Basf Se

XETRA:BAS

Earnings Call Transcript 2023-Q2

[Stefanie Wettberg, Senior Vice President Investor Relations]

Good morning, ladies and gentlemen. Welcome to BASF Conference Call on the Second Quarter 2023 results. Today’s presentation is being recorded. All participants will be in listen-only mode throughout. The presentation will be followed by a question-and-answer session. [Operator Instructions].

Today’s presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in opportunities and risks of the BASF report 2022.

BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements.

With me on the call today are Martin Brudermüller, 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/Q22023.

Now, I would like to hand over to Martin Brudermüller.

[Martin Brudermüller, Chairman]

Good morning, ladies and gentlemen. On July 12, we adjusted our full-year’s outlook and released preliminary Q2 figures. Today, the first time with Dirk, we will provide you with further details.

Let’s start with the development of Global Chemical Production. Based on currently available data, global chemical production stagnated compared with the prior-year quarter on account of weaker global demand. Among the large chemical markets, only China recorded growth. However, this was largely due to the low baseline resulting from the COVID-related lockdowns in Q2 2022.

In Europe, chemical production again declined strongly compared with the prior-year quarter. This was due to lower demand resulting from high inflation, frontloading of durable goods consumption during the COVID years, as well as elevated natural gas prices.

In Q2 2023, gas prices were still around twice as high as the average between 2019 and 2021 and 5x higher than the Henry Hub quotation for the quarter. In some cases, this has already led to temporary or permanent shutdowns of production capacities in the European chemical industry.

In North America, chemical production also declined compared with the prior-year quarter in an environment of weak demand for consumer goods. Lower demand and increased energy prices were also the main reasons for the decline in chemical production in Asia, excluding China, with the notable exception of moderate growth in India.

Despite recessionary developments in Europe and the United States and a subdued economic development in China, we do not expect a further weakening in demand at the global level of the second half of 2023. Inventories of chemical raw materials in most customer industries have already been greatly reduced.

Let’s take a closer look at the current and historical levels of indicators for inventories in the manufacturing industry by region. On this slide, values below 50 indicate declining inventories, values above 50 indicate restocking.

In Western Europe and North America, the indicators are already below their long-term averages. Furthermore, indicators in these two regions are now in the range of historical inflection points from destocking to inventory build-up. From this perspective, we should have likely reached the trough. Inventory indicators for Asia Pacific are above the long-term average, but have to be interpreted in the context of a somewhat higher growth momentum in industrial production.

Overall, these observations and statistical data are in-line with the current development of order entries in our operating divisions. Some customers are recognizing that they cannot expect further prices – further expect purchase prices to fall further. This should also support gradual demand recovery combined with a cautious rise in consumer confidence.

Moving on to BASF performance. Q2 2023, we faced low demand from our key customer industries, except automotive. Overall, BASF Group sales declined by 25% to EUR17.3 billion in Q2 2023, mainly on account of lower prices and volumes. Negative currency effects also lowered sales.

Compared with the extremely strong prior-year quarter, EBIT before special items decreased by EUR1.3 billion and amounted to EUR1.0 billion. The decline was especially driven by the upstream segments. Dirk will go into more detail on the development of the segments.

We are looking ahead. Therefore, I will give you an update on the projects we are undertaking worldwide to prepare BASF for the future. I will start with our new Verbund site in South China. By 2030, we expect the Zhanjiang Verbund site to generate sales of between EUR4 billion and EUR5 billion and an EBITDA of between EUR1 billion and EUR1.2 billion.

The project execution is on track. The first plant for engineering plastics successfully started up in August 2022 as planned, and despite all COVID-related challenges. As part of the initial phase, first BASF products made in Zhanjiang were already delivered to customers in the second half of last year. The plant for thermoplastic polyurethanes will come on stream in the third quarter of this year.

In mid-2022, we started the construction of Phase 1. This is the heart of the Verbund. It comprises a world-class mixed-feed steam cracker, several value chains for petrochemicals, intermediates and specialty chemicals for consumer products, as well as related infrastructure. This core complex is planned to start up as of the end of 2025. Pre-marketing is ongoing. Several contracts for future sales have already been signed.

We are building the new Verbund site in South China to serve the Chinese market. Further expansion and diversification of the value chains is already in preparation and is expected to go on stream from 2028 onwards. This will enable us to meet the growing demand of local customers, also for products used in special applications.

We are financing the investment with a combination of equity and a mix of various debt instruments mainly issued in China. Local bank financing is expected to be supported by Chinese and international banks. Overall, we are making the best use of cash generated by our existing Chinese Group companies and minimizing cash injection into China.

The new Zhanjiang Verbund site will also be a lighthouse project in terms of sustainability: We aim to operate it with 100% green energy from right of the start of Phase 1 production. Last week, we achieved an important milestone in this regard, in addition to the already signed or planned PPAs with partners for onshore wind and solar energy.

BASF and Mingyang have agreed to jointly construct and operate an offshore wind farm in South China. Mingyang is the largest private wind turbine manufacturer in China. It will hold 90% of the joint venture shares, BASF 10%. The majority of the power generated will be used to supply renewable electricity to BASF’s Verbund site in Zhanjiang.

The wind farm will have a total installed capacity of 500 megawatts. Subject to construction approval for the relevant authorities, the wind farm is expected to be fully operational in 2025, in-line with the startup of the heart of the Verbund. This is the first Sino-German offshore wind farm project in China involving development, construction and operation.

We are not only investing in China. We are also pursuing new projects in the United States.

Already in January 2023, BASF broke ground on the third and final phase of the MDI expansion at our Verbund site in Geismar, Louisiana. We will increase production capacity to approximately 600,000 metric tons per year by 2026 to support the ongoing growth of our North American MDI customers.

We are investing $780 million in this final expansion phase from 2022 to 2025. Including the first and second phase, this investment volume totaled around $1 billion. This makes the MDI expansion project BASF’s largest wholly owned investment in North America. For future investments in the United States, we will evaluate incentive schemes provided by the Inflation Reduction Act.

In June 2023, BASF and Yara announced a joint study to develop and construct a world-scale low-carbon blue ammonia production facility in the U.S. Gulf Coast region. Together, we are looking into the feasibility of a plant with a total capacity of 1.2 million to 1.4 million tons per year to serve the growing global market for low-carbon ammonia. The feasibility study is planned to be completed by the end of 2023.

Approximately 95% of the CO2 generated from the production process is aimed to be captured and permanently stored in the ground using CCS technology. For BASF, the new capacities would partially be used for backward integration, thus reducing the carbon footprint of our ammonia-based products. Therefore, this is another project that underlines BASF’s commitment to drive the transformation of the chemical industry.

Finally, some details about a project that is strengthening our position in a fast-growing market: our battery materials investment in Europe. At the end of June, we celebrated the opening of Europe’s first co-located center of battery material production and battery recycling in Schwarzheide, Germany. The state-of-the-art production facility for high-performance cathode active materials and the battery recycling plant to produce black mass are important steps in closing the loop in the European battery value chain.

The CAM plant has been gradually commissioned since the end of 2022 and is fully sold out for the coming years. It will supply products tailored to the specific needs of cell manufacturers and automotive OEMs in Europe. The construction of the battery recycling plant to produce black mass has already started, and production is expected to begin in 2024.

With these investments in Schwarzheide, BASF is supporting the European market for e-mobility and at the same time enabling faster growth for our global business. Overall, we aim to build a battery materials business with sales of more than EUR7 billion by 2030. We strive for an EBITDA margin before special items of more than 30% excluding metals.

Now, I will hand over to Dirk for further details on our performance in financial regard.

[Dirk Elvermann, Chief Financial Officer]

Thank you, Martin, and good morning ladies and gentlemen also from my side. I will now provide you with further details of BASF Group’s key financial figures in the second quarter of 2023 compared with the very strong prior-year quarter.

As Martin already mentioned, sales declined by 25%, primarily on account of lower prices and volumes. Prices declined particularly in the Chemicals and Materials segments because of lower raw materials prices and lower demand. All segments recorded lower volumes. However, excluding precious metals, the Surface Technologies segment increased volumes. Portfolio effects had a slightly negative impact on sales and were mainly related to the sale of the kaolin minerals business. Currency effects negatively impacted sales as well.

EBITDA before special items decreased by 41% and amounted to EUR1.9 billion. At EUR1.0 billion, EBIT before special items declined by EUR1.3 billion. This decline was mostly due to lower earnings in the Chemicals and Materials segments.

Compared with Q2, 2022, net income from shareholdings declined by EUR341 million to EUR92 million. This was largely due to lower earnings from Wintershall Dea, which in the prior-year quarter still included major contributions from activities in Russia. Net income of BASF amounted to EUR499 million compared with EUR2.1 billion in the prior-year quarter.

In Q2, 2023, the tax rate was 35% compared with 18% in the prior-year quarter. This increase is mainly related to the fact that deferred tax assets for tax loss carry forwards in Germany are currently not recognized for accounting purposes.

Cash flows from operating activities significantly improved by EUR950 million to EUR2.2 billion in the second quarter. At the end of June 2023, the equity ratio was 47.1% and thus only slightly below the figure at the end of 2022.

With that, let’s now take a look at the segment performance in more detail. Almost all segments contributed to the decline in EBIT before special items. Chemicals and Materials, which posted very strong earnings in the prior-year quarter were responsible for around 80% of the decline in BASF Group’s EBIT before special items. In both segments, EBIT before special items decreased mainly due to lower volumes and margins.

In Industrial Solutions, EBIT before special items also decreased considerably compared with Q2, 2022. In this segment, lower volumes and margins were again the main drivers. Furthermore, the prior-year quarter still included earnings contributions from the kaolin minerals business which we divested in September 2022.

Surface Technologies achieved slight earnings growth, driven by the Coatings division and the mobile emissions, chemical and refinery catalysts businesses. Compared with Q2 2022, global light vehicle production grew by 15.5%, according to S&P Global. This strong increase particularly resulted from the base effect in China following the lockdowns there in the prior-year quarter.

The 2023 outlook for the automotive industry, which is most relevant for our Surface Technologies segment, remains favorable. For the full year, global light vehicle production is expected to grow by 5.3%, according to S&P Global.

In the Nutrition & Care segment, EBIT before special items was considerably below the prior-year period. The main reasons were lower margins and volumes. In the Nutrition & Health division, margins in the vitamins business were particularly weak given the historically low vitamin A prices.

In the Agricultural Solutions segment, EBIT before special items decreased slightly in the second quarter compared with the prior-year period. This was mainly due to lower volumes resulting from cautious buying behavior, as crop commodity prices softened compared with Q2 2022. Higher channel inventories also played a role here. However, we had a very good start in Q1 2023, and our Agricultural Solutions segment performed strongly when looking at the full season in the northern hemisphere.

Finally, other remained a negative earnings contributor but posted considerably improved EBIT before special items year-on-year. This was mainly due to a higher contribution from our insurance companies.

I will now continue with our cash flow development, again focusing on the Q2 performance. Cash flows from operating activities increased by almost EUR1 billion to EUR2.2 billion. This was largely driven by cash inflows of EUR800 million from changes in net working capital. In the prior-year quarter, there had been cash outflows of EUR1.7 billion.

Payments made for property, plant and equipment and intangible assets rose by 43% compared with the prior-year quarter to EUR1.3 billion. This increase was mainly related to our growth projects, particularly our investment in China. Free cash flow increased by EUR569 million compared with Q2, 2022 and reached EUR905 million.

Now turning to our balance sheet at the end of June 2023 compared with year-end 2022.

Total assets amounted to EUR83.5 billion. This is a decline of EUR1 billion, mostly due to lower current assets, which decreased by EUR807 million to EUR36.6 billion.

Lower other receivables and miscellaneous assets and reduced inventories more than compensated the higher trade accounts receivable. The increase in trade accounts receivable was mainly caused by the strong sales performance of our Agricultural Solutions segment in the first half of this year.

Non-current assets were almost unchanged at EUR46.9 billion. Non-current liabilities increased by EUR1.8 billion to EUR25.0 billion, in particular due to higher financial debt. Net debt increased by EUR4.0 billion to EUR20.2 billion at the end of June 2023. The equity ratio at the end of Q2 was at 47.1%.

In the following, let me summarize the measures we are implementing to improve BASF’s competitiveness, particularly in Europe. As announced in detail at the end of February, we are executing a cost savings program with a focus on Europe and are adapting our Verbund structures in Ludwigshafen.

Together with the initiatives that were already underway in our global service units, we will reduce fixed costs by around EUR1 billion by the end of 2026. This is an annual run rate. By the end of 2023, we expect to be at a run rate of more than EUR300 million from our cost savings program with a focus on Europe.

In addition to these programs, we are rigorously controlling our fixed costs and managing discretionary costs on a permanent basis. We also have a strong focus on cash management to support our free cash flow. We will continue to improve cash conversion and we will reduce our inventory levels.

In the light of the current macroeconomic framework, we also have further trimmed our CapEx for this year. Instead of the EUR6.3 billion announced as part of the full-year reporting in February, we now expect CapEx of around EUR5.7 billion for the BASF Group in 2023.

Before Martin concludes with the outlook, I would like to give you a brief update on the carve-out of the mobile emissions catalysts and precious metal services business that was announced in December 2021. The carve-out has now been completed, as targeted, within 18 months. This was achieved while maintaining business continuity for customers, partners and employees. At the same time, the team ensured that the business performed strongly and won several new platforms.

BASF Environmental Catalyst and Metal Solutions, abbreviated ECMS, is headquartered in Iselin, New Jersey. It now operates in its own legal entities, using a dedicated IT system landscape and services. With global operations in 15 countries, more than 4,500 employees and 20 production sites, ECMS is a global leader in catalysis and precious metals, offering a wide range of products and services.

In the new setup, the team will focus on market opportunities in step with the more stringent light- and heavy-duty emissions regulations. ECMS will also further pursue growth areas in circular solutions and the hydrogen economy. The businesses will continue to be reported as part of the Catalysts division in the Surface Technologies segment.

And now, I will hand back to Martin for the outlook.

[Martin Brudermüller, Chairman]

Thank you, Dirk. Ladies and gentlemen, as announced on July 12, we expect weaker second-half sales and earnings than previously forecast. We adjusted our outlook for the full year 2023 accordingly. We now anticipate sales of between EUR73 billion and EUR76 billion. And EBIT before special items is now expected to reach between EUR4.0 billion and EUR4.4 billion in 2023. Based on the expected weaker earnings performance, we now anticipate a ROCE of between 6.5% and 7.1%.

The forecast for our CO2 emissions has also been reduced. CO2 emissions are now expected to be between 17.0 million metric tons and 17.6 million metric tons in 2023. Let me reiterate that for the second half of 2023, BASF does not expect a further weakening in demand at the global level, as inventories of chemical raw materials in most customer industries have already been greatly reduced.

However, we are assuming only a tentative recovery, because we expect that global demand for consumer goods will grow slower than previously assumed. Margins are therefore expected to remain under pressure.

On the slide with our outlook, you can also see the adjusted assumptions regarding the global economic environment in 2023. While the GDP growth assumption was increased due to the strong development of the service sector, we lowered our growth assumptions for industrial and chemical production.

Thank you, and now Dirk and I am glad to take your questions.

[Stefanie Wettberg, Senior Vice President Investor Relations]

Now ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions]. The first question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.

[Christian Faitz, Kepler Cheuvreux]

Thank you very much, Stefanie. Good morning, everyone. Two questions if I may. One is actually a bit of a complex in agriculture. How do you plan to deal with the channel inventories that have been building up during Q2 on the back of probably non-favorable weather for spray applications?

Are you in the process of buying volumes back? And also, how has the Brazilian application season started in terms of demand? And lastly, on agchem, I'm positively surprised to see how well your pricing has held up in Q2, given that one of your more prominent herbicides, glufosinate, significantly decreased in price, at least if I look at Chinese quotes. Any comments on that?

My second question would be on the elucidation of the battery materials in China. Why has this decreased so much? What's going on there? And has this improved in the meantime? Thank you very much.

[Martin Brudermüller, Chairman]

Christian, I think this is the right question to warm up for Dirk for the first time here in the call.

[Christian Faitz, Kepler Cheuvreux]

Good.

[Dirk Elvermann, Chief Financial Officer]

Yes Christian, Dirk speaking. So happy to take the question, first on the Ag. Indeed, the Agriculture Solutions Division had a fantastic first half of the year, maintained high prices. Now, the second quarter compared to the second quarter last year, a little bit slower. But if you take half year 2023 compared to half year 2022, fantastic result and also optimistic that we will maintain the high performance for the entire year.

So what do we see in more detail? We had high prices. We don't have any effects taken into the first half of the year that belong to the second half of the year. So this is true result of the first half of the year. This was part of your question. The glufosinate ammonium effect, this is a negative one, but is comparatively to the market a relatively smaller one. It's a one-digit percentage number that is here part of the equation.

Now, if we take the outlook, indeed, we see that product on the ground, also for the second half of the year that should work nicely. The distribution channels are indeed full, and this has to be managed. Whether this will lead to a significantly lower demand, we will still have to see. The business for the second half of the year is still in the making, but it's not about product on the ground. It's rather distribution channels.

And as you said rightfully, Brazil will now be the decisive question. So far, I'd say so good. We have a high level of demand, but now also the pressure on prices is increasing, and so we still have to see that. But overall, for the entire year, for the Ag Solutions business, we have a confident view altogether.

[Martin Brudermüller, Chairman]

Christian, on your question about lower earnings in battery materials. I mean, the lower earnings in Q2, as well as in the first half of 2023, in the battery materials business are mainly attributed to a significant decline in the lithium price. The decline was actually more than 40% since January 2023. And there's also a very weak market demand in the global consumer electronics, and the BASF, Shanshan operation in JV is still very much exposed to this sector.

For the second half year, we expect an increase in the earnings compared to the first half and this should be supported by an increase in volumes and implemented cost-saving measures. We should also not forget that the traditional catalyst business, which is consolidated here, the refinery catalyst and also the chemical catalysts are also expecting actually to grow their earnings in the second half of this year compared to the second half of last year.

[Christian Faitz, Kepler Cheuvreux]

Thank you very much, Martin and Dirk, and have a good weekend.

[Stefanie Wettberg, Senior Vice President Investor Relations]

The next question is now from Matthew Yates, Bank of America. Please go ahead.

[Matthew Yates, Bank of America]

Hi, good morning everyone. And welcome, Dirk. Now that you're all warmed up, I can maybe ask a slightly tougher question. So the press release mentioned you're planning to have sharper focus on cash management. As you're probably aware, there's a lot of anxiety from your shareholders around the balance sheet as we go through this period of tough trading, combined with high CapEx spending.

So can you talk a little bit more about the different levers you think you can pull to improve that cash management of the group? Are we talking about sort of cost-cutting, CapEx plans, working capital management, disposals or all of the above? Because I think there's an anxiety from investors that BASF doesn't have a Plan B if the cycle doesn't quickly turn for sustaining that dividend. Thank you.

[Martin Brudermüller, Chairman]

Clearly for the new CFO.

[Dirk Elvermann, Chief Financial Officer]

Thanks, Matthew, for the question. So yes, and first of all you see the focus on the cash management already, I think in the second quarter results, which we have just explained. So what are the levers that we are pulling?

So (a) CapEx we talked about. We started the year with a EUR6.3 billion expectation for this year. We have trimmed this down first to a little bit below EUR6 billion as you know, and now we're at EUR5.7 billion. And this is attributable to savings in the base CapEx I'd say, which is the maintenance and funding of our overall asset footprint.

But also with regard to our growth projects, we came down here and this is a little bit of FX effect certainly, but this is also smart negotiations with partners in China. So that we are not just postponing CapEx to the outer years, but that we are really also reducing it to now 5.7 billion. This is I think a comfortable number, which will not be higher and I think that's the step in the right direction.

Cost savings; I mentioned we are having the various dimensions. We have the focus projects, cost-saving projects on Europe, EUR 500 million run rates from non-operating activities, and then until 2026, also the streamlining of the Verbund in Ludwigshafen with the further 200 million. And then we have the running programs for the service units, which we have also explained. So altogether, it's a little bit more of EUR1 billion run rate as of 2026, the latest.

And then on inventories, that's close to my heart also. You know the typical inventory profile of the group, so we are normally peaking around late summertime. This year, we stayed very focused on inventory build-down alone in June. Just to give you an idea, we are more than 400 million lower than in May in terms of our inventories, and if you compare it with June last year, we are more than 550 million lower. So this shows you in which direction we want to go there.

Last not least, accounts receivable. There we will see of course the build-down in the second half when the cash collection from the agricultural business is at its peak, and also here we see some cash release. So in short, in a nutshell, we are pulling all levers that we have.

[Matthew Yates, Bank of America]

And can I ask a follow-up, and forgive me if this is overly simplistic, but if you're cutting your full-year sales guidance by the best part of EUR10 billion, is there a rule of thumb for what that means for the size of working capital release?

[Dirk Elvermann, Chief Financial Officer]

Yes, forgive me that I'm not giving you an exact number here. Of course, there is also a natural effect, as we both know. From the working capital then, on the other hand side, you have also then the less EBITDA. I mean, it's mainly a price question here. So it's a little bit too early to predict that completely, but I think the direction is clear.

[Matthew Yates, Bank of America]

Okay. Thanks very much.

[Stefanie Wettberg, Senior Vice President Investor Relations]

Okay. The next analyst in the queue is Andreas Heine, Stifel. Please ask your questions.

[Andreas Heine, Stifel]

I have actually three very short ones. The first one is, could you elaborate a little bit on the demand trend in China going into Q3? The same would be on the battery material plant in Schwarzheide. You are sold out from several years, but it takes some time to ramp it up. When can we expect on EBIT levels that this plant will be profitable? And the last one, I guess that nutrition in the Nutrition & Care business is loss-making on current vitamin prices. Could you elaborate how you see this subdivision going forward in the second half in 2024?

[Martin Brudermüller, Chairman]

Andreas, let me start here with the China thing. I think what is the surprise to the world is that it seems like China is also not able to walk on water. Also, that’s what became very evident when the Prime Minister, Lee Chang was visiting Berlin and had also interaction with CEOs to talk about that, also getting recommendations and advice. How to kick start the Chinese economy again, and it is very obvious that there is some nervous reactions over there because it is not working with the classical instruments anymore.

What is the reason behind that? I think it is exactly the same as everywhere in the world. People are uncertain in this environment. I think Chinese people are not so happy and confident with their own government. They spend a lot of money for the education of their kids. They have a 20% unemployment rate of young people now. They have lost a lot of money in real estate. They are simply cautious on spending money and this is why it is not so easy to come back to consumer confidence and spending. You see that in retail sales and everything to be cautious.

That doesn't change anything in the fundamentals. If you look at the per capita consumption of Chinese versus the rest of the world, we cannot wish that they consume as much as we do. But with 1.4 billion people, there is actually so much room to get closer to us, that I think the fundamentals for the next decades are not changing. But obviously, that is not kicking in the second half as it did during the financial crisis, where actually China paced out the world. That is why everyone experienced a pretty similar situation in China, including BASF by the way, like everywhere else in the region.

Battery materials, yes. We also we ramped that up now and actually get the whole process running, kind of commissioning and everything. But you have also to understand that there are certain steps in the approval process. You have so called C&D samples, which have to come then from certain amount of patches of that, which are then approved with the customer. That also takes some time. We are in the middle of that progress and so far no bad surprises.

In terms of when this will be positive, I cannot give any answer on that, because we normally don't do that on a plant level. But coming with that, loading the plant, being in sync with the customer, that actually then should bring also the plant into the positive territory.

On Nutrition & Care, yes, I think Vitamin A and Vitamin E is in a difficult situation. It is very low in terms of prices, almost historically low prices. But there is also a demand that is going down. In both in animal nutrition, as human nutrition, extremely low demand, so it's a volume effect and it's a margin effect. Without talking too much about competitors, but I think if you look at also the announcement of our major competitors, then you can see that this is not a BASF problem. That is actually something that the whole industry faces now.

It's a fierce situation. We actually react on that by taking fixed costs out. By now taking our new investments into operation and ramping them up and with that then having to go through this difficult to face. But that was traditionally an area particular in the Vitamin A where BASF was always the cost leader. So I'm absolutely convinced that we get out of that. How long that does actually take, has a little bit to do obviously general, let's say demand recovery.

[Andreas Heine, Stifel]

As you said, you believe that BASF is cost leader. Is that still true in the current environment of high energy prices as your assets in vitamins predominantly be in Germany?

[Martin Brudermüller, Chairman]

That is more challenged. Certainly it has been more challenged very clearly when the energy prices were high. But as they have come down, they are still high and remain higher. But even that, with the new assets we take into operation, increased capacity, more efficiency, we are absolutely sure that we can also hold that in the future.

[Andreas Heine, Stifel]

Thanks a lot.

[Andreas Heine, Stifel]

So now we have Chetan Udeshi, JPMorgan. Please go ahead.

[Chetan Udeshi, JPMorgan]

Sorry. I was just – Martin, you mentioned something like you don't expect further demand weakening. I mean, this was – I don't know whether this was based on the statistical data that you refer to in terms of manufacturing industry inventories or is this something you see actually in your order book? I mean, let's put it this way.

If I look at Q3, we all know there’s a seasonality in the agricultural chemicals division. I don't know if you want to give us any feel for it. But you know Q3 typically breakeven sort of a number, so maybe it comes down by EUR200 million, EUR300 million. Ex that business, would you expect your rest of the business to be at least at the same level as Q2? Given that you are saying that you don't expect a demand to fall further, that was the sort of first question.

And the second question was, just coming back to this discussion around cost cutting, fixed cost savings. Is any of that in the numbers already in first half, because the Q2 was really – I mean, when we look at the earnings across divisions, it’s quite tough. So I don't see any evidence of any of these cost savings coming through. But I was just curious whether you've seen any of these benefits in the first half or are they more second half loaded? Thank you.

[Martin Brudermüller, Chairman]

Hi Chetan, thanks. I’ll take the first and second part is Dirk. I mean we have spent an awfully lot in understanding this whole demand pattern. And as I said, I mean I'm 17 years in the board. I have never actually seen such a situation. I think it is not comparable with what we have seen in COVID times and also during the financial crisis, because it is this time really affecting all the regions, a little bit in a similar way all over the globe. That was usually not the case in the past, because one of the regions did better than the others.

But looking into this and studying this, and also looking on our own numbers Chetan, we can see that the orders were declining, but they are bottoming out now at a certain level where they actually are. We don't see over the recent weeks that the orders further declined.

That said, orders at hand are slowly, slowly, slowly going up. But they also seem to have a trough. We have seen that over the recent weeks that is coming up. So it is not only a qualitative staying what I say, but I see this reflected also in the numbers.

Is this now having v-shaped development? Certainly not, but we see that we are somehow at the trough and bottoming out. That refers also to what we hear from customers. Some example, we see particularly in Asia, MDI also in the immediate business that this is starting to stabilize. We see actually the chemicals refinery catalyst arena, actually a rather good outlook. That was also why I mentioned that earlier when Christian asked about the development over here.

We see also certain stability coming in in the customer care areas and several other businesses. So that gives us the confidence that its bottoming out. Does this now say, everything goes up steeply? No. This is also why we had to adjust our outlook. But I think it is fact based and it is also based with a lot of discussion with customers.

I mean if you look at this destalking, and we talk about always about this, re-stalking, destalking, this is always the magic thing. If you don't have to explain something, you talk about destalking and re-stalking.

Actually you can never really know where the customers are. The only thing you can do is, that once in a while I do that when I visit the customer, and you see how many pallets are in this thing. Is it empty or isn't full? Which gives you a kind of seeing/believing thing. But we saw now destalking. For many months and actually at a certain point, this has to come to an end. And I think we are in many of the industries at that point. So that gives us a little bit the different spin today, in today's call than maybe the very depress if you have seen everywhere. You know us for being conservative and cautious.

So I think take it as it is. When we say it’s like this, with the words we use now also in explanation and also in the speech, and now we set a few more information to fix costs.

[Dirk Elvermann, Chief Financial Officer]

Yes, hi Chetan. Dirk speaking. First of all we gave you the EUR300 million that we are expecting for this year. I think we can safely say that EUR260 million round about is already in our pockets and where do you see it in the P&L? I mean, not everything you can see directly, but some things you see directly. If you go to the personal expenses, then you see that they are down by 3.6%. So there is something that you can see, other parts you don't see, but its EUR260 million now and EUR300 million for the year and more than EUR1 billion, roundabout EUR1 billion, a little bit more than EUR1 billion overall in the saving programs.

[Chetan Udeshi, JPMorgan]

Thank you.

[Operator]

Now we have Georgina Fraser, Goldman Sachs. Please go ahead.

[Georgina Fraser, Goldman Sachs]

Yes, hi. Good morning. Hi Martin. Hi Dirk. My first question is, now that you've recently completed the carve-by of ECMS, the autocatalyst business, could you maybe talk about the strategic options that you see for that business now on a kind of standalone basis?

My second question is, Martin, I think this morning you've been quoted in the media saying that politicians should be alarmed, the stock valuations and industry challenges that chemical companies are facing. That BSF last year acted very early and decisively to make energy intensive plant closures in Europe. Do you think the bulk of these structural changes in the region for the chemical industry are behind us or do you think it's a trend that's only just underway? And what does that mean for the region's ability to deliver on net zero or energy transition ambitions compared to regions like China for example? Thank you.

[Martin Brudermüller, Chairman]

Georgina, it’s always very mindful questions from you. I'll take the second one and Dirk the first one. I mean, I am worried about the competitiveness and the situation the European chemical industry is in. I mean, you see on one hand the volume loss. I mean it's in year-to-day in Germany about 17%, in Europe 13%, another 5%, 6% was actually lost already last year. So that basically means 20%, 25% of the production volume in Europe is gone.

That shows you low utilization rates. You can may now ask where is this coming from? No one has the exact numbers. But I think as much as you can understand it, I would make a rough guess that half is actually lost exports, where Europe is simply not – kept comparing ourselves out in the world. The second half is most probably the lack of competitiveness of our customers.

So looking at this and on the same moment, looking into the over regulation we get from Brussels, my 14,000 pages, we have so far been released to affect the chemical industry and it's not the end; it’s actually really worrying. So the energy cost and situation availability, I think we are seeing ourselves too safe in Europe, because we had a mild winter that can come back very easily if we get a cold winter and some other stuff. So that will be in the headlines again.

So I would say the politics is not reacting in the right way to actually take that serious and look for relief. Either a memorandum or moratorium, sorry – on some of the regulation, as well as particularly looking in the German side on energy prices, electricity prices for the industry.

We have done our homework. As always, we are fast. We have been the first one with the EUR500 million cost cutting of non-production. We got a huge headline and then afterwards everyone else came. So I would say BASF is always a bit faster than the others here.

I think the closure of the plants are absolutely (Audio Gap). I can only assure you there's nothing coming out more from our side as much as we can foresee this for a while as of looking medium term, but I am absolutely sure that the one or the other will come. And if I see, when I talk within the industry, I see that people are considering this, whether it makes sense to produce in Europe. So we have absolutely to think about structural changes in the industry, which will partially be also for good, because if stuff is shut down, then it is shut down.

So it is a kind of for emergency and we need support from the politicians to safeguard this industry. Let me say, this is the fourth largest industry in Europe. It actually generated EUR50 billion of trade surplus for many decades. With the increase of gas prices last year, this is gone. Europe is importing more chemicals today than it’s actually exporting.

So something has to be done, and if you look on market cap and share prices and also without commenting on others, that some outside of Europe looking into acquisitions now on the European chemical sector, then I would say this altogether is an emergency call which should be taken up by the politicians.

Sorry, maybe one thing. Yes, that might slow down the one or the other contribution for the transformation in the energy side. I would say it will shift within the regions. For most of the chemical companies as for BASF, that's a global target. If the conditions in Europe are not good, we will try to decarbonize in other regions faster.

And you saw that China wind farm thing is one thing. We get great support in China to do that. Zhanjiang will be a mega super modern site. It’s totally digitalized, lowest carbon footprint, and companies will look into investing more in the U.S. with the IRA, where you have a business case for transformation. So all that is I think an urgent call for support for the chemical industry in Europe.

[Dirk Elvermann, Chief Financial Officer]

Hi Georgina. To your question on ECMS, so first of all, let me say again, we are very proud that on our team's ECMS team, but also our team’s incorporate and services that they have really delivered the full carve-out within 18 months according to time and budget. So how do we see into this business now? I mean, this business is fully invested, well positioned, hunting for additional market share and very cash return rich.

So we can take this business, enjoy the focus it has on its markets, also receive the cash that is coming from that business, or we can also take the stance if there's somebody who is attributing more value to the cash flows, to find another strategic option. But this is absolutely not yet decided. There's no decision taken on that. But I think the carve-out itself was a very important step for the crystallization of the value of that business within the BASF Group.

[Georgina Fraser, Goldman Sachs]

Thank you so much.

[Stefanie Wettberg, Senior Vice President Investor Relations]

Okay. We have four more analysts on the line, so perhaps keep it a bit shorter. It's now Jaideep Pandya from On Field Research. We have then Peter Clark and Sebastian Bray and Laurent Favre. But now, Jaideep Pandya, please go ahead.

[Jaideep Pandya, On Field Research]

Thanks. The first question is for you, Martin. On sort of the upstream side of things, if I was to say that you guys will get 10% more volume next year, would that make any meaningful impact on spreads, given how low utilization is right now? Do you think that tightening towards 75%, 80% brings some pricing momentum or conversely actually, more volume means more pricing pressure, because there's just so much competitive pressure in the system?

And the second question is for Dirk, who you sound so similar to Hans, so I'm going to ask you a tough question. Currently BASF, when they show up, you have basically EUR6 billion-ish of CapEx and EUR3 billion-plus of dividend outflow in a EUR9 billion, EUR10 billion world of EBITDA. So how prudent is it to keep dividend at the current level or conversely, at what point would you consider cutting the dividend for actually building a long-term future for BASF on a CapEx front, if we don't see a meaningful recovery in the cycle? Thanks a lot.

[Martin Brudermüller, Chairman]

Jaideep, I'll go for the first, and Dirk for the second one. Very clear, Dirk was mentored and trained by Hans, but he's a totally different type, so be sure about that, there's no second Hans.

Jaideep, about your question with 10%, let's say volume increase in the upstream sector, you made this now on 10%. It's tough to judge on 10%. But I would say 10% is a meaningful demand increase. That clearly would change the dynamics totally, because let's be very clear. The availability, the supply side is high. The demand is low.

Upstream stuff and commodities react so fast on that. Basically on a daily basis you can almost say, see in the formula prices. So I think that would have fundamental change, that prices would turn around. Would bring us then to top margins? No, but it would clearly improve the margins, because I think everyone would be sure to have enough stuff at the right time. And then it depends also where it comes. Is this globally distributed or which region it comes? But it would definitely help us to get the prices up and certainly load the plants much better.

[Dirk Elvermann, Chief Financial Officer]

So and I then follow-up with your tough question. So as you know, maybe for the BASF Board, this first important statement, shareholder value and specifically an attractive dividend is of high importance. And we showed in the past that this is also true in difficult years. So I don't have to repeat our dividend policy, you know it well. But you know that also in years like 2020 and ‘22, which were difficult years, we kept the dividends stable and I have to say, I'm also proud of that.

So now ‘23, we are all seeing the numbers. We see that at least in parts of the world there's also recessionary elements in it, which it’s in the chemical industry particularly hard. You see that also in earnings and our full year outlook that we had to reduce and you also saw that we are committed to our large capital projects to enable our future profitable growth, but you are also prudent and take some cuts there where possible.

Then also as part of the equation you have to see BASF free cash flow, I think that was a positive surprise also to the community. It’s very strong in the second quarter 2023 and this will also then support an attractive dividend going forward.

And if I take this all together, whether we’ll be able to maintain our dividend per share for the year ‘23 will strongly depend on how the rest of the year now goes, and I think here we all have to see that and I think this is what I can respond to your question right now.

[Jaideep Pandya, On Field Research]

Just to say you are comfortable with the net debt to EBITDA round two or would you mind taking it even higher to maintain dividend.

[Dirk Elvermann, Chief Financial Officer]

Our – so you saw our debt now going up on different elements and you also know that I mean our debt management is very much driven by our rating. We are and I think not many companies in the chemical sphere have a solid A rating. I think this is also a guiding principle here. So again, it's all fitting together at the end has to fit together all together, but so far I'd say on a debt level we are working of course. We talked about working capital management etc., but I think this is what we can say today.

[Jaideep Pandya, On Field Research]

Thanks a lot.

[Stefanie Wettberg, Senior Vice President Investor Relations]

So now Peter Clark, Societe Generale. Please go ahead with your questions.

[Peter Clark, Societe Generale]

Yes, good morning, I've got two. The first one, I'm getting the clear message your own CapEx but it's not postponed, its a delay. So when I look at the five year plan at EUR28.8 billion, I'm assuming that you're looking to get that down and subsidiary to that, in terms of the North American exploration of a new venture with Yara, I’m assuming that's not actually in that five year budget or is it? If you can clarify that.

And then the second question is around the trends again into the second half and particularly automotive. I know you're very confident in automotive, its holding up well. But on the third quarter I seem to remember there's quite a tough year-on-your comp, particularly in Asia Pac where China was ramping up again after the shutdowns I think in Q2 ’22.So am I right in thinking the third quarter from automotive OEM, you have a tough comp. Thank you.

[Martin Brudermüller, Chairman]

Yes Peter, on the last one I think we clearly said this 15% that we were seeing now, but we said also a 5% over the whole year, which shows you exactly the effect that you said you have a base effect over there and as you see also the dynamic slowing down a bit. I think what we clearly see on one hand, the semiconductor thing is over.

The orders on hand are melting down, because consumers get also more cautious in buying a car. I think there is some confusion still about when is the right point to buy it best, which is actually going much slower than except of China over there. And then over all let's say that people don't have the money to buy cars now. So that is all I think contributing a bit, that is basically making us a little bit more cautious, but it's still a growing industry this year.

So on the CapEx, as we always said, we are actually are very cautious on that and we look into everything two and three times. In the difficult times now we are really taking extra look and getting things done.

Very clearly and very happy we are about the development with our large capital investment in China. That is actually coming in very, very well, because negotiations with contractors also cost about materials and I would say excellence in execution really bring cost down. Not only for this year, we are hopeful actually for the overall investment over there. They are performing very well. And we took actually money out of running projects, we also postponed some projects, because you don't need it new cap as it is to decide now when you are actually in shrinking markets.

So your assumption that Yara is not in, is absolutely right and I would also remind you that this is minority position of peers and so its equity consolidation and you will not see it in the CapEx numbers anyway.

So, I leave it with that, but be assured that we will be very tough on CapEx all through the years going forward.

[Peter Clark, Societe Generale]

Thank you.

[Stefanie Wettberg, Senior Vice President Investor Relations]

Now, we have Sebastian Bray, Berenberg. Go ahead with your question.

[Sebastian Bray, Berenberg]

Hello, good morning, and thank you for taking my questions. I have two, please. The first is on the automotive sector. This has been a source of relative strength over the last two years. There may be some lead indicators that demand starting to slip a little. You mentioned earlier Martin, the comments around the slight pickup in orders on a near-term basis for the industry. But is this also the case for automotive or is it more appropriate to talk about a slight weakening there, is there any change?

My second question is on the mission's control business, together with the precious metal activities that have been carved out. Could you give us any idea if the economics of this business, either in terms of its absolute sales or profitability currently? Thank you.

[Martin Brudermüller, Chairman]

I mean, overall the order income from automotive I would say is rather stable. Also, when I said weakness or getting maybe a little bit weaker, that has also to do a lot with the base effect over there. So I see actually automotive rather stable, particularly the emission catalyst business and Dirk will come to this in a second, is also stable. And you see also that we have a very strong coating business, currently is performing actually very well, and that shows you there will be no car produced or sold, that is not painted, so that's always very, very good indicator over there.

So I regard that part as the most stable part together with the agricultural part in our portfolio still, and is that too easy mass project [ph].

[Dirk Elvermann, Chief Financial Officer]

Yes, a little bit on the catalyst business. So if we look into Q2, 2023 to 2022, just take the catalyst business out of the service technologies. There you see a decline of course. This is on the back of particularly lower prices and volumes in the precious metal services, but altogether business holding up nicely, and I think the very strong performing business in the automotive sector is the ECM Coating. So the Coating's business that we have, were both in terms of volumes and in price you see an incline and see really a strongly performing business on the back of quite a nice market development for them.

[Stefanie Wettberg, Senior Vice President Investor Relations]

So I think Laurent, have to move on to the next call today. So we have come to 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. We will present our third quarter results on October 31. Thank you for joining us this morning. We wish you all a great summer break once the reporting season is over. Goodbye for today.