the Congress Center Rosengarten in Mannheim. We will present our second quarter results on July 26.

Thank you for joining us this morning, and goodbye for now.