Basf Se

XETRA:BAS

Earnings Call Transcript 2022-Q2

[Stefanie Wettberg, executive]

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the second quarter 2022 results. [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 accurate. Such risk factors include those discussed in opportunities and risks of the BASF Report 2021. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements.

On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans Engel, Chief Financial Officer. Please be aware that we have already posted the speech on our website at bsf.com/Q22022.

Now I would like to hand over to Martin Brudermüller.

[Martin Brudermueller, executive]

Good morning, ladies and gentlemen. On July 11, BASF released preliminary figures for the second quarter of 2022. Today, Hans Engel and I will provide you with further details regarding our business development.

In the second quarter, BASF again delivered strong earnings despite continued high raw material costs and energy prices. To put the BASF team's performance into perspective, let's begin with a snapshot of the current macroeconomic environment.

Compared to quarter 1 2022, the uncertainty and intransparency regarding the short- and mid-term economic development have increased. The main reasons for this are the ongoing war in Ukraine, the risk associated with natural gas supplies in Europe and the resulting high prices for raw materials and energy as well as China's zero-COVID strategy and related lockdowns.

Despite these challenges, the demand from our customer industries remained generally solid. However, global automotive industry and production in the second quarter of 2022 declined by 6% compared with Q1 2022. For 2022, IHS Markit has adjusted its forecast to about 80.8 million units. This is a reduction of around 2.1 million units compared with the forecast of the beginning of this year.

In the second quarter of 2022, China's economic growth was negatively impacted by the severe lockdowns in several large cities, particularly in Shanghai. In the second half of 2022, China's economic development is expected to improve, mainly due to a more differentiated strategy to tackle the coronavirus and dedicated financial stimulus measures by the Chinese government, particularly for the automotive industry.

To counter high inflation, central banks have started to raise interest rates. This will increasingly impact demand in the coming months and reduce growth in 2023.

Let's now briefly look at chemical production by region in Q2 2022 before we turn to the financial performance of BASF. According to the currently available data, global chemical production increased by just 1.3%. Despite a strong comparison base and the pandemic-related lockdowns, chemical production in China increased by 3.1%, with 2.5% chemical production also grew in North America. By contrast, chemical production declined by 2.6% in Europe and by 0.6% in Asia, excluding China.

I will now move on to the BASF business development in Q2 2022. Our upstream and downstream businesses successfully implemented further price increases and largely passed on higher prices for raw materials and energy.

Due to the lockdowns in China, BASF sales volumes in the country declined by 17.4% in the second quarter of 2022 compared with an increase of 10.4% in Q2 2021. This change was driven by significantly lower sales volumes in April. Sequentially, however, sales volume recovered again strongly in May and June.

In Q2 2022, EBIT before special items was at the level of the very strong prior year quarter and amounted to EUR 2.3 billion. The higher earnings were driven by the Agricultural Solutions, Nutrition & Care and Industrial Solutions segments. Other also contributed to the positive performance in Q2 2022.

I would like to add that the positive business development in the second quarter of 2022 continued in July. Since we are often asked about this, I would like to stress once again, currently, all of BASF's European sites are supplied with natural gas, in line with demand. We are monitoring developments very closely in particularly -- in particular, at our largest site in Ludwigshafen, where we use a considerable amount of gas.

In this context, I will, therefore, briefly address the details of the alert level regarding gas supply declared by the German government on June 23, 2022. The second stage of the emergency plan for gas comprises 4 key measures and leave responsibilities and market mechanisms intact.

First, oil all market participants such as gas suppliers, gas traders or network operators are obliged to take coordinated action to avoid temporary or regional gaps in supply in Germany and to achieve the target fill level of 85% for German gas storage facilities on October 1. To this end, the market area manager Trading Hub Europe has received an additional credit line of EUR 15 billion from the federal government to purchase gas.

Second, market participants, including BASF, are obliged to participate in a crisis team that must report to the Federal Ministry of Economic Affairs on a daily basis.

Third, the German government is taking legal measures to restart coal-fired power plants in Germany to contribute to electricity production and safe gas in power production.

And fourth, Germany's Federal Network Agency wants to open a market platform where gas that is not required by companies can be auctioned.

In the following, I also want to comment on the third and final emergency stage of the emergency plan for gas. This stage comes into force when there is an unexceptionally high demand for natural gas, a significant disruption in natural gas supplies or other significant deterioration in the supply situation.

Then according to the regulations, nonmarket-based measures must be taken to ensure natural gas supplies, in particular, to protected customers. According to the Ministry of Economic Affairs, the Federal Network Agency will become the federal load dispatcher and will regulate the distribution of natural gas in coordination with the network operators.

In this process, certain consumer groups are particularly protected. These groups include households, social institutions, such as hospitals and gas-fired power plants that also supply heat to households. But they also include industrial companies that manufacture products that are crucial for society. In this case, gas is allocated according to the relevance of the company to society. We are coordinating closely with the government agency, suppliers and network operators.

Should the German government declare the third and final emergency stage, we currently expect that BASF would still receive sufficient natural gas to maintain operations at the Ludwigshafen site at reduced load. We are also confident with regard to Schwarzheide, our second largest site in Germany. Here, for example, we are able to generate 100% of our power and steam demand using fuel oil. For BASF production sites outside of Europe, we expect hardly any impact in the event of a European gas shortage.

I will now provide you with further details regarding our natural gas demand in Europe and give an update on our mitigation measures in the event of natural gas supply shortages.

In 2021, BASF's natural gas demand in Europe amounted to 48 terawatt hours. Thereof, 37 terawatt hours were consumed in Ludwigshafen. In Europe, we used around 60% of our natural gas demand to produce power and steam. The remaining 40% is used as feedstock. At our Verbund site in Ludwigshafen, the split is around 50% for each of the 2 categories. If the natural gas supply does not fall below around 50% of our maximum demand, we will be able to operate Verbund in Ludwigshafen at a reduced load.

Our mitigation measures include the following. Where technically feasible, the preparations to substitute natural gas, for example, with fuel oil, are progressing well, and technical optimizations are in place.

In addition, we have developed scenarios and implemented measures to optimize production at our European sites. We are reducing production at facilities that require large amounts of natural gas such as ammonia plants. This is standard practice in the chemical industry, for example, when margins are not economically viable.

The graph on the slide shows the largest consumers of natural gas at the Ludwigshafen site. Ammonia is the largest natural gas consumer, with around 50% of the total demand as feedstock. In contrast to some other gas consumers at the Ludwigshafen site, external sourcing of ammonia is possible. Externally sourced ammonia is, therefore, an important element of our risk mitigation considerations in the event of a major curtailment of natural gas volumes.

The second biggest consumer is the acetylene plant, followed by syngas production. Together, both plants account for almost another 25% of the total natural gas demand as a feedstock. Power and steam production in Ludwigshafen can partially be switched to fuel oil and thus substituting around 15% of the natural gas otherwise needed for this.

Compared with Q1 2022, natural gas prices declined slightly in the second quarter of 2022 but remained on a high -- very high level. In Q2 2022, the additional cost for BASF's European sites amounted to EUR 800 million compared with the same quarter of 2021. In comparison with the second quarter of 2020, the increase was EUR 1 billion. To mitigate these higher costs, we have implemented and will continue to implement further price increases.

I will now move on to the volume development by segment. In the second quarter of 2022, Sales volumes of BASF Group declined slightly. This was mainly due to a lower precious metal volume, which accounted for 99% of the volume decline in the Surface Technologies segment. Excluding this effect, BASF sales volumes were almost stable with minus 0.2% compared with the second quarter of 2022 -- 2021.

On a segment level, Agricultural Solutions and Nutrition & Care saw a positive volume development.

Now I would like to hand over to Hans for further details.

[Hans-Ulrich Engel, executive]

Thank you, Martin, and good morning, ladies and gentlemen. Let me start with our sales and earnings development in Q2 2022.

Sales increased by 16% to EUR 23 billion, primarily due to 13% higher sales prices. All divisions increased prices, except for Catalysts, where lower prices for precious metals led to a decline in sales prices. Currency effects of plus 7% also contributed to the positive sales development and were mainly related to the U.S. dollar. Lower sales volumes, mainly due to reduced precious metal volumes, had a slightly offsetting effect.

As already mentioned, EBIT before special items reached EUR 2.3 billion, matching the level of the very strong prior year quarter. At segment level, Agricultural Solutions and Nutrition & Care considerably increased EBIT before special items compared with the prior year quarter, and Industrial Solutions slightly increased earnings. The Chemicals, Materials and Surface Technologies segments recorded considerably lower EBIT before special items in Q2 2022. In the 2 upstream segments, we saw a normalization in margins compared with the prior year quarter that was more pronounced in Materials than in Chemicals. In the Materials segment, lower demand from the automotive industry contributed to the decline in earnings.

In the following, I will comment on the business development of the downstream segments in more detail and give some additional information. I will start with Surface Technologies.

Sales in the Surface Technologies segment declined by 8% and amounted to EUR 5.4 billion. Lower volumes and lower prices in the Catalysts division were the main driver for this development. Positive currency and portfolio effects had an offsetting effect. The Coatings division achieved considerable price increases and slightly higher volumes. EBIT before special items declined from EUR 289 million in Q2 2021 to EUR 227 million in the second quarter of 2022 on account of lower earnings in the Coatings division.

In the light of the strong and increasingly dilutive impact of precious metal sales on BASF's KPIs, we will start disclosing additional information. As of Q2 2022, sales in the Surface Technologies segment will be broken down to reflect sales excluding precious metal trading and precious metal sales in mobile emissions catalysts. Using the adjusted Q2 2022 sales figure for the Surface Technologies segment as a basis, the segment's EBITDA margin before special items increased by 10.1 percentage points to 16.8% and, for the first half of 2022, by 11.2 percentage points to 18.2%.

For the BASF Group, the EBITDA margin before special items based on the adjusted sales figure for Surface Technologies, excluding precious metals, increases by 2.4 percentage points to 16.7% in the second quarter of 2022 and by 2.6 percentage points to 17.9% in the first half of the year. We believe that this enhanced disclosure helps investors to better understand the earnings profile of the business. For more information, please refer to BASF's half year financial report on Page 49.

I now turn to Nutrition & Care segment, where sales increased considerably because of significantly higher prices and positive currency effects. Volumes declined slightly in the Care Chemicals division and increased slightly in the Nutrition & Health division. EBIT before special items increased considerably due to the significantly higher earnings in the Care Chemicals division.

Let me also address the changes in our Nutrition & Health division that we have recently announced. The division will strengthen its commitment as a leading ingredients partner to the nutrition and flavor and fragrance industries. Going forward, Nutrition & Health will consist of 3 focused global business units for nutrition ingredients, aroma ingredients and pharma solutions.

The next slide provides more details. In nutrition ingredients, we will act as a strong ingredients partner to the animal and human nutrition industries. We will strengthen our core product platforms, which are deeply rooted in the BASF Verbund and invest in vitamins and feed enzymes. Our food and health performance ingredients portfolio, which is produced at our site in Illertissen, Germany plays a vital role in addressing growing trends in human nutrition. However, the business has limited portfolio synergies and integration into the BASF Verbund. Therefore, strategic options will be evaluated to identify suitable opportunities for this business.

In aroma ingredients, we will further build on our strong ingredients position to address sustainability trends in the flavor and fragrance industries. We will focus on growth investments in the citral value chain and on innovation to support the sustainability needs of our customers.

In pharma solutions, we will continue to offer our broad portfolio of excipients based on core value chains and selected active ingredients. For biopharmaceuticals, we will focus on growth and innovation. In addition, we will partner with customers in developing effective and reliable formulations, also with increasing use of digital solutions.

I will now turn to the Agricultural Solutions segment, which recorded a strong second quarter. Significantly higher prices in all regions paired with favorable currency effects and higher volumes led to a positive sales development. This reflects overall strong demand in the Northern Hemisphere in 2022. EBIT before special items increased considerably, mainly driven by higher sales offsetting higher costs.

Global agricultural markets continue to be healthy, with robust commodity prices, while challenges from global raw material and transportation capacity shortages and inflationary cost increases remain. We look optimistically into the second half and expect a good start into the season in South America.

In the following, I will briefly look in more detail at the financial figures for BASF Group in the second quarter of 2022 compared with the prior year quarter. I will start with EBITDA before special items, which increased by EUR 76 million and amounted to EUR 3.3 billion. EBITDA reached EUR 3.4 billion, an increase of 6%.

At EUR 2.3 billion, EBIT before special items reached the high level of the prior year quarter. Special items in EBIT amounted to plus EUR 11 million compared with minus EUR 39 million in the second quarter of 2021. EBIT increased by 1.5% to EUR 2.4 billion in Q2 2022.

Net income from shareholdings increased by EUR 477 million to EUR 433 million. The considerable increase compared with the prior year quarter primarily resulted from the higher income from our shareholding in Wintershall Dea, which amounted to EUR 446 million.

Net income amounted to EUR 2.1 billion compared with EUR 1.7 billion in the prior year quarter. The increase was mainly driven by higher net income from shareholdings.

Let's now look at the details of our cash flow development in Q2 2022 compared with the prior year quarter. Cash flows from operating activities amounted to EUR 1.2 billion, a decrease of EUR 1.3 billion compared with the prior year quarter. The decline was mainly driven by higher bonus payments, which were almost EUR 1 billion higher than in the prior year quarter.

Overall, changes in net working capital led to a cash outflow of EUR 1.7 billion compared with a cash inflow of EUR 9 million in Q2 2021.

Cash flows from investing activities amounted to minus EUR 639 million in the second quarter of 2022 compared with plus EUR 323 million in the prior year quarter. In Q2 2021, proceeds from divestiture, particularly from the divestment of BASF's pigment business led to the positive development. Payments for property, plant and equipment and intangible assets rose by 16% to EUR 892 million.

Free cash flow, thus decreased by EUR 1.4 billion to EUR 336 million in Q2 2022. The decline was mainly caused by the lower cash flows from operating activities.

Turning to our balance sheet at the end of June 2022 compared with year-end 2021. Total assets increased by EUR 9.6 billion to EUR 97 billion.

Noncurrent assets amounted to EUR 53.6 billion, an increase of EUR 1.3 billion. The increase was mainly driven by translation effects due to the depreciation of the euro.

Current assets increased by EUR 8.3 billion to EUR 43.4 billion, mainly due to higher trade accounts receivable. In addition, higher inventories, other receivables and miscellaneous assets and cash and cash equivalents contributed to the increase.

Noncurrent liabilities decreased by EUR 1.3 billion to EUR 24 billion, mainly due to lower provisions for pensions and similar obligations. These provisions decreased by 50% to EUR 3.1 billion due to higher interest rates.

Net debt increased by EUR 5.2 billion to EUR 19.5 billion at the end of June 2022. The equity ratio was 37.8% (sic) [ 47.8% ] compared with 48.2% at the end of 2021.

And with that, back to you, Martin.

[Martin Brudermueller, executive]

Ladies and gentlemen, I would like to give you an update on the progress of construction at our new Verbund site in Zhanjiang in China.

In December 2019, we kicked off the investment project with the decision for an initial phase ahead of the main Verbund to respond to the high demand from our customer industries. As planned and despite all COVID-19 challenges, the first plant for the production of engineering plastics is currently starting up. The second plant for thermoplastic polyurethanes will come on stream in mid-2023.

Following the final approval for the construction of the plant Verbund site in Zhanjiang, we are now starting construction of Phase 1. This is the implementation of the main part of the project, what we call the heart of the Verbund. This phase comprises a world-class mixed feed steam cracker, several value chains for Petrochemicals, Intermediates and Chemicals for consumer products as well as related infrastructure.

It is planned to start up this core complex in a sequence as of the end of 2025. Further expansion and diversification of the value chains with the additional product lines is already in preparation and is planned to be implemented in the second phase that is scheduled to go on stream from 2028 onwards.

BASF will implement the most advanced process technologies and will power the entire Zhanjiang Verbund site with 100% renewable electricity. By utilizing the latest digital technologies and applying the highest safety standards, the site is intended to be developed as a role model for smart manufacturing and sustainable production. The new Verbund site in Zhanjiang will be a key platform for long-term, profitable and sustainable growth, not only in Greater China but for the BASF Group as a whole.

To conclude, I would like to present you our adjusted outlook for 2022. We now expect global economic growth and chemical production to grow by 2.5% each. Global industrial production is expected to grow by 3.0%. We anticipate an average oil price of USD 110 per barrel Brent crude and an exchange rate of USD 1.07 per euro. For the second half of the year, BASF anticipates a gradual cooling of the economic development globally but much more pronounced in Europe. This assumes that there is no severe restriction coming from the new -- from new lockdowns in China and that natural gas shortage do not lead to production shutdowns in Europe.

Due to the very positive business development in the first half of 2022, we are adjusting the forecast for the BASF Group for the 2022 business year. Based on the abovementioned assumptions, we are now forecasting higher sales of between EUR 86 billion and EUR 89 billion for 2022. The lower end of the range for BASF's group EBIT before special items was increased to EUR 6.8 billion from EUR 6.6 billion. The upper end remains unchanged at EUR 7.2 billion. We are confident that we can achieve the upper end of this range.

ROCE is likely to be lower at 10.5% to 11% because of the higher capital base driven by price and currency effects. We expect lower CO2 emissions of between 18.4 million metric tons and 19.4 million metric tons in 2022. As additional information, I would like to add that we expect CapEx to amount to less than EUR 4 billion in 2022, lower than our original planning of EUR 4.6 billion.

Current developments mainly driven by the war in Ukraine and its impact on energy and raw material prices and the availability of raw materials, especially in Europe, may lead to additional headwinds, deviating from the assumptions I just presented. In particular, risk could arise from production stoppage at major European sites as a result of further restrictions to European gas supplies from Russia. In this case, the loss of European capacities could be partially compensated for by higher plant utilization, capacity utilization at the sites outside of Europe.

Further risk could arise from the future course of the corona pandemic and new measures to contain the number of infections. Opportunities could arise from continued high margins even in the case of an economic slowdown. We are responding to the economic slowdown with cost-reduction measures.

And now we are glad to take your questions.

[Stefanie Wettberg, executive]

Ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions]

And we will begin with Christian Faitz, Kepler Cheuvreux. He will be followed by Gunther Zechmann and then Andrew Stott. So now it's Christian Faitz, Kepler Cheuvreux.

[Christian Faitz, analyst]

Two questions, if I may. First of all, Agricultural Solutions, you talked about lower volumes in Europe. Is this weather-related, i.e., less fungus and insect pressure and hence sales channels being full? And at the same time, you have a strong increase in overall nominal fungicide sales that would suggest significant growth outside of Europe. Would that be a correct observation?

Second question, what is your current scenario on the Rhine River levels and potential curtailments in this year of exceptional drought in Western Europe, which could easily top the 2018 situation?

[Martin Brudermueller, executive]

So Christian, maybe I'll start with the Rhine River. You know that we have actually, with the impact we had in 2018, taken a lot of measures and studied mitigation measures but also, let's say, our infrastructure. First of all, and I think this is very important, we installed a forecast system -- an early warning forecast system, which gives us a lead of 6 weeks at least to know what is coming. And that gives you also the time to prepare in terms of logistic measures and increasing your inventories.

Second part is -- and that was the other effect from logistics. That was the cooling water situation, where you have an upper level of water temperature to be released. So we have actually changed the setup and have invested in infrastructure so that we have closed cooling loops with air cooling, which makes us much less vulnerable on the temperature level of the river.

We have also engaged in a shipbuilding, which I have to admit is not yet driving, but we have also leased all those ships that have actually a comparable low depth and can drive a much lower or Rhine levels. And we have partially also then organized to reshuffle from ship to other logistics means.

So I think by all that in the current moment, we are not worried that we'll come in a similar situation. What is then beyond the 6 and 8 weeks, I cannot forecast. But I would say we are much better prepared in terms of such an impact than in 2018. It's not really a worry in the moment.

And Hans, on Agricultural Solutions.

[Hans-Ulrich Engel, executive]

Yes. Christian, happy to take your questions on Agricultural Solutions. Indeed, weather affecting business in Europe a bit. The drought conditions here had an impact on the application of crop protection products. But you've seen the results of the quarter overall, which was very strong, in particular also due to the pricing initiatives that we've driven across the portfolio. Fungicides, as you mentioned, a strong business -- a very strong business, in particular, outside of Europe.

With respect to the channels based on latest information that I have, that's actually a situation in Europe which I would describe as normal and a situation in North America which I would describe as channel inventories being at the lower end of what we see on the normal circumstances. Hope this helps.

[Stefanie Wettberg, executive]

So we move on to Gunther Zechmann, Bernstein. Please go ahead.

[Gunther Zechmann, analyst]

The first one is on the gas price, the second one on China. On the gas price, to what extent do you expect that you have higher costs just from the mitigation measures that you talked about, thinking of fuel oil, maybe externally sourcing ammonia? So what does that do to your cost base? And where do you expect that certain value chains might not be economically viable? I think you mentioned that in the speech as well.

And then the second one on China. You put China chemical production at 3.1% in Q2. Your China volumes were down over 17%. Why is it that BASF is so much more affected by lockdowns than the industry? Or are there any other factors that would contribute to that delta, please?

[Hans-Ulrich Engel, executive]

Yes, Gunther, this is Hans. I'll try to answer your gas price question, which is not an easy one because where we are substituting, you are looking at situations where you're substituting against a gas price, which is very, very high. Look at yesterday's spot price for Northwestern Europe, which hit the EUR 200 mark per megawatt hour. It may actually be cheaper to use, as an example, heating oil to produce your steam than use very expensive natural gas.

So it really depends case by case. What we've done is we've given you the increase in energy costs that we have overall, both for Q1 and for Q2. It adds up for the BASF Group to a total of EUR 2 billion in the first half. And I think that's the way to look at it and to compare the earnings of BASF in a situation like this, which are at or even above the prior year level.

Value chains, potentially affected. I mean Martin mentioned already in his part of the speech. Ammonia, we also clearly are looking at the acetylene and BDO value chains. These are value chains at car and high gas prices that obviously are under significant competitive pressure. But I think we're taking the right measures there to go for that.

[Martin Brudermueller, executive]

And Gunther, just one answer here on China. I don't have the split for each and everything, but the lockdown in the car industry and the automotive industry was the main impact here. And you know that 20% of global sales in China, the share is even a little bit higher from the portfolio, and that was basically the reason why we had this steep decline. But as we also said in May and June, this also came very steeply up again.

[Stefanie Wettberg, executive]

Okay. So the next question, it comes from Andrew Stott, UBS. We will then have Matthew Yates, Mubasher Chaudhry and Tony Jones. But now it's Andrew Stott, UBS.

[Andrew Stott, analyst]

First question was on just going back to the comments you've made, Martin, in your speech on natural gas allocation. You picked out a 50% allocation and being able to run Ludwigshafen on a reduced rate. Is there a reason you ticked 50%? Is that a preagreed number with the German government for Phase 3? Or is that just a scenario? So that's the first question related to this.

The second one is following on from Gunther's question on fuel oil replacement. There's elastics in your statement within that, which says that this obviously assumes you can secure the fuel oil. Is that just a basic caveat? Or are there real potential problems in getting that fuel oil replacement?

And final question then -- sorry, it is all related to the same thing. I just want to make sure I read this right. Is it the case that you think you can displace 15%, 1-5, of your gas requirement at Ludwigshafen by fuel oil?

[Martin Brudermueller, executive]

So Andrew, I hope I get your pessimistic view on chemical industry a little bit up. So let me try to answer this question. This 15% is actually an own BASF estimate. I mean we have never shut down the site in 157 years. So we have done all kind of analysis. And you can imagine, with all these different users, you can make hundreds and thousands of scenarios.

So if you consider, on one hand, steam demand, which is something which you cannot buy outside, you could -- you might reduce power production because you can buy electricity from outside, but you cannot buy steam from outside. So that is a significant part of running that. And then on the other hand, you have mentioned apart from the raw material side. Then you can already figure out that 15% is not such a wrong number, but that is not a number that was agreed with someone. That is our own rough estimate, where it is about to keep the whole thing running. I have also to admit, however, like in the past, where people said that you can run a steam cracker only at 40% and 45%. And during the Lehman crisis, we have actually run it much lower run rate.

So I would also not exclude that the BASF guys, ultimately, they learn every week, can also do better than this. But this is, I think, a rough guess, which we have to date.

Fuel replacement, you know that if you have burners that they are very much designed on the fuel. So you cannot just switch from gas to liquid. Theoretically, some of the plants could. If we would have a little bit more lead time and we would have equipment to change burners, you could even increase the 15% of fuel gas here in Ludwigshafen, and we're working on such ideas. But the question is how fast something like that could be done. That is certainly nothing which will happen beyond what we already mentioned here at the site. But that could be a preparation even for next winter, which is still one that is under consideration of gas shortage. So be sure that we continuously improve and get less dependent on gas.

And I think these were your questions. Sorry, you were talking about the fuel oil. I mean we're talking about volumes, which we actually secured. We have also -- and I mentioned in the speech, Schwarzheide, which is a smaller power plant, for example, which we can run 100% on fuel oil. We have totally secured the fuel over there. I don't think we talk about here volumes for BASF that would have significant market impact.

[Stefanie Wettberg, executive]

Okay. So now we move on to Matthew Yates, Bank of America.

[Matthew Yates, analyst]

Just one question, please. And I'd like to ask about Wintershall. BASF obviously chose to invest its capital many, many years ago into oil and gas assets because it was intended to create somewhat of a portfolio hedge for you, which in the current energy price environment will be very beneficial. However, the decisions you've made over the last few years around the structure and the governance of this asset means that BASF shareholders are currently not really seeing any cash benefit from owning these assets irrespective of the EUR 0.5 billion of profit booked on the P&L. So can you update us on your thinking for monetizing this business, either through a disposal or the prospect of receiving some meaningful cash dividends at some point in the coming quarters?

[Hans-Ulrich Engel, executive]

Yes. Matthew, this is Hans. Thanks for the question. I mean what are the current cash flows from Wintershall Dea? You rightly pointed this out. This is by way of dividend. We've received the dividend on the preferred shares in the second quarter and -- or may have been end of Q1, I don't recall exactly. And we are expecting a dividend payment also then on the common shares in the second half of the year.

As you know, we've made a strategic decision to exit this business via an IPO, which didn't work in 2020 and didn't work in 2021 for obvious reasons. Currently, also not working. We are looking at ways to monetize, as you can imagine. And we will speak about this when the time has come. But I think first of all and importantly to say, cash flow of BASF is supported at this point in time through the dividend payments that are coming out of Wintershall Dea.

[Matthew Yates, analyst]

Can I follow up on that, please? Can you elaborate a little bit on what the exact dividend policy of Wintershall is? Obviously, in recent history, the company had quite a high debt burden, but that's rapidly coming down. So what are the criteria for the timing and size of any dividend over the coming quarters?

[Hans-Ulrich Engel, executive]

I can't give you the details. The shareholders will decide on the dividend. And obviously, the cash position of the company and the liquidity that the company has on which it has reported yesterday, as you have seen, will play an important role in making that decision now during the second half of the year.

[Stefanie Wettberg, executive]

So now we move on to Mubasher Chaudhry from Citi.

[Mubasher Chaudhry, analyst]

Just to follow up on the Ludwigshafen flexibility. Can you give us a feel of how quickly the utilization can be bought up and down? Is that something that can happen within days or it requires a longer-term planning in terms of being able to bring down the utilization and should -- if and when the situation improved, being able to take it back up? That's the first question.

And the second question is a little bit more around the leverage. The net debt moved up a little bit. And given your forecast of quite a weak second half, do you feel comfortable around continuing with the buyback at this pace? Or is there a potential to be slowing it down a little bit? Just some thoughts around the capital framework would be helpful.

[Martin Brudermueller, executive]

I quickly start to talk about the first one. So we have never actually shut down the site, but we certainly know where the critical assets are. Usually, if there would not be a gas supply anymore in conversation with the pipeline suppliers, you have about -- the pressure on the pipeline for about maybe 6 to 8 hours. Then it falls to a certain threshold where then also safety measures have to kick in, in the plants to protect the plants. That means that's about the time you can drive down the facilities. For most of this -- for most of the plants, this is totally uncritical. You have some plants set at a high temperature level. If they cool -- if you cool down them too fast, you actually destroy the reactor because you get cracks and whatever.

So we know what these facilities are, and I think if we would see that coming, we would maybe start with those first. But overall, I think the response time we have, this is hard work for them, but we can manage.

[Hans-Ulrich Engel, executive]

Yes. Mubasher, this is Hans. I'll take your question on net debt and on buyback. So first of all, on net debt, yes, it has moved up. That is not out of the ordinary that net debt moves up after Q2 in which, among other things, we pay the dividend at EUR 19.5 billion. It stays within the range that we've seen between, say, 2019 and 2022. So also there, nothing out of the ordinary.

On the buyback program, we have progressed. You may have seen what we showed on the website beginning of this week. We've bought back, in the meantime, a bit more than 20 million shares at roughly EUR 1 billion that we spent for it, and it is our full intent to continue with the program, as announced.

[Stefanie Wettberg, executive]

So now we move on to Tony Jones, Redburn. We will then have Markus Mayer and then Jaideep Pandya. So now Tony Jones, Redburn.

[Tony Jones, analyst]

I've got 2 left, please. Thanks for the update on the gas shortage plan. It's really helpful. But if we assume that your 50% scenario plays out, can you give us a rough indication of the EBIT impact on an annualized basis? There's a lot of moving parts. So any indication would be really appreciated.

And then on the cash flows, we've seen high input costs, and maybe procurement has been stock building on some critical inputs now ahead of a shortage. Should we be, therefore, expecting working capital to still be negative in the second half?

[Martin Brudermueller, executive]

Tony, I'll start with the first one. And clearly -- to say clearly, we cannot give you any impact here because that depends on so many things. I mean first of all, what is the real level? You said 50%, which is the critical threshold. But the question is then how we really react. What would be the power price from the grid? Do we get enough over there? If we buy ammonia, at what price actually? If we bring in BDO derivatives maybe from our Chinese operations into Ludwigshafen, what is the price and the transfer level here? So it has so many impacts that I think this would be really a guess number. It's a rather big range where you can theoretically think about it, and I would not engage now to mention more number. I hope you understand that.

[Hans-Ulrich Engel, executive]

Yes. Tony, on your cash flow question, no, we do not expect to increase net working capital just to the contrary. We expect that net working capital will decrease. You look at raw material price developments over the last months. They -- leaving gas aside, they seem to have peaked now in Q2. So we don't expect much further increases there. If anyhow when you think about BASF's business profile, the second half of the year, lower sales, rough split there, 60% in the first half of the year, 40% in the second half of the year. We will bring inventory down. So as a result of all of that, expectation is that there will be cash releases from net working capital.

[Stefanie Wettberg, executive]

Since we still have 10 analysts in the queue, I would suggest and really request you to focus on one question you really want to ask.

We now have Markus Mayer, Baader-Helvea; then Jaideep Pandya; and then Laurent from BNP Paribas. So now Markus Mayer. Please go ahead.

[Markus Mayer, analyst]

One or several small questions on the guidance basically. As I understood it correctly that you are still confident to reach the up end of your EBIT guidance range. And also as add-on question to this, the potential production cuts in BDO, ammonia and acetylene is already included in the guidance, either in the lower end, I guess? Or is that basically really still outside of the guidance? And also, the cost-reduction measures you said, have they been already included in the guidance?

[Martin Brudermueller, executive]

So I think this is all, I think, a realistic picture. Yes, we think we can reach the upper level. Basically, I hope that was seen right from you. What we described is a kind of a soft landing towards the year-end. So nothing going rigorously down, but it is softening from the demand side, and that means supply/demand is softening, but that means also pricing power is softening. So this all goes basically weaker. And actually, the idea is that when we -- the softening and the weakening of the margin is counteracted by some of the cost reductions, this is partially postponement, which, I think, is also natural to think about when do you need what when you are in a softer environment. But it also might come then to the point that we also think structurally to cut some of the costs and really go to lower overall cost basis.

So that includes certainly also our assumptions, which kind of products we might reduce and we might buy in. And ammonia, you mentioned is one -- or is actually the biggest factor here. So I think you should take that with a lot of positive confidence from our side.

[Stefanie Wettberg, executive]

Now Jaideep Pandya, On Field Research.

[Jaideep Pandya, analyst]

Yes. Just one question, but it's just about 2 dimensions. So your CO2 guidance for the year, roughly speaking, about 1 million tonnes lower. What is the background for this, please? Is it just ammonia reduction? Or is this more to it given that you're increasing your fuel oil consumption? So I would assume your fundamental scope is increasing, but you're still guiding for a lower CO2.

And then second part to this is there's a significant divergence in chemical prices in China versus Europe and the U.S. So if we stick to ammonia, just for an example, what is the cost disadvantage right now, on an overall basis, for producing this in China versus Europe and the U.S.? So just want to understand, is there a scenario where you're going to produce much more in your Chinese assets and ship rather than producing your European assets?

[Martin Brudermueller, executive]

So I think the CO2 is a little bit of everything what you said. I mean, first of all, you see that this is not a year with a very strong volume effect. Secondly, we would then actually shift -- indeed, if we buy in ammonia and shut down own production, we shift from Scope 1 to Scope 3, which is also clear. But on the other hand, we have also showed you a plan in the Capital Market Day that we actually reduced both by OpEx measures and by increasing the amount of green electricity. And all that together actually gives this effect. And as you think, we are in July already, half of the year is going away. So it is about the next 4, 5 months, 6 months.

[Hans-Ulrich Engel, executive]

Jaideep, this is Hans. I don't have the necessary details answering your question. But what I can tell you is that ammonia prices at this point in time in Asia and in North America are pretty much at the same level, slightly below USD 1,000 per metric ton, a little bit higher currently in Europe for obvious reasons. That's the difference in gas cost there. As far as I know, but I'm looking to Martin, who has the China expertise, we don't produce any ammonia in China. So no way to bring it out of our own system. But we are producing in a world-scale plant in a joint venture together with Yara in Freeport. And when you look at natural gas prices in the U.S., which have also increased, which are currently at $8 to $9 per million Btu. You can imagine that there's a big advantage for a U.S. ammonia producer. And we're certainly tapping into the potential, let me put it this way, that we have there.

[Stefanie Wettberg, executive]

Now I see here Laurent Savi in the system, but I assume it's Laurent Favre, BNP Paribas.

[Laurent Favre, analyst]

That's my brother, Steffi. My question is on Zhanjiang on the [ NDFID ]. I think when we did a deep dive back in September, you have highlighted EUR 8 billion to EUR 10 billion of CapEx. And since then, we had inflation everywhere, and the euro has come down by more than 10%. So I was wondering what is the latest on CapEx budget for Zhanjiang. And then related to that, in the current market environment in China, what would be the EBITDA contribution of the assets fully ramped-up?

[Martin Brudermueller, executive]

I talk about the first part. Indeed, it's on the upper end of what you mentioned, but the important part is that the team reduced, in RMB, the investments. So it is basically a reporting issue because of the federal -- of the exchange rate between the euro and the RMB.

And the second part of your question?

[Laurent Favre, analyst]

So more than EUR 10 billion then?

[Martin Brudermueller, executive]

Yes.

[Hans-Ulrich Engel, executive]

This is Hans. Laurent, your second question was on earnings potential fully ramped-up.

[Laurent Favre, analyst]

Yes.

[Hans-Ulrich Engel, executive]

Yes. No change there. We're still working with -- for the year 2030, a bit more than EUR 1 billion in EBITDA.

[Stefanie Wettberg, executive]

We will now move on to Chetan Udeshi, JPMorgan. And he will be followed by Georgina Fraser and then Charlie Webb. Now Chetan Udeshi, JPMorgan.

[Chetan Udeshi, analyst]

I was just curious in terms of understanding what was the reasoning for not assuming any production cuts in Europe in the remainder of the year, especially given the European Commission came out with a clear guidance that all member states have to reduce production -- or gas consumption, rather, by 15% on average. I mean the point I'm trying to get to is it feels for us externally that BASF is not yet in a crisis mode to manage this situation. Is that a fair assessment? Or have you thought about like how you're going to deal with this situation, not in just in terms of technical production metric but more strategic commercial framework? Because I was also looking, and Martin, your comments about substituting some of the production from Europe to rest of the world, but I didn't see any mention of maybe trying to optimize the pricing, et cetera, to manage that situation. So I'm just trying to understand, how is the company thinking about the whole situation overall?

[Martin Brudermueller, executive]

Chetan, I don't know why you think we are not in a crisis mode. We are in a crisis mode but not in a panic mode. And I think this is important because I think the team, as I mentioned always, this is a moment of pride because they are really good in managing this, and you know we had several of them in the past where actually then the team gets the maximum out of it. We have calculated ourselves to death in hundreds of scenarios, how to do certain things and to reduce that and to import here. And I think that comes together.

On the other hand, what is happening on the external part? And I think if you'd already look on the share of Russian gas in Germany, which has come down from 50% to now lower than 35%. And then also basically, at the end of the year kicking in the first LNG terminals, the floating ones in Germany. You most probably read maybe this morning that France announced now to deliver gas to Germany. Then to restart the power plants, the coal-fired power lines now, even to consider the further reduction with running the nuclear power plants more and then saving, on the other hand, everywhere.

So if you take all that, including the level of storage and maybe assume that the part from the Russians go up a little bit, we are in a scenario that even this winter, we could cover as Germany, as Europe if that is not maybe a particularly cold winter or if it's a normal winter. And I think in all that together by -- on our share to reduce basically from 100% to 50%, that's 2% of German gas usage. We are confident that the basic scenario we get through without an interruption here.

So I would say we are, on all levels, engaged, fully prepared for all kind of scenarios, but we are optimistic that we can get through this. And you mentioned also, certainly, the activation of your global grid, your global capacities when running out capacities in other regions, full to -- or to support European customers. So all that, we are in crisis mode, but we are not panicking. And this is why we have brought you these assumptions for the second half.

[Stefanie Wettberg, executive]

So now Georgina Fraser, Goldman Sachs.

[Georgina Iwamoto, analyst]

I wanted to ask a longer-term question related to the competitive pressures in certain value chains. Do you see today already the basis for a structural shift of chemical production to be relocated outside of Europe on the back of this energy crisis? And would that impact the chemical industry's ability to decarbonize?

And then I'm going to try and sneak one more in, if that's okay, just to leverage your insights on the German government's crisis management plan. If the gas continues to flow at the rate we have just now, 20%, at what point does the government trigger Phase 3?

[Martin Brudermueller, executive]

Okay. Maybe on the first 2. I mean, I think, it's too early now to make all these calculations, but I think that we have a competitiveness issue in Europe, far beyond the chemical industry is no doubt. We will have structurally higher energy costs because one contribution of the valves and also the growth in Europe was the cheap Russian gas. This is now LNG-based. There is USD 5 to USD 6 per MMBtu ether for gasification transport and regasification. So that will structurally bring the costs up.

What then the long-term prices are? How much LNG comes in? This is, I think, too early to say. But that certainly has to trigger some thoughts about long-term competitiveness and further capacity growth. You might run out capacities but not build new ones. It also strongly depends then on the integration. You know that we also add a lot of margin by using these raw materials in the old value chain. So there's a lot -- a whole lot of considerations to this, but I think Europe has to think about its competitiveness long term when it comes to energy prices far beyond chemical industry.

I think that can actually burden the decarbonization plans because that is -- they're not talking now for BASF but for the chemical industry as such. There's a lot of investments to be done to really decarbonize. If the margins get smaller, the earnings get smaller, then this might have an effect about the speed and the capability to invest in decarbonization. So -- but a little bit too early to say.

And in the German plan, maybe Hans?

[Hans-Ulrich Engel, executive]

Yes. Georgina, this will be pure speculation. I mean if you look at what the German government has done so far for Phase 1 and also for Phase 2 compared to what happened in other countries, such as Italy and Austria, we -- Germany was not a front-runner. And I'd say based on everything that we've experienced so far, the German government is carefully analyzing the situation and then making the right calls at the right point in time. So let's see what's going to happen with gas flows over the next weeks.

Now given my very personal opinion, I don't expect anything to happen with respect to a Phase 3 call prior to the end of September, early October. But that's a personal guess, and we'll see what happens.

[Stefanie Wettberg, executive]

So we still have 5. So I urge you to ask one question because it's 11:00 already, but I -- we would like to give you the chance to also ask your questions. Now we have Charlie Webb, then Peter Clark and then Sebastian Bray. Charlie Webb, Morgan Stanley.

[Charles Webb, analyst]

Maybe just one on this kind of normalization, obviously, you're expecting in the second half. Just maybe can you allude to some of the kind of the upstream normalization you see might unfold, where -- which change are you seeing some softening? And how are those kind of discussions with customers around pricing -- how have those evolved perhaps versus the first half of the year looking into the second half of the year? Do you get any sense that those customers are destocking or kind of tying to turn, I guess, the kind of price momentum the other way? And how should we think about that with kind of the lingering inflation that's around?

[Hans-Ulrich Engel, executive]

Thank you, Charlie. I tried to count how many questions these actually were. But I'm trying to answer as quickly as I can. So normalization, we've seen in a number of products starting, in particular, in North America, with cracker products where prices and margins have come down quite a bit. The same is true for cracker margins in Asia. We've seen this also during the course of Q2 and now also going into Q3 in the acrylics value chain, in particular, with respect to acrylic acid. We've seen it with respect to BDO.

But frankly, this is not a big surprise. If you think back to the guidance that we've given at the beginning of the year, we clearly addressed it. We clearly said that we are expecting margins to come down from the very high levels that we had in 2021 in the upstream business. And I should have also mentioned that we see MDI becoming weaker in Asia and, in particular, in China. So we see actually now what we had already addressed earlier in the year. That was the question on normalization.

Pricing. Look at what we've done in the first half of the year. Look at what we've done across the businesses in Q2, in particular, considering the high raw material and the high energy prices. We will have to continue. Does this make customers happy? No, it does not. Do customers, in the end, understand? Yes, they do. Does it become more difficult during the course of the year? Yes, it has.

[Stefanie Wettberg, executive]

Okay. So now it's Peter Clark, Societe Generale. Please go ahead.

[Peter Clark, analyst]

It's back on the cash flow. You seem pretty comfortable with the cash flow, and I accept there's a lot of inflationary effects that work through, but you have got the CapEx significantly rising into this. So are you still on for the EUR 25.6 billion 5-year plan? I think EUR 6 billion was next year because clearly, China is going ahead. And what level of net debt to EBITDA would you start to get worried? Because I have over 2 next year, but I'm a bit more bearish than you, I think.

[Hans-Ulrich Engel, executive]

On cash flow, I think for the second half, Peter, I already addressed that, what our expectation is. We have not made any changes to our 5-year CapEx plan, and we will look at this during the -- now in the new budgeting and planning phase, but my point of view at this point in time is we will not see too much change there. Currently, we're sitting at a leverage ratio, which I think with a balance sheet like BASF has it with the kind of EBITDA and cash flow that we generate that you and I should not be worried about.

[Stefanie Wettberg, executive]

So now is Sebastian Bray, Berenberg. And we will then have Andreas Heine and Rob Hales to conclude. Sebastian Bray, Berenberg. Please go ahead.

[Sebastian Bray, analyst]

Two quick ones, please. Firstly, what is the sales value of -- on an annualized basis, of a business under strategic review in Nutrition & Care?

And secondly, how messy could the exit process from Wintershall get? And what I mean by this is my guess is that LetterOne has some type of veto rights that are making it more difficult than BASF would have liked to extract cash from that business. Thus, the -- do the articles governing the control of the company have scope for arbitration if LetterOne digs in its heels? And how long could this process take?

[Hans-Ulrich Engel, executive]

Sebastian, this is Hans. So first, your question on how messy can an exit get, I don't think that this will get messy. Expect the shareholders to have agreed on certain exit rights to kick in at certain points in time. I'd say what's been agreed upon is within the frame that one would call an ordinary and usual -- or customary framework that's been agreed upon. So that's why I do not expect an exit to get messy.

And then I think your first question related to our Illertissen business. And I don't think that we have disclosed anything on -- we have disclosed the employees, but this is not what Sebastian is interested in. He would like to know what the earnings potential is of that business. We haven't disclosed that. And as we said, we're looking into strategic options there, Sebastian. I hope this helps even though I didn't tell you a lot.

[Sebastian Bray, analyst]

What is the employee number? I haven't seen this.

[Hans-Ulrich Engel, executive]

330.

[Stefanie Wettberg, executive]

So now Andreas Heine, Stifel.

[Andreas Heine, analyst]

Yes, then very briefly. Just can we give an update where you stand with the carve-out process of the automotive catalysts and how you intend this to continue?

[Hans-Ulrich Engel, executive]

Andreas, it's Hans again. So this is perfectly in line with what we had planned. We're progressing with the respective carve-out measures and should be done with the carve out some time. I want to say early second half of 2023.

[Stefanie Wettberg, executive]

So now we have the last question from Rob Hales, Morningstar. Please go ahead.

[Rob Hales, analyst]

Kind of a long-term question on the China Verbund, I guess. I'm assuming you take 8 to 10 years to be fully built, all the plants there. But the benefit of the Verbund is integration. So does that mean up until that point, you'll be kind of a relatively high-cost producer for the plants that are kind of operating in the first phases?

[Martin Brudermueller, executive]

I'm not really capturing what you mean. I mean the Verbund has certainly now, in the first step, a high infrastructure part. That is always the burden when you do. And then you have the other phases, which are actually very economic because you don't have to go for that part anymore and you can benefit from utilization and infrastructure. And this is also why the Verbund is always a long-term concept. We talk now about Phase 1 and 2. And I think the next generations, we'll talk about 3, 4, 5.

Because there's a lot of space left, there's also expansion land, and we have clearly the intention to make that a container for future investments of China. And I would say the further down you go and the bigger you make that, the more the benefit comes out of that. And that was also important for us that we are very happy actually taking the big infrastructure part into consideration that actually also in the first phase, our contribution is already a very strong one to the BASF group. And given, I think, the growth perspective, that is a fantastic opportunity for BASF Group.

[Hans-Ulrich Engel, executive]

And maybe to add this, Rob, it will definitely not take 8 to 10 years to fill Phase 1 and what may be decided as Phase 2 of this new Verbund side. This will be much, much faster.

[Stefanie Wettberg, executive]

Yes. Ladies and gentlemen, this brings us to the end of our conference call. On October 26, we will present our third quarter results. Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us this morning.