BASF (OTCQX:BASFY) Deutsche Bank's Depositary Receipts Virtual Investor Conference March 19, 2013 11:45 AM ET
Kurt W. Bock - Chairman of the Board of Executive Directors
Hans-Ulrich Engel - Chief Financial Officer, Member of the Board of Executive Directors, Chairman of BASF Corporation and Chief Executive Officer of BASF Corporation
Kurt W. Bock
Yes, thank you, Florian. And also welcome from my side. Pleasure having you here in Ludwigshafen. Obviously, Maggie Moll is not here today, she cannot be with us because she got hit by the influenza, as many people have been hit, and she sends her best regards. And I'm sure she will follow us now on the Internet. Everything else will be very surprising, frankly.
So thanks for joining us here, again, in Ludwigshafen. And let me start with a short overview of our full-year 2012 results. Last year, we increased sales and earnings despite the significantly weaker economic development than in 2011, and then expected by us at the beginning of last year.
Sales improved to EUR 78.7 billion, up more than EUR 5 billion compared to 2011. The main drivers were an excellent development of our Agricultural Solutions business and higher volumes in Oil & Gas. Currency tailwinds also contributed to the top line. By contrast, our Chemicals business stayed behind expectations. Volumes in the Chemicals business declined 3% compared to 2011, reflecting the overall weaker economic development. At EUR 12.5 billion, EBITDA rose by more than EUR 500 million versus a strong prior-year result. EBIT before special items increased by 5% to EUR 8.9 billion, special items were positive, but slightly below the previous year. EBIT came in at EUR 9 billion, up 5%. EBIT after cost of capital was EUR 1.5 billion after EUR 2.6 billion in the previous year.
Net income decreased by 21% to EUR 4.9 billion, mainly due to a higher tax rate, resulting from a larger share of the highly taxed Oil & Gas business and a lower contribution from the Chemical business. Moreover, the 2011 result included a capital gain of almost EUR 900 million from the sale of our K+S stake, which to a large extent, was, as you know, tax-free. Adjusted EPS was EUR 5.71, 9% lower than 1 year ago. At EUR 6.7 billion, operating cash flow was once again very strong. The decline of almost EUR 400 million compared with 2011 was primarily driven by the reduced net income.
Let's now have a look at the business development in the first quarter of last year. Sales in Q -- also contributed to sales growth. The main driver for the strong volume growth was Oil & Gas. In the Chemical business, we were also able to grow volumes by about 1%. At EUR 2.7 billion EBITDA was some EUR 200 million below Q4 of 2011. The prior year quarter, however, was positively impacted by the disposal gain of Styrolution in the amount of almost EUR 600 million.
EBIT before special items were also EUR 1.8 billion, up 18% compared to the weak fourth quarter 2011. In special items, we have seen a big swing year-on-year. While in Q4 2011, we had positive special items in EBIT of more than EUR 400 million. Heavily influenced by the aforementioned disposal gain, we incurred negative special items of about EUR 160 million in Q4 of last year.
As a consequence, EBIT came in at EUR 1.6 billion, a decrease of roughly EUR 300 million. Net income was EUR 1.0 billion, a decline of 13% versus Q4 of 2011. The prior year quarter was positively impacted by the disposal gain of Styrolution, while Q4 of 2012 benefited from the reversal of a tax provision. Adjusted earnings per share were EUR 1.35, up 29%.
In 2012, we continued to shape our portfolio for future growth. At the beginning of the year, BASF announced the creation of a new Battery Materials unit focused on developing value-adding solutions to propel the evolution of batteries for electromobility. This comprised a couple of acquisitions. An equity ownership position in Sion Power, a global leader in the development of lithium sulfur batteries; followed by the acquisition of Ovonic Battery Company, a global leader in the Nickel-Metalhydride battery technology; Merck's battery electrolyte technologies business; and Novolyte Technologies, a global leader in electrolyte formulations for lithium-ion batteries. Three months ago, we started up our cathode material plant in Elyria, Ohio, which is in the United States.
In the fourth quarter of 2012, we acquired Becker Underwood, a leading global player in biological seed treatment and biological crop protection. Another important step in further strengthening our downstream activities was the acquisition of Pronova BioPharma in January of this year. With this acquisition, BASF will achieve a leading position in the fast-growing and attractive market for omega-3 fatty acids. It complements a prior acquisition of Equateq in May of 2012, and offer significant expansion opportunities for BASF's existing dietary supplements business.
We also keep building our upstream activities in Oil & Gas for further growth. In October, we announced a transition -- a transaction with Statoil, substantially expanding our production and reserve of Oil & Gas in the North Sea. Please note that this transaction is expected to close in the middle of this year with economic effect as of January 1 of 2013. You will see volume, sales and earnings from this transaction only from closing onwards. Earnings, which are generated between the beginning of this year and closing will be booked against the financial compensation of USD 1.35 billion. This means that the actual payment for Statoil will be reduced.
And last but not least, in November, we announced an asset swap with Gazprom. As part of this JV, we'll get access to blocks IV and V of the Achimov formation in western Siberia and transfer our 50% stake in the gas trading and storage business to our partner, Gazprom. Closing of this transaction is expected by end of this year.
During last year, we divested non-core businesses like our fertilizer activities and announced the sale of smaller, non-strategic businesses such as RELIUS COATINGS and MEYCO Equipment for tunneling and mining. In addition, we implemented restructuring measures in Paper Chemicals, Construction Chemicals and Performance Polymers, where we closed EPS plants in India and Malaysia.
As you know, our growth plan is based on our innovation pipeline. We continue to increase our R&D spending, up by 9% to EUR 1.7 billion last year. We keep increasing our budget based on very good ideas and our excellent R&D Verbund. We will also continue to deepen our collaboration with customers around the world. And one of the most recent examples of innovation is a brand new midsole technology developed by BASF and by Adidas, and I have to step aside quickly to get this product now. This is the shoe I'm talking about. Please have a look at the cushioning material of Adidas' newest creation. You can see that it consists of thousands of small energy capsules. These capsules are the secret to the highest energy return in the running industry. A new development process turns solid granular material and thermoplastic polyurethane into these capsules, which makes the shoe's distinctive midsole. These capsules store and unleash energy more effectively in every stride. Actually, I tested it. This is not my shoe. It's a little bit too small. But I tested it. It's a completely different way of running and it really brings back the energy when you move up again with every stride. So this shoe was presented by Adidas in New York just 2 weeks ago. It will be available in stores as of tomorrow, February 27. And I think it will be a good buy.
Ladies and gentlemen, as you know, shareholder return is of utmost importance to us. We stand by our dividend policy to increase our dividend each year or at least maintain it at the previous year's level. As announced this morning, we will propose to the Annual Shareholders' Meeting to pay out a dividend of EUR 2.60 per share, an increase of EUR 0.10 or 4%. Over the past 10 years, we have raised our dividend on average by almost 16% per year. Based on the share price of EUR 71 at the end of 2012, we are offering once again an attractive dividend yield of around 3.7%.
We continue to deliver long-term value for our shareholders. Over the last 10 years, the average end [ph] Return on BASF stock was 19%, clearly outperforming the German and European stock markets as well as the MSCI World Chemicals Index.
This leads us directly to our outlook for 2013. Even if many of us feel a reduced level of uncertainty heading into 2013, at least until last night, I think we should be prepared for continuous high volatility and unpleasant surprises. What is our baseline for 2013? We expect global GDP to grow by 2.4%, only slightly higher than in 2012. Significant economic risks will remain, as we all know. Austerity measures to improve public finances will continue to dampen demand in the Eurozone and in the United States. However, worldwide economic growth will be bolstered by low interest rates and by governments' stimuli measures in the emerging markets.
At 3.4%, global industrial production is expected to grow slightly faster than last year, driven by both industrialized countries as well as the emerging markets. We assume an average oil price of $110 per barrel brand [ph] as a less than [ph] Average exchange rate of 1.00 -- $1.30 per euro.
Now based on those assumptions, what does it mean for the chemical industry? At 3.6%, we predict global chemical production to recover slightly in 2013. After a contraction in 2012, we expect Europe to grow at a very low rate of 0.3% this year. Growth in the United States is likely to come down a little due to lower growth in automotive and construction. For 2013, we anticipate growth of 1.9%. In Asia, excluding Japan, growth will probably somewhat exceed the previous-year pace and reach 8.1%, while Japan is likely to see another contraction. After slower-than-projected growth in China in 2012, we expect additional stimuli from sectors like construction, automotive, electronics and consumer products. Chemical production in South America is expected to grow faster than last year. We expect 3.7%, mainly driven by an economic recovery, hopefully, in Brazil.
Based on these assumptions, our outlook for the year 2013 is as follows: We strive, not surprisingly, to increase volumes in 2013, excluding the effect of acquisitions and divestitures. We want to exceed the 2012 levels in sales and EBIT before special items. The expected increase in demand, together with our measures to improve operational excellence and raise efficiency will contribute to this. The NEXT program has been completed successfully and delivered EUR 1 billion by the end of 2012. Our current efficiency program, STEP, which strives for an additional earnings contribution of EUR 1 billion by the end of 2015 is well on track. For 2013, we expect the program to deliver about EUR 300 million. We also continue to invest for future profitable growth. In 2013, we plan capital expenditures of EUR 4.5 billion. And last but not least, we aim to earn a high premium on our cost of capital once again in 2013.
I will now hand over to Hans, who will give you some more details regarding the business development of our segments. Thank you. And Hans?
Good afternoon, also from my side. Let me highlight the financial performance of each segment in more detail. I will focus on the respective business development in comparison to the fourth quarter of 2011. Let's start with Chemicals.
In Chemicals, sales in the fourth quarter 2012 increased, equally driven by price and portfolio effects. The latter resulting from feedstock sales to the new owner of the divested fertilizer business. Volume growth and currency tailwinds also contributed to top line growth. EBIT before special items declined, mainly due to lower margins and shutdowns. Sales in petrochemicals increased. Higher selling prices and the favorable exchange rate development more than offset a slight decrease in volumes due to weaker demand. Higher raw material cost could not be fully passed on and cracker margins came under pressure, especially in Asia and the United States. Planned and unplanned shutdowns at our sites in Ludwigshafen and Port Arthur, Texas, also negatively impacted earnings. Thus, EBIT before special items was lower.
In Inorganics, sales increased. The main driver was feedstock sales to the new owner of the divested fertilizer business, which are now reported as third-party sales. Slightly higher prices and the startup of our new sodium methylate plain -- plant in Brazil also contributed to growth. EBIT before special items, however, was below Q4 2011, which had benefited from the dissolution of provisions.
Improved demand in Q4 2012 led to an increase in sales in intermediates, continuing the positive trend of the previous quarters. Despite higher fixed costs, mainly related to scheduled turnarounds, EBIT before special items came in above the previous year. Sales in Plastics increased due to stronger volumes, higher prices and positive currency effects. EBIT before special items rose substantially due to a significant improvement in polyurethanes.
In Performance Polymers, sales increased due to slightly higher volumes, prices and currency effects. Demand for polyamide precursors remained weak and margins continued to be under pressure.
Our Engineering Plastics business developed positively due to continuing strong demand from the automotive industry, particularly in North America and Asia. However, EBIT before special items declined considerably, primarily as a result of weaker margins for polyamide precursors.
Sales in polyurethanes grew strongly, driven by higher volumes and prices. Demand from the automotive industry was, again, on a high level, particularly in North America and Asia, while demand from the construction industry remained subdued. Compared to the very weak fourth quarter of 2011, the supply-demand balance for polyurethane basic products improved significantly, and we were able to raise prices. System houses and PU specialties contributed to a good performance. As a consequence, EBIT before special items rose sharply.
Now to Performance Products. Sales in Performance Products came in above the prior year quarter, mainly driven by higher volumes. Price declines were offset by positive currency effects. EBIT before special items decreased. We continue to optimize our asset base and business models, which resulted in special items of minus EUR 33 million.
In Dispersions & Pigments, sales were flat. Higher volumes and favorable currency effects compensated for lower prices. We were able to significantly grow volumes in additives. Demand across the other businesses remained stable. EBIT before special items declined significantly due to lower margins as a result of increased raw material cost.
Sales in Care Chemicals rose slightly. Higher volumes more than offset lower prices. The hygiene business experienced strong volume growth, benefiting from product tightness. The market environment for formulation technologies as well as personal care, however, remained challenging and margins declined. Consequently, EBIT before special items was lower.
In Nutrition & Health, sales grew compared to the weak prior year level, primarily due to higher volumes in all businesses. Prices declined mainly as a result of lower vitamin prices in animal nutrition. Continuing margin pressure and higher fixed cost kept EBIT before special items below the level of last year's fourth quarter.
In Paper Chemicals, sales almost reached the prior year level. Favorable currency effects nearly compensated for lower volumes and prices. We continue to implement restructuring measures, which negatively affected volumes. Volumes of the continued business, however, rose slightly. EBIT before special items decreased due to lower margins and higher fixed cost, mainly as a result of the startup of 2 new plants in China.
In Performance Chemicals, sales increased, thanks to higher volumes and a positive currency impact. While demand for fuel and lubricants was slightly lower, we were able to increase volumes for Oil field and Mining Chemicals as well as plastic additives. As a result, EBIT before special items went up.
Now to Functional Solutions. Sales in Functional Solutions decreased slightly. Overall volumes were down, especially due to lower precious metal trading. A small decrease in pricing was compensated for by currency tailwinds. We saw healthy demand in Catalysts and Coatings, driven by automotive. Our strict fixed cost management led to a substantial increase in EBIT before special items. Special charges of EUR 147 million mainly resulted from restructuring measures in the Construction Chemicals division.
Sales in Catalysts were down. Precious metal trading decreased by EUR 35 million to EUR 640 million. We saw double-digit unit growth in mobile emission catalysts. This was driven by strong OEM business in Asia and North America, which more than offset the weaker demand in Europe. And improved product mix and lower manufacturing costs led to an increase of EBIT before special items.
Construction Chemicals sales rose, driven by significantly improved demand in North America and Middle East. Weaker ad mixture sales in China were the main cause for business decline in Asia. European sales were lower due to the continued weakness in the southern part of the region. EBIT before special items increased strongly because we were able to raise prices and improve margins. On top, we realized the first benefits from the implementation of restructuring measures.
Sales in Coatings increased slightly. OEM Coatings demand grew strongly in the Americas and with European premium manufacturers, while refinish coatings performed well in Asia. However, demand for decorative paints in Brazil was lower compared to a very strong previous-year quarter. Due to better margins, EBIT before special items was up.
With that, to Agricultural Solutions.
Sales in Agricultural Solutions were up in the fourth quarter. Growth was driven by higher volumes, the consolidation of the Becker Underwood acquisition and the favorable currency impact. Prices were almost at the same level as in the prior year quarter. The season in South America is in full swing. Our products were in high demand and we increased sales significantly despite dry weather conditions in Brazil. North American business was slightly lower as royalties have been already reported in Q3 2012. Last year, they were booked in Q4. Business in Europe did not fully match last year's level due to a timing effect as sales in Germany and France are expected to materialize closer to application date in Q1 of 2013. Business in Asia developed very positively as the season in Japan and Australia caught up from a late start. In China, fungicide sales developed well. This positive impact was partly offset by unfavorable weather conditions in India. EBIT before special items in Q4 was below prior year's level due to the timing effects, higher R&D spendings and investments in growth markets.
On a full-year level, 2012 was another record year. Sales rose by 12% to EUR 4.7 billion, EBIT before special items grew by 28% to more than EUR 1 billion and we delivered on our EBITDA margin target of 25%.
Now to Oil & Gas. Sales in Oil & Gas grew strongly mainly due to higher volumes in Exploration & Production as well as in Natural Gas Trading. EBIT before special items grew substantially. Special charges amounted to EUR 120 million and were related to an impairment of the Yme development project in Norway. Non-compensable taxes on oil production amounted to EUR 492 million. Net income decreased by 9% and was EUR 250 million.
Sales in Exploration & Production increased. Oil production in Libya was, on average, about 85,000 barrels of oil per day in the fourth quarter of 2012, compared to roughly 40,000 barrels of oil per day in Q4 2011. The startup of additional wells in the Achimgaz joint venture also contributed to top line growth. EBIT before special items was significantly up due to higher volumes and a higher oil price in euro terms.
In Natural Gas Trading, sales grew considerably, driven by higher volumes. Earnings, however, declined, mainly as a result of lower trading margins given the competitive market environment.
Now to Other. Sales of EUR 1.2 billion reported in Other, mainly comprised the sale of raw materials, engineering and other services, rental income and leases. EBIT before special items declined by EUR 91 million mainly due to lower earnings of other businesses. As a result of the share price increase in the fourth quarter, we incurred a sizable provision for the long-term incentive program.
In Q4 2012, the allocation of special items to the operating divisions resulted in a positive contribution of approximately EUR 150 million to Other. In the previous year's fourth quarter, we reported special items of roughly plus EUR 600 million, which primarily came from the disposal gain of Styrolution.
Let's now come to the cash flow. We started the year 2012 with a cash position of about EUR 2 billion. With EUR 6.7 billion, we generated again a strong cash flow from operations in 2012, thereof, EUR 1.6 billion in Q4. In 2012, we stepped up capital expenditures. We spent EUR 4.1 billion, an increase of more than EUR 700 million versus 2011. Free cash flow reached EUR 2.6 billion. It decreased EUR 1.1 billion versus 2011 mainly as a result of the rise in CapEx. And we paid EUR 2.6 billion in dividends to our shareholders and minority interest holders. Thus, we ended last year with a cash position of EUR 1.8 billion.
Let's now have a look at our balance sheet. Total assets rose by EUR 3.1 billion to EUR 64.3 billion. Long-term assets increased by EUR 1.5 billion, mainly as a result of acquisitions in 2012. Due to the agreed-upon asset swap with Gazprom, we put our Natural Gas Trading and Storage business into a disposal group. This led to the reclassification of long- and short-term assets. In total, long-term assets of EUR 1.1 billion and short-term assets of EUR 2.3 billion were transferred to assets of the disposal group. Our financial indebtedness rose by approximately EUR 350 million to EUR 13.4 billion. Net debt amounted to EUR 11.6 billion, an increase of roughly EUR 600 million versus the end of 2011. Our net debt-to-EBITDA ratio stayed below 1.
Liabilities of the disposal group for Natural Gas Trading amounted to EUR 2.2 billion. As this reclassification of liabilities was in the same magnitude as the increase of provisions for pension obligations, other liabilities remained fairly stable. Provisions for pension obligations rose primarily as a result of reduced discount rates. At 40%, our equity ratio remained on a healthy level.
Ladies and gentlemen, before we go into the Q&A session, just a few words on the upcoming IFRS changes. As of January this year, we are following IFRS 10 and 11, which leads to reporting changes, especially for some of our joint ventures. Overall, the application of IFRS 10 and 11 will lead to lower reported sales and income from operations, in particular, in the Oil & Gas segment, where we will also eliminate the effect of deductible and nondeductible oil taxes in Libya. Net income will only be slightly influenced by the changes in accounting standards. The qualitative statements in our 2013 outlook, given by Kurt earlier, remain valid. We will explain to you in detail the impacts of these changes that they will have on our financial statements in a separate event on March 22. We will then also provide you with restated figures for 2012, reflecting our new segment structure.
Thank you very much for your attention. And we are now happy to take your questions.
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