Basf Se

XETRA:BAS

Earnings Call Analysis

BASF Q3 Performance with 2023 Outlook

In Q3 2023, BASF's total assets decreased by EUR 1.9 billion to EUR 82.6 billion, mainly due to lower receivables, inventories, and trade accounts. Net debt rose EUR 2.6 billion from 2022 year-end to EUR 18.9 billion, yet the equity ratio increased slightly to 48.8%. The company aims to save over EUR 300 million in European costs by end of 2023, targeting annual savings of over EUR 700 million by 2026. Capital expenditures (CapEx) for 2023 were cut by EUR 1 billion to EUR 5.3 billion, with a EUR 4 billion reduction planned over five years. Sales and earnings for 2023 are expected at the lower end of EUR 73-76 billion and EUR 4-4.4 billion respectively, with challenges anticipated at the start of 2024. Nevertheless, BASF plans to maintain dividend levels, bolstered by strong financials.

Introduction to BASF's Q3 2023 Results

The BASF Group has navigated a challenging third quarter, shaped by weakening global chemical production and pressures across various segments. This performance calls for a careful examination of both the external economic factors and the company's internal strategies.

Global Chemical Industry Downturn

Global chemical production presented a mixed picture, with an overall growth of 4.8% influenced by a strong recovery in China but a decrease of 4.4% when China is excluded. Europe witnessed a notable production shrink by 6.6% due to rising inflation and energy costs, with North America and Asia (excluding China) also experiencing declines.

BASF's Financial Highlights and Concerns

BASF's sales plummeted by 28% to EUR 15.7 billion primarily due to lower prices and volumes, particularly in the Materials, Chemicals, and Surface Technologies segments. This contributed to an EBIT before special items reduction by EUR 772 million, now at EUR 575 million, net income plummeted to minus EUR 249 million, and EBITDA before special items decreased by 34% to EUR 1.5 billion.

Operational Segment Performance Disparities

There were significant performance disparities among the various operational segments. The Agricultural Solutions and Surface Technologies segments witnessed increased EBIT before special items, driven by higher prices and volumes. Conversely, there were considerable earnings decreases in the Chemicals, Nutrition & Care, Industrial Solutions, and Materials segments owing to the tough macroeconomic landscape.

Positive Cash Flow Amid Lower Net Income

Despite the significant drop in net income, BASF achieved a 17% increase in cash flows from operating activities to EUR 2.7 billion, thanks to successful changes in net working capital and a disciplined inventory management approach. Payments for property, plant, and equipment, and intangibles rose to EUR 1.2 billion, associated with growth projects such as their China investment.

Strategic Measures and Future Outlook

BASF is executing measures to strengthen its financial foundation, including aiming to reduce 3,500 jobs as part of cost-savings programs and confirming a significant EUR 10 billion investment project in China. The company maintains a focus on strategic portfolio management, climate neutrality goals, and preserving competitiveness in a shifting energy landscape.

Lingering Uncertainties and Guidances

The company anticipates sales of between EUR 73 billion and EUR 76 billion along with an EBIT before special items of between EUR 4 billion and EUR 4.4 billion in 2023, expecting results at the lower end of these ranges due to macroeconomic uncertainties. BASF underscores its commitment to maintaining dividends while contending with expected challenges at the start of 2024.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, good morning, and welcome to the conference call of BASF SE. [Operator Instructions] The conference is going to be recorded for reasons of documentation and streamed live on the internet at basf.com/pressconference.

After the presentation, you have the possibility to ask questions. [Operator Instructions]

I'll now give the floor to Nina Schwab-Hautzinger, Head of Corporate Communications and Government Relations.

[Nina Schwab-Hautzinger, executive]

Yes. Welcome, and good morning, ladies and gentlemen. Thank you very much for having dialed into our conference call. Today, we are going to present the financial figures of BASF Group for the third quarter 2023.

You will be talking to Martin Brudermuller, Chairman of the Board of Executive Directors of BASF; and Dirk Elvermann, who is the CFO of BASF.

Before we start, I would like to give you a few pieces of housekeeping. Conference language is German with a simultaneous interpretation into English. And if you want to ask a question, please ask it in the question -- in the language you're listening to the conference. So if you ask an English question, you will get an English answer. In this case, the German-speaking participants will listen to the simultaneous interpretation.

And now I give the floor to Martin Brudermuller.

[Martin Brudermueller, executive]

Good morning, ladies and gentlemen. Dirk Elvermann and myself would like to welcome you to our conference call presenting our results for the third quarter of 2023 and providing further details.

Let's start with the development of the global chemical production. Based on currently available data, the chemical industry remained under further stress in the third quarter as all regions, with the exception of China, exhibited a decline in production compared with the prior year quarter. In China, on the other hand, there has been a considerable recovery in domestic demand for a broad range of chemical products in recent weeks, albeit accompanied by low sales prices. Whereas global chemical production in total grew by 4.8% including China, it decreased by 4.4% without China.

In Europe, chemical production slowed considerably compared to the prior year quarter. This was due to a lower demand resulting from high inflation, increased interest rates and renewed rise in natural gas prices. Moreover, there has been a slowdown in consumer spending due to the front-loading of durable goods consumption during the COVID years.

In the third quarter of 2023, European natural gas prices were still around 40% higher than the average between 2019 and 2021 and 4x higher than the Henry Hub quotation for the quarter. Consequently, European chemical production continued to decline in the third quarter of 2023 and shrank by 6.6% compared with the prior year quarter.

In North America, chemical production also declined compared to the prior year quarter in an environment of weak domestic demand from industries and consumers.

Compared to the same quarter of the previous year, chemical production was also weaker in Asia, excluding China. Subdued consumer spending and strong import competition from China were the main reasons for this.

However, there are also positive indicators. Let's again take a closer look at current and historical levels of indicators for inventories in the manufacturing industry. On this slide, values below 50 indicate declining inventories and values above 50 indicate restocking. In our second quarter conference call, I mentioned that these indicators were below their long-term averages and in the range of historical inflection points from destocking to inventory buildup for Western Europe and North America. The figures for the third quarter of 2023 broadly confirm our expectations.

The indicator for Western Europe improved marginally, signaling a slightly lower decline in inventories. The indicator for North America has moved further towards neutral. In Asia Pacific, however, the inventory indicator is continuing to edge up, pointing to increasing inventories amid the ongoing slow recovery of industrial production. Overall, these observations and statistical data remain in line with the current development of order entries in our operating divisions. Particularly in China and India, we saw firmer demand while order entries are indeed stabilizing in the other regions.

We now move on to BASF's performance. Overall, BASF Group sales declined by 28% to EUR 15.7 billion in the third quarter of 2023, mainly due to lower prices and volumes. Prices fell particularly in the Materials, Chemicals and Surface Technologies segments, but we were able to increase prices in the Agricultural Solutions segment.

Sales volumes were considerably lower than in the prior year quarter across all consumer or customer industries with the exception of automotive. In the Surface Technologies segment, which supplies most of its products and solutions to the automotive industry, volumes, excluding precious metals, were fairly stable.

In the course of the year, volume decline slowed down. In the third quarter of 2023, volumes declined by 3% compared to the second quarter of 2023. Compared to the prior year quarter, earnings in the Agricultural Solutions and Surface Technologies segments increased, while the remaining segments recorded considerably lower earnings.

Overall, EBIT before special items declined by EUR 772 million compared to the third quarter of 2022 and amounted to EUR 575 million. This is in line with the average analyst estimates of EUR 601 million compiled by the Investor Relations service provider, Vara Research, on behalf of BASF in October 2023.

And with that, I will hand over to Dirk Elvermann.

[Dirk Elvermann, executive]

Thank you, Martin, and good morning, ladies and gentlemen. I will now provide you with further details of BASF Group's key financial figures in the third quarter of 2023 compared with the prior year period.

EBITDA before special items decreased by 34% and amounted to EUR 1.5 billion. The EBIT before special items declined by 57% to EUR 575 million. I will go into the details at segment level on the next slide. Net income amounted to minus EUR 249 million compared to EUR 909 million in the prior year quarter. Besides the lower EBIT, this decline was driven by the overall negative earnings of Wintershall Dea due to special items. In the third quarter of 2023, Wintershall Dea recognized impairments on assets in the Middle East and also booked provisions for restructuring measures relating to the adjustment of the company structure that they announced in September.

Compared with the third quarter of 2022, BASF's cash flows from operating activities increased by 17% to EUR 2.7 billion, mainly due to considerably higher cash inflows from changes in net working capital. This resulted particularly from reductions in inventories.

Now let's take a look at EBIT before special items in the segments in the third quarter compared with the prior year period. The Agricultural Solutions and Surface Technologies segments increased EBIT before special items compared with the third quarter of 2022. The considerable increase recorded by the Agricultural Solutions segment mainly resulted from higher prices and included a onetime effect from insurance payments. The slight increase in the Surface Technologies segment was driven by considerable earnings growth in the Coatings division on account of higher prices and volumes. This more than compensated for significantly lower EBIT before special items in the Catalysts division.

Overall, BASF's earnings reflected significantly lower EBIT before special items in the Chemicals, Nutrition & Care, Industrial Solutions and Materials segments owing to a weaker macroeconomic environment.

In the Chemicals segment, both divisions recorded significantly lower EBIT before special items mainly due to lower margins and volumes. In the Petrochemicals division, the unplanned outages of the crackers in Port Arthur, Texas; and Nanjing, China in September additionally burdened earnings.

In the Materials segment, the considerable decline in EBIT before special items was driven by significantly lower earnings in the Monomers division, particularly as a result of lower prices. Earnings in the Performance Materials division fell slightly, mainly due to lower prices and volumes.

The Industrial Solutions segment recorded considerably lower EBIT before special items in both divisions, particularly on account of lower volumes and margins.

EBIT before special items in Nutrition & Care declined significantly. In the Nutrition & Health division, EBIT before special items was negative mainly because of currently very low prices in the vitamin industry. This was partly offset by positive earnings in Care Chemicals. These were however also significantly below the level of the prior year quarter due to lower margins on account of lower prices.

Ladies and gentlemen, we will now look at our cash flow development, again focusing on our performance in the third quarter. Cash flows from operating activities in the third quarter increased by EUR 384 million to EUR 2.4 billion. Let me state clearly. This is a remarkable improvement in view of the significantly lower net income.

The cash flow generation was largely driven by cash inflows of EUR 1.9 billion from changes in the net working capital. This is an increase of EUR 1.2 billion compared with the third quarter of 2022. Lower inventories resulted in a cash release of EUR 488 million, while in the prior year quarter, inventory buildup of EUR 834 million had tied up cash. This reflects our high discipline in inventory management as part of our self-help measures in the currently difficult economic environment.

Compared with the prior year quarter, payments made for property, plant and equipment and intangible assets rose by EUR 215 million to EUR 1.2 billion. This increase was mainly related to our growth projects, particularly our investment in China.

In the third quarter 2023, free cash flow increased by EUR 170 million compared with the prior year period and reached EUR 1.5 billion.

Now let's look at the balance sheet at the end of September 2023 compared with year-end 2022. Total assets declined by EUR 1.9 billion and amounted to EUR 82.6 billion. This decline was driven by lower current assets, mainly on account of lower other receivables and miscellaneous assets reduced inventories and lower trade accounts receivable. Overall, current assets decreased by EUR 3 billion. Noncurrent assets increased by EUR 1.1 billion because additions to property, plant and equipment exceeded depreciations.

On September 30, 2023 net debt amounted to EUR 18.9 billion. This was an increase of EUR 2.6 billion compared with year-end 2022, but a decrease of EUR 1.4 billion compared with June 30, 2023. Compared with 30th of September 2022, 1 year earlier, net debt was significantly lower. The equity ratio at the end of the third quarter of 2023 was slightly higher than at year-end 2022 and stood at 48.8%. Overall, this demonstrates BASF's financial strength with a strong balance sheet and good credit ratings, especially compared with peers in the chemical industry.

And this brings me to our ambitious cost savings programs. We are consistently working on our cost structures to improve BASF's competitiveness, particularly in Europe. As announced at the end of February, we are executing a cost savings program focusing on Europe, and we are adapting our Verbund structures to -- in Ludwigshafen. By the end of 2023, we will achieve the run rate of more than EUR 300 million from our cost savings program with a focus on Europe, as already indicated in our second quarter reporting.

We now expect annual cost savings in non-production areas to reach more than EUR 600 million by the end of 2024 and more than EUR 700 million by the end of 2026. These figures include measures related to Europe in the Global Business Services and Global Digital Services units. Additional measures in these 2 service units in other regions will contribute a further EUR 200 million. Together with the EUR 200 million in savings from the adaptation of the Verbund structures in Ludwigshafen, we will reach total annual savings of around EUR 1.1 billion by the end of 2026.

I'll hand back over to Martin Brudermuller.

[Martin Brudermueller, executive]

Ladies and gentlemen, we are adjusting our capital expenditures in response to the current conditions. In light of the macroeconomic environment, we have significantly trimmed our CapEx for 2023 by EUR 1 billion to 5.3 billion as compared to the figure of EUR 6.3 billion announced in February. In addition, we will reduce CapEx further by a total of around EUR 3 billion over the next 4 years. That's for the 5-year period from 2023 to 2027, we are planning CapEx of EUR 24.8 billion, which is EUR 4 billion lower than our original budget of EUR 28.8 billion.

Let me be clear about this. We are reducing the overall investment for BASF Group, but we remain fully committed to our growth projects and our transformation towards climate neutrality. Moreover, we are not simply postponing investments. We are reducing the number of projects and will implement alternative measures that involve lower CapEx. We are also taking advantage of the subdued market environment to lower investment costs as our procurement team in China is currently proving quite impressively. On February 23, 2024, we will present to you the new CapEx budget for the planning period from 2024 to 2028.

Ladies and gentlemen, we are continuing to broaden the foundation of BASF's future profitable growth. In this context, I would like to provide you with an update on BASF's Verbund site project in Zhanjiang in Southern China. The investment project is fully on schedule and in line with our budget. Last month, the second downstream plant for thermoplastic polyurethane, TPU, successfully started up.

After the completion of further parts of the underground infrastructure and the piling work, which has been largely finished, construction activities are increasing significantly due to the construction of the chemical plant [ roof ] and other infrastructure. There are currently more than 15,000 construction workers on the site every day. The photograph on the slide shows the impressive progress of this project.

We are taking advantage of the attractive financing conditions in China and are financing the Zhanjiang Verbund side with a combination of around 20% equity and 80% debt. The equity is funded by dividends from BASF's existing group companies in China. And in the debt financing, we will be based on the Chinese capital market and local bank financing. We are proud that BASF is able to independently execute such a mega project in these challenging economic times.

And with that, back to Dirk again, who will now give you an update on Wintershall Dea.

[Dirk Elvermann, executive]

Yes. We continue to pursue a strategic goal of selling BASF's 72.7% share in Wintershall Dea we are working on various options for that goal.

Wintershall Dea is currently in the process of legally separating its Russia-related business. This separation is planned to be completed by mid-2024 and marks an important milestone in the overall process. Significant federal investment guarantees are in place for the Russian assets. The related claims, however, are not accounted for as receivables in our balance sheet. For the business year 2022, BASF already received around EUR 290 million as common dividend from Wintershall Dea. This means we do not expect any further dividend payments this year.

Wintershall Dea has made strategic and structural adjustments to reflect the changing energy sector and particularly its exit from Russia. Currently, Wintershall Dea is reorganizing its company structure with a target of reducing administration costs by around EUR 200 million per year. In the future, the Management Board will comprise 3 instead of 5 members. As part of the restructuring, the company plans to reduce around 500 positions.

That's all for me. I'll hand back over to Martin Brudermuller.

[Martin Brudermueller, executive]

Ladies and gentlemen, before we conclude today's conference call with the outlook, I would like to make a few more comments on our portfolio management. Over the past weeks, there have been a number of media articles speculating about planned divestitures of parts of BASF Group during my term. Referring to the businesses that were mentioned, I want to say the following.

We have a clearly defined and already known position on Wintershall Dea, which Dirk Elvermann has just confirmed and explained. We are very satisfied that the carve-out of ECMS, BASF's environment, catalyst and metal solutions, was successfully completed in July. The stand-alone structure prepares the business for the upcoming changes in the internal combustion engine market. This generally allows strategic options for the future, but we have no intention to sell this business at this time.

We're also particularly satisfied with the current very strong performance of our Coatings division and have no plans to divest this business or any part of it.

As far as the Illertissen site is concerned, we have confirmed that we are examining strategic options for this rather small food ingredient business that has only limited synergies with the rest of our portfolio. Independent of Illertissen, the optimization of our site footprint, with around 240 production sites worldwide, is an ongoing task as part of our consistent portfolio management which we usually do not talk about as much.

Now I will conclude with the outlook. In the fourth quarter of 2023, we expect global chemical production to further stabilize. However, in the current interest rate environment and in view of increasing geopolitical risks, the macroeconomic outlook remains extremely uncertain. In particular, rising raw materials prices could weigh on demand and margins since pricing power is limited in times of low demand.

As announced in July, we anticipate sales of between EUR 73 billion and EUR 76 billion as well as EBIT before special items of between EUR 4 billion and EUR 4.4 billion in 2023. We meanwhile expect sales and earnings at the lower end of the respective ranges. If chemical production does not further stabilize, there are risks from a further decline in volumes and a sharper-than-expected price reduction. We are maintaining the underlying assumptions for the global economic environment at the levels presented in July.

Ladies and gentlemen, looking ahead, we do not expect an easy start into the year 2024, but we are firmly convinced, as soon as demand really picks up again, BASF will defend and expand its market shares with good competitiveness through leaner structures and good cost positions and will provide powerful support to its customers worldwide.

To conclude, I would like to state once again, an attractive dividend is of high importance for the BASF's Board of Executive Directors. This also holds true in challenging times. Therefore, our practice of keeping the dividend at least at the previous year's level remains unchanged. Our strong balance sheet, high equity ratio and good credit ratings give us the necessary financial strength.

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

[Nina Schwab-Hautzinger, executive]

[Operator Instructions] The first question is from Mr. Reitz from SWR.

[Hartmut Reitz]

I have one question on the development of the employee figures at the site of Ludwigshafen. You were talking of 2,500 for the jobs to be reduced in the cost savings program, including the jobs in production. And now in the course of the year, you see a decline by 190 jobs. What do you expect the further development to be? Or is it a sign that maybe things are not as bad as expected, it is not such an important question for employees and for the entire region.

[Dirk Elvermann, executive]

Well, Mr. Reitz, I'm Dirk Elvermann, and I'll answer your question. So when it comes to the cost-savings program, we not only are in plan with the cost but also in our planning to reduce jobs. We gave you the figures during the so-called Work Stream 2 these are the nonoperating areas here. Globally, we want to reduce 3,500 jobs. That's 2,600 net, in net figures, and BASF SE takes half of that. We are in plan here. The figure is still the same.

But of course, we want to render this sociable -- socially compatible. So first of all, we want to make arrangements with the employees. And this is just only in the initial phase, but I can state and confirm that we are in plan when it comes to reducing these jobs.

[Nina Schwab-Hautzinger, executive]

The next question comes from Mr. Burger from Reuters.

[Ludwig Burger]

Yes, thank you very much. As I can see, you said on your investment project in South China, that everything is in plan there. But you did not explicitly confirm the EUR 10 billion overall volume for Zhanjiang. Can you say something about that?

[Martin Brudermueller, executive]

Yes, I can, of course. The EUR 10 billion can be confirmed today. And I think there's also something written on that. So let me say a few points on that.

So firstly, the situation in China is a very good one for our project to run. Inflation, which is mentioned time and again, and which makes the project more expensive as they say, that's not true. Inflation rate was 0.7%, that's the estimate for today. And 1.9% for 2022. And since the sourcing takes place almost exclusively in China, inflation doesn't make this project any more expensive.

So if you look at the exchange rate of renminbi to euro, it stands as it was when we announced the project. And as I said in my presentation, the China team did an excellent job with the contract. So the Chinese economy, as you know, is not running as smoothly as expected. And this is why contractors don't have full capacity utilization. So we get very, very good and favorable rate because they want to employ their people, so we are below what we had expected.

And the modules are also manufactured there. So when it comes to this and also to material costs, this is exactly the right time window. And I can confirm that both time and costs are in plan for China.

[Nina Schwab-Hautzinger, executive]

Let's continue with the next question. Mr. Freytag from FAZ.

[Bernd Freytag]

I have a question on Wintershall. Mr. Elvermann, could you please state the state guarantees and what this means, that currently, that they are not yet booked as receivables? And Mr. Mehren yesterday described that it's quite difficult to really exit the Russian activities. Can you assume if BASF plans a divestment, that the remaining business will be sold off, that's your plan, and that the Russian business will be depreciated.

And my second question regarding the energy costs. Could you please state how they have changed over the course of the year? And Mr. Brudermuller, maybe you can comment on the industrial energy price. Things have calmed down, but the debate is ongoing.

[Dirk Elvermann, executive]

Yes, Mr. Freytag. Please let me start with the questions regarding Wintershall Dea. Well, the exact amount of the state guarantees, I ask for your understanding that this is confidential information. We are subject to certain terms. But I know that there were different amounts cited. And I can inform you that this is a very significant amount in the lower range of EUR 1 billion, of billions.

Why do we decide not to state it as a receivable item in our balance sheet? Well, in order to do this, well, this is an accounting issue. You would be virtually certain. This is the specific term that these monies will be paid. There are very high requirements, and we would need an agreement with the guarantor. This should exist. But right now, we're still in the midst of talks, and this is premature to book it now from an accounting perspective.

But right now, we are in a very strong position. And from an investor's perspective, I would say that this is a value upside. We're talking about Russia -- executing the Russian business -- or rather to separate the Russian business from non-Russian business. By mid-2024, this process will have been completed.

And this process is not a case of doubt. But nevertheless, it is quite complicated because the Russian parts cannot be separate from the Russian part. You have to do it the other way around because we had to carry out a separation which does not require the consent of the Russian state. So this is quite understanding -- but accordingly, this is a very long process, but quite easily understandable process where we then want to monetize the part.

The Russian part has been depreciated in our books. This applies to E&P activities as well as to all transportation activities, meaning that there is no additional need for depreciation. Actually, our receivables are the other way around, namely the receivables we broached upon.

Now commenting on the energy costs. Energy costs have been decreasing in the third quarter, and there's a figure I can cite, by EUR 1.4 billion compared to the prior year quarter, and it's quite striking that at the European energy prices are comparatively higher, around about 4x higher than the American energy prices.

[Martin Brudermueller, executive]

Mr. Freytag, commenting briefly on the power cost as a whole. You know that the transformation of industry as such from fossil energies to other energies can only work with electrification, and this will work only if the electricity price is an appropriate order of magnitude. If we fail to do this, then the entire German and European industry will lose competitiveness. And for the energy-intensive processes, this is a really big issue, and the chemicals industry is part of this. This is why we address this issue, particularly the small- and medium-sized enterprises, address this issue.

All in all, this is a reason for concern. Electricity prices are not declining but rising in this republic, and thus, this is an alarming signal. We have to make sure that electricity prices and the electricity landscape in Germany are kept at a level that we, as an industry, will be able to carry through. This applies not only to production costs, but also the cost for electricity and also the grid fees. And altogether, we end up with the final electricity price that the industry will have to pay.

And let me add that every industry has a totally different departure position. And this is why the discussion about electricity is quite difficult. You know that BASF produces the lion's share of its electricity itself, but due to the wind power plants in the North Sea, it is now forced to do away with its in-house electricity production, it has to use the public power grids, and this is not favorable for us. It's not so much about the production cost. We do have a good comparison in our wind park in the Dutch border compared to the prices that we have to pay for our own power.

So you really have to differentiate and you have to analyze as to how you can reduce the power prices in those 3 components. And thus, the political discussion is quite difficult. And sometimes, it's also about how to go about this. And the different situations we're encountering and all of this has to be taken into account.

And having said this, this goes to show that, no, I'm not a friend of subsidies. But for a certain period of time, I do believe you should define a specific electricity price that will be low and sufficient for industry until we have the renewables. And then when we have renewables, power prices will decrease again and then the ecosystem and energy-intensive industries will be able to stand a chance to survive and to maintain the competitiveness, and to improve it. And I hope that you will understand what this is about and why this is such a complicated and sophisticated discussion. Thank you very much.

[Nina Schwab-Hautzinger, executive]

Now there was next question, Ms. Weiss from Reuters.

[Patricia Weiss]

Wonderful. I have 2 questions. On the one hand, regarding investments. You said we do not shift investment around, we reduce the number of projects and then take alternative actions. Could you cite a few examples, which projects are being reduced? Are these large-scale projects, small projects? And where? To get a better idea of that.

And on the other hand, going forward, 2024 is not an easy start into the next year. Do you have a feel as to whether the chemical industry will plummet or whether there will be an upward trend? Could you give us a few insights and also talk about the sentiment?

[Martin Brudermueller, executive]

Yes. Thank you very much, Ms. Weiss. Regarding the investment in the China project, I already commented on that. And we are on target. And what we have always done and do today, that every project is analyzed in depth. We have more projects than money. That's good.

We have an in-house competition as to why you have the best investment. And of course, there are a few shifts. And it's quite obvious if you are operating at a low utilization rate because demand is low as in Europe, you can imagine that you need new capacities at a later point in time. Maybe you don't even need them at all. And of course, we have to take a closer look at those projects.

And normally, the team and the engineers reflect everything in hardware, but you can also reflect a lot with a digitization, and you can also take organizational measures. And normally require less CapEx and that will actually have the same effect. And we will take a very close look at this again.

And then projects can be mapped via other measures. And I already mentioned that inflation is declining. You always have to find the right window of opportunity. Or the contractors, so what they need, their interest. If you don't have a sufficient utilization, then you have to use the right time window when there is lots going on, but there are a lot of uncertainties. The question is, how much do you invest given those times of uncertainty? And despite the inflation on raw material, everybody thinks about raw materials, but then we have the high installation and assembly costs, and they are now slightly lower because we're working at a lower utilization rate.

So these are all kinds of different aspects we have to look at. And this year, we already excluded EUR 1 billion. We are quite sure that, in the years to come going forward, given the current economic situation, yet another EUR 3 billion can be excluded. And EUR 24.8 billion instead of EUR 28.8 billion is nevertheless a really good amount, a nice amount for investing.

[Nina Schwab-Hautzinger, executive]

Outlook 2024?

[Martin Brudermueller, executive]

Yes, looking into 2024. We tried to show you during our presentation that we see us bottoming out, so to speak. In China, we see the demand going up, volumes going up, and our plans are quite well utilized, but at bad prices because there are overcapacities in relation to the demand not yet picking up so much. And we looked into the other regions as well.

So the question is really when will confidence come back and that people order again. And then consumers that, understandably all over the world, we have -- we are dealing with a worldwide low demand. When will consumers be psychologically stimulated enough to buy again? And then it starts that first chemicals are being bought and inventories are stocked and then you start with production.

But we don't believe in a fundamental change over the next month. And this is why I told you that the start into 2024 will definitely not be very easy. And then we'll have to look forward. And our visibility looking forward is limited. We don't really know what is coming. So we'll have to take it step by step.

[Nina Schwab-Hautzinger, executive]

Thank you very much. So the next question is from [ Ms. Ruffler from The Top Floor Hall. ]

[Unknown Attendee]

I have one question on Wintershall Dea. I heard once that the money from selling it is planned to -- for the financing of the new site in China. Is that what you commented, too? And that's my first question.

And the second question, we were talking about overproduction already. And also in China, people talk about overproduction, particularly for basic chemicals. So the new plant of BASF, will that contribute to even further overproduction? And is there enough demand for what you will be producing?

[Dirk Elvermann, executive]

Well, [ Ms. Ruffler ], I will start, Mr. Elvermann speaking. And looking at the first question, basically, we look at our projects separately. We do not need to sell Wintershall Dea in order to be able to afford our site in China. So I think we tried to already express this in our presentation. So we have good operating power, and we have good cash flow also in difficult times. That's the basis. And if you look at it, this year, we have an operative cash flow amounting to EUR 3.9 billion so far in the first 9 months of the year 2023. And I believe that shows our operating power here, the earnings power.

And of course, we think about restructuring the portfolio, and oil and gas is being carved out of the portfolio. And so our growth projects have to be brought forward. Of course, it's complicated. But one thing is very clear. We don't have to do one thing in order to be able to do another thing. Everything has to be observed separately.

[Martin Brudermueller, executive]

Yes, [ Ms. Ruffler ], maybe looking at the overcapacities in China and capacities in our plant. China as such is a net importer for chemicals still despite all the investment that they have. So there are product lines where you -- that they will import longer, there are some product lines where China started to export itself strongly. So you have to say it depends on the product lines.

Before speaking here today, we looked at it. And we -- of course, we are always in contact with our partners there. We have pre-marketing up and running. We already have signed some contracts. And all in all, the products are growing. For every product, finding the correct point in time when starting it, when ramping it up, well, you can never have bad situation.

But we believe, that with our commissioning point in time, after concluding it in 2025, we believe that, that time window is quite good. And we also said that we assume that almost the entire volumes of the plant will stay in Guangdong. We will not even leave the province.

And we also have a good historical comparison because the same goes for Nanjing. Nanjing today sells the lion's shares of its volumes only in the province Jiangsu alone in -- to customers that are around the site in a distance of 200 kilometers. So bringing it to other regions in China, well, that might have to happen, but we don't even think that this will be necessary.

So our market analysis long term is good. It's a good fit. And we just are back from China. We spent last week in China, and it's quite remarkable to see the atmosphere there. It doesn't show this atmosphere that we see here in Germany. So it is very dynamic. Looking at the automotive industry, it's a very important customer industry for BASF.

Even if not everything runs absolutely smoothly, everything is bumpy around the world, but we still have a long-term positive view on the Chinese market.

[Nina Schwab-Hautzinger, executive]

Thank you very much. Okay. So let's speak to -- switch to the English questions now.

Now switching to English. And the first question from the English-speaking room comes from Patricia Nilsson from the Financial Times.

[Patricia Nilsson]

If I could just quickly follow up on Ms. Weiss' question in terms of the cut in the investment budget. You spoke about slowing demand in Europe, saying perhaps we won't -- will need investments at a later time or not need them at all. Is it right to understand that the majority of investments that are no longer happening are in Europe? And could you give a little bit more clarity on this?

I'm also wondering if you speak of the rebound in China. Could you tell us a bit more, which products, which sectors? New figures came out today showing that Chinese manufacturing output fell in October. Have you felt this? Is that something you are concerned about?

And my final question is you mentioned that automotive -- demand from the automotive industry is strong. Could you give us a bit more detail on this? Is that worldwide? Is that the European automotive industry? Or is it the Chinese?

[Dirk Elvermann, executive]

Yes. Let me start with the automotive question. Altogether, I'd say, for the running year, auto is, besides ag, really the industry that is strong, holds our results up. You see that particularly in the results of our Coatings business, which had the strongest quarter, I think, in its history.

We are confident that the momentum for auto will sustain. So the units produced in this year will certainly super seed previous year's level. So fundamentally, also remains intact. And this is also where our businesses are benefiting from -- to a different degree. I said already Coatings, very strong; Catalyst, a bit mixed; and batteries behind that, mainly on the back of low lithium prices that you also see currently. But altogether, fundamentally also strong and also with a roughly [ 20% ] share of wallet towards BASF Group, a strong backbone.

[Martin Brudermueller, executive]

Yes, Patricia, you had 2 -- first question about the investment budget again. I mean, first of all, let me clearly say we do not sacrifice on the growth projects and we also do not change our green transformation.

Let me start with the last one. I think we made that clear that the budget, we need to achieve our minus 25% CO2 target until 2030, is more towards the end of the period. So far in the next years, we have rather lower investment sums because we're talking about pilot plants and we're talking partially new technologies that are partially publicly funded. And then we will have a scaling which will then be in the last years before 2030. So that is a little bit further away, and this is why we don't sacrifice here.

I talked about China and also about the other growth area where we actually are not looking into cutting. But we will look into all the other activities. And I mentioned already capacity utilization and then also expectation, how long do you need to fill these capacities? How quickly do they fill? Then also are determining when you need new capacities, we'll look into this in all the regions.

But on the other hand, also very clear, we have a commitment to Europe. We have a commitment to our site. Dirk told you also what we are doing to regain and to strengthen also our competitiveness here at the Ludwigshafen site. And we have also a site agreement here which clearly says that we are going to invest about EUR 2 billion per year into this site.

And this is all in principle still existent, but we will look into the portfolio and what is the right timing. And there is no now special sacrifice on Europe. We will look into this from a global perspective, and I expect that all the regions will finally contribute to this reduction of the investment budget.

Your second question was about China, that you, I think if I got this right, read a study which is not supporting that the volumes go up. I can only tell you about our own experience, and we have been in China last week, I told you that. We talked to our people who have actually clearly reported that throughout the most business areas, and Dirk made already a comment about automotive, which is an important customer industry for us in China as well. We can see these volume increases, and the capacity utilizations are significantly going up over the recent weeks, and we also expect that this is going to continue.

[Nina Schwab-Hautzinger, executive]

Thank you. The next question is from Andrew Noel from chemicalESG.

[Andrew Noel]

I've got 2 questions, please. The first one, I wanted to ask, are you seeing any benefits from the creation of ECMS, the auto cats business, as a stand-alone with more legal -- with its own structure, its own autonomy? Is this a model that could be applied to other businesses within BASF that are more specialty or they have a high number of SKUs? Just having that extra autonomy, maybe you've seen something in ECMS that could be applied elsewhere, like Ag or Coatings or so on? That's the first question.

The second question is, is there a danger that the German chemical industry and BASF will have to impose prolonged plant shutdowns this winter to get -- to make it through the winter? I mean, maybe not -- even months, not weeks.

[Dirk Elvermann, executive]

Yes. I'll start with the first one. So first of all, for ECMS, I think Martin said already, we are tremendously happy that we completed the carve out in time, and we see the benefits. Benefits are as follows. We have a very clear go-to-market approach here. We have a more industry-profile service concept for that market. And altogether, structures, which are, I would say, even better fit for purpose than before.

When we decided on ECMS, we took that decision really for ECMS. So this is not supposed to be the harbinger for others to come, but we thought, for the business of that kind, very strong, heavily invested, cash flow-generative, very much focused on one industry, but ultimately with a very long sunset period. We thought this is the right way to go, to keep that business separate, but then also to continue to enjoy the cash flows that are coming from that business. So it's the right decision for ECMS, but it is not a natural role model or harbinger for other business.

[Martin Brudermueller, executive]

Andrew, you talked about the potential, the shutdowns here in Ludwigshafen or Europe. Let me clearly say I was warning about the gas situation last year, that this needs time to restructure. I think we have made huge progress, and I have to give credit here to the German government with the LNG terminals that was really faster than we actually expected.

But let's be also very clear, the low economic activity reduced the gas consumption in Europe, there's overall savings by the people, and we had a very, very mild winter last year. So for that reason, we always said you are never out of the woods, and I would be careful on that.

If we get an extremely strong winter, if China recovery goes on and will demand and buy more LNG on global markets, it will impact energy prices. And that could, in the extreme case, also come that we have to look a little bit about how we use and where we use gas.

But we told you also at the same moment, that we in the site of Ludwigshafen have dramatically reduced our dependence on natural gas. We have flexible-ized our production, and we have also our production that is -- or the energy production that is connected with natural gas, flexible-ized by running them partially on oil-based products. And with that, we would be in such a case, much, much less dependent on gas. Actually, we will come down to up to 10% and can still run the site with up to 10% of what we had in 2021.

So the situation could become more tight. The prices could go up. But I would say, for Ludwigshafen, that there is no risk that we have to shut down our plants. But I would always say, let's stay a little bit cautious on that one, and it is definitely then also a competitiveness question of the European industry as such.

[Nina Schwab-Hautzinger, executive]

Thank you. We have no further English questions, so now we switch back to German.

And we have another question on -- in German. Mr. [ Coles. ]

[Unknown Attendee]

Yes, Mr. Brudermuller, many people are speculating about your successful on media. I'm wondering, who will be your successor? Do you feel like commenting on this? Do you have a personal favorite person you'd like to head the company? Or is this, for you, an unfortunate point in time? I feel it's really a bit of a pity where you're leaving because everything is in the midst of change. Would you have wished for a different point of time?

[Martin Brudermueller, executive]

Well, [ Mr. Kos ], I am sure that you will understand that I will not speculate about my successor. So we will inform the public when the time is right.

Well, let me tell you, nobody is bedded on roses in life. And last year, I would have imagined a totally different time. And given this business situation, nobody would like to hand over to a successor in those times.

But when I started this job, in my first interview, I said I want to make sure that the structure of BASF will be better when I hand over to my successor. And I can state that we did improve the structure in the past years, decarbonization and so on and so forth. And Mr. Elvermann said that the structures and the cost savings, well, we were successful with this, and China is the largest CapEx project for BASF and a milestone.

We made significant progress in many areas. Well, the current economic situation and the development of the share price and the market capitalization, well, they do not correspond to my goals and wishes.

Well, let me tell you, the CEO and my successor is not the order of the day. BASF is important, but we will be and ready. We always been able to overcome crisis with the current CEO and most certainly also with future CEOs.

[Nina Schwab-Hautzinger, executive]

Thank you very much. There are no additional questions, so much for this press conference today. Thank you very much for your interest in BASF and that you are on board. Should you have any further questions, you can contact our team anytime in the press office.

Let me point out that we will have our R&D press conference with Melanie Maas-Brunner, and she is our Chief Technology Officer. It will take place on the 1st of December on site here in Ludwigshafen. And the figures for the total year 2023 will be presented to you on the 23rd of February 2024 during our annual press conference.

Thank you very much, and have a nice day.