BASF Group (OTCQX:BASFY) Q4 2010 Earnings Conference Call February 24, 2011 8:00 AM ET
Jürgen Hambrecht – Chairman and CEO
Kurt Bock – CFO
Hans-Ulrich Engel – Member of the Board
Christian Faitz – Macquarie
Lutz Grueten – Commerzbank
Sophie Jourdier – Citi
Thomas Gilbert – UBS
Tim Jones – Deutsche Bank
Martin Evans – JPMorgan
Martin Roediger – Cheuvreux
Jaideep Pandya – Berenberg Bank
Harald Gruber - Silvia Quandt Research
Jochen Schlachter – UniCredit
Jeremy Redenius – Sanford Bernstein
Good afternoon, ladies and gentlemen, and welcome to the BASF 2010 annual results conference here in Ludwigshafen. At the same time, I also welcome all of those who are watching the webcast, who are listening in by conference call. BASF, as you have seen this morning ladies and gentlemen, presents itself in excellent shape. And the Group generated record results in 2010, and is and is also very optimistic for 2011. This means that BASF aims to significantly exceed the record level for sales and earnings that we achieved in 2010.
With me this afternoon at this conference Jürgen Hambrecht, our Chairman and Chief Executive Officer; Kurt Bock, our Chief Financial Officer; and Hans-Ulrich Engel, Member of the Board, and amongst many other responsibilities, he is responsible for Oil and Gas.
Jürgen will start off the presentation, talking about the performance of BASF in the year 2010, the successful implementation of our profitable growth strategy and the progress we made in achieving our strategic objective. Subsequently Kurt will review the 2010 financial results, and then the conclusion will be made by Jürgen again with the outlook for 2011. Afterwards, all three gentlemen will be happy and available to take your questions.
Now, let me remind you that, as I said, we are webcasting this event. We posted for you the charts as well as the press documents on our website, basf.com/share. I also wanted to ask you to please switch off your mobiles and your Blackberries because they could cause some problems with our microphone system. And, finally, I would like to draw your attention to our disclaimer which you see here on the chart.
So, with this, I would already like to hand over to Jürgen.
Yes, good afternoon, ladies and gentlemen. Thank you that you are joining us this afternoon at our headquarters here in Ludwigshafen. Some of you are still missing because snowfall obviously in Frankfurt Airport, but I’m hearing, I am not sure. I have not seen snow here, but might be in Frankfurt. And some of you have come from Frankfurt, so I am wondering maybe the car is easier.
Now, let me start. The title of our presentation today puts it in a nutshell; BASF is in an excellent shape. We reached record sales of almost EUR64 billion, up 26% compared to 2009. EBITDA at EUR11.1 billion and EBIT before special items at EUR8.1 billion, reached record levels each. The EBITDA margin in 2010 climbed to 17.4%, and is well on track to reach the EBITDA margin targeted and you know about this 18% by 2012.
Besides the strong recovery of the world economy, the excellent business performance in 2010 is also attributable to our strict cost reduction efforts. Our efficiency program NEXT is running at full speed and had contributed about EUR600 million to earnings by end of 2010.
We increased net income by 223% to EUR4.6 billion and reached an adjusted EPS of EUR5.73. In 2011, we will continue on our path for profitable growth and strive to significantly exceed the record earnings level of 2010 based on the assumption however that operations in Libya will be restarted in a reasonably short period of time.
Fourth quarter has been supported by a strong performance over almost all business. I will briefly highlight a few points, Kurt will give you more details on the business development of each segments later. Sales in Q4 increased by 25% to EUR16.4 billion compared to last year’s quarter.
EBITDA on record level in a fourth quarter of EUR2.7 billion. And despite one-off costs of more than EUR200 million not recurring in 2011, EBIT before special items increased by 19% to EUR1.8 billion. However, significantly higher fixed costs were caused by the long-term incentive plan and an extra employee bonus for the extraordinary management of the crisis during the last two years. In addition we used the strong margin momentum into 2011 to intensify clean-up work towards year-end and by accelerating maintenance, restructuring and other non-recurring items.
Net income climbed to EUR1.1 billion, up 142% and adjusted earnings per share were at EUR1.39, EUR0.33 higher than in Q4 2009.
As you know shareholder return is of utmost importance to us. The Board proposed this morning to pay out a dividend of EUR2.20 per share, an increase of EUR0.50. This reflects an attractive dividend yield of 3.7%, based on the share price end of 2010.
Moreover, BASF is delivering consistent long-term value for its shareholders. Over the past 10 years, the average annual return on BASF’s stock was almost 14%, clearly outperforming the German and the European stock markets as well as MSCI World Chemicals index.
2010 was a record year for BASF due to our operational excellence, the successful execution of our long-term value creating strategy and the extraordinary performance of the entire BASF team. Many thanks to all of the employees. I want to say this here, because let me say starting 2008 leading towards the end of 2010 was super, excellent performance, which I have to say was the best experience in my lifetime in BASF.
Looking into the future, I am confident that we are well positioned for further solid profitable growth. As you know, our growth strategy builds on three pillars. We have leading positions in growth industries and emerging markets and we certainly will strengthen these into the future, we will continue with our active portfolio management, driving the portfolio even closer to the end customers, and we will grow organically via numerous product and systems innovations as well as innovations out of our megatrend work.
Overall, our target is to outperform global chemical production growth by at least 2 percentage points per annum and achieve an EBITDA margin of 18% by 2012. As already shown in the past, we are consistently delivering on this promise. On the next slides I will highlight important developments for each one of these three pillars, and please allow me to take a little bit more time than usual on these three pillars.
First pillar, leading positions in growth industries and emerging markets. Our strong presence in emerging markets will further contribute to BASF’s growth. And we use the term “emerging markets” as defined by Dow Jones. We almost doubled our sales in emerging markets in absolute terms during the last five years to EUR5 billion, which is about 27% of our total sales in 2010, excluding the Oil & Gas, which is very much more than 95% based on Europe. We will further spur organic growth in these countries by increasing our sales forces, strengthening regional R&D, specific focus R&D, and investing in new production capacities. From 2005 to 2010, investments in emerging markets amounted to EUR3 billion. From 2011 to 2015, we will invest a further EUR2.6 billion in new capacities.
Special focus of our growth strategy will be on Asia Pacific as almost two-thirds of future growth in the chemical industry will come from this region. Between 2005 and 2010, we increased our sales on average by 14%, 3.5 percentage points more than the market average. In 2010, we achieved sales of EUR12.5 billion, well above the pre-crisis level, generating already roughly a quarter of BASF Group sales, excluding Oil & Gas, in Asia Pacific. Over the years, we have significantly increased profit contribution out of Asia. In 2010 we reached an EBITDA margin of 14% in this region, based on about 60% local manufacturing content. The rest comes are basically out of Europe.
In our Strategy 2020, we aim to grow sales on average 2 percentage points per year faster than the chemical market by first developing and marketing innovations in Asia for Asia, means R&D spending, investing EUR2.3 billion over the next five years to generate 70% of sales through local production and need to go into the projects which you are aware of, and by strengthening market focus through industry and customer target groups. By 2020, we project sales of more than EUR20 billion and substantially higher earnings contributions from this region.
The second pillar of our growth strategy is our proactive portfolio optimization. Here are two examples. After Ciba, Cognis is now a further step in moving our portfolio closer to end customers. In December last year, we successfully closed the acquisition of Cognis. Cognis performed very well in 2010. On a pro forma basis, Cognis would have contributed sales of about EUR3 billion, an EBITDA of EUR550 million and an EBITDA margin of approximately 18% percent. Given the attractive enterprise value of EUR3.1 billion at closing, we are confident that this acquisition will generate substantial value right very early on.
Currently we are fully on track with the integration process. At the end of March we will be able to give you a more detailed overview of the planned integration process, the costs and the substantial top line synergies as well as cost synergies as I said in March, not today. We still have to inform our people beforehand.
With Cognis, we have significantly improved our market position in many attractive businesses, especially in personal care as shown in this chart. As a leading supplier in these markets, we will be able to define market standards in close cooperation with our customers. We will operate more efficiently and more effectively and finally reach more customers all over the world, generating top line growth and synergies.
Second example is Styrolution. At the end of November 2010, we announced the plan to form this 50-50 joint venture with INEOS. The new company will be the number one globally in styrenics. Company will have sales of about EUR5 billion and more than 3,000 employees. The joint venture will offer the broadest product portfolio and it will have a strong footprint in all major regions. The carve-out of BASF’s styrenics activities into separate legal entities was already completed as of January 2011. The establishment of the planned joint venture, which is subject to approval by the appropriate antitrust authorities, is expected in the second half of 2011. And last but not least, Styrolution represents the first step in our value creating divestiture process.
Our active portfolio management is clearly paying off as demonstrated by the EBITDA development over the last 10 years as you can see here. EBITDA, excluding others, reached EUR11.7 billion in 2010, up almost 50% compared to the full-year figure 2009, clearly above last pre-crisis levels and well above the crisis level of 2001. We achieved this excellent result due to the continuous optimization of our portfolio as well as our sustained and relentless efforts to increase operational excellence and to reduce costs. Today, we are clearly on a new level of performance with substantially reduced earnings volatility, but this is a topic we have talked for length with each other.
Innovation is the third pillar, important cornerstone for the continued profitable growth of the BASF Group. And here I am not talking about abstract ideas in the labs, it’s all about marketable solutions which meet the needs of our customers today and tomorrow. And let me just take one example out of many others, nine on the right hand side, Xemium a product of our Agricultural Solutions segment. You remember maybe a year-ago, I talked about Kixor, a new herbicide which was successfully launched in 2010 and continues to thrive with unprecedented success.
Today, I would like to introduce to you a new product that nicely complements our strong fungicide portfolio Xemium, a next-generation carboxamide with blockbuster potential. As a pioneer in this product class, we are proud to launch a new carboxamide which can be used for all fungicide segments. We will help our customers with Xemium-based products for field crops and as well also offer products for specialty crops such as vegetables and fruits.
Xemium products can be marketed to a wide customer basis due to its broad range of application and efficient and long-lasting disease control. The data submission process is underway, and we expect regulatory approval in time for a market launch from 2012 onwards. Xemium will be a global active ingredient which we plan to gradually introduce in more than 50 countries and for more than 100 crops. Thus, we are optimistic that Xemium again will play out its blockbuster potential and generate peak sales in excess of EUR200 million.
Through innovation we see significant growth and value creation potential. Today, we value our innovation pipeline with a net present value of EUR21 billion, and I don’t need to talk about what means Net Present Value here. The biggest value contribution stems from R&D projects in Agricultural Solutions, Performance Products and Corporate
Research, especially planned biotechnologies. Thanks to rigorous R&D controlling we generate a high success rate. The expected commercial value of our pipeline is about 50% percent of NPV.
In 2010, sales with new products on the market for five years or less exceeded our target of EUR6 billion. By 2015, we target annual sales of about EUR8 billion from product innovations.
And now, I will hand over to Kurt, who will provide more details with regard to Q4 2010.
Well thanks Jürgen, and also good afternoon from my side, ladies and gentlemen.
As Jürgen mentioned, 2010 was a record year for BASF Group. And also in the fourth quarter, we posted new record numbers. At EUR16.4 billion, sales reached a record level for a fourth quarter, and we are up 25% versus the fourth quarter of 2009. Volumes were up 4%. Volumes excluding Oil & Gas grew by 8%. We continued to raise prices, also compared with the third quarter of 2010, in order to protect our margins in view of rising feedstock costs.
EBIT before special items was the second highest ever in a fourth quarter. It was burdened as Jürgen mentioned by several one-off costs at year-end due to intensified maintenance, accelerated restructuring and other nonrecurring items. Significantly higher fixed costs have been caused by our long-term incentive plan and a special employee bonus, which Jürgen already mentioned. On top, harsh weather conditions towards year-end impacted all construction related businesses.
Net income at EUR1.1 billion is a new record for a fourth quarter. It was partly due to a tax rate well below the annual average given tax credits in Asia, tax refunds and deferred tax income. Adjusted EPS were EUR1.39, up 31% compared to Q4 2009.
On the next slides, I will highlight the financial development in the fourth quarter in more detail. After many unusual quarters due to the crisis, seasonality is now dominating the development in most businesses again. Therefore, I will mainly focus on the comparison to the fourth quarter of 2010 with previous year’s fourth quarter.
First Chemicals. In our Chemicals segment, increases in volumes and prices as well as positive currency effects led to strong sales growth in all divisions. EBIT before special items rose significantly compared with the fourth quarter of 2009. This was due to higher capacity utilization as well as increased margins for basic products. Demand also remained strong toward the end of the year, but we incurred one-off items especially from accelerated maintenance.
In Inorganics, sales grew compared with the previous fourth quarter mainly as a result of higher volumes and prices. The business environment was favorable, particularly in the electronic chemicals and inorganic salts businesses. Earnings reached the level of the fourth quarter of 2009.
In Petrochemicals, demand rose for all products. Prices rose considerably as higher raw material costs were passed on; this contributed to the strong sales growth. There continued to be some supply bottlenecks, particularly for acrylic acid, solvents and plasticizers. Following an improved availability of cracker products in the third quarter in Asia and North America, supplies also increased in Europe. Thanks to high demand, our plants were operating at high capacity utilization rates. Earnings significantly surpassed the level of the previous fourth quarter.
Sales in Intermediates improved considerably year-on-year thanks to higher demand and prices. Our capacities were fully utilized for products in the butanediol value-adding chain, polyalcohols and numerous amines. The increases in volumes were a major factor in our strong earnings growth.
Now to Plastics. In Plastics, demand for our products continued to be high. Sales grew substantially compared with the previous fourth quarter. We were able to pass on higher raw material costs to customers, particularly in Performance Polymers. Positive currency effects contributed to sales growth. However, our business with customers from the construction sector weakened due to harsh weather conditions. Thanks to higher volumes and despite higher feedstock costs, income from operations before special items improved compared to previous year.
In Performance Polymers, the positive trend continued into the fourth quarter. However, we saw a significant decline in demand for foams for the construction industry. Sales growth was driven by strong volumes, price increases resulting from higher raw material costs and positive currency effects. Despite higher expenses resulting from plant shutdowns, earnings increased substantially.
While prices remained stable, sales in Polyurethanes rose mainly due to increasing volumes and positive currency effects. Sales volumes increased in all business areas. In particular, demand for specialties as TPU and Cellasto was good. Higher raw material costs, particularly for benzene, negatively impacted our margins and earnings were below the level of the fourth quarter of 2009.
Now, I am coming to Performance Products. All divisions in this segment posted a rise in sales. Thanks to higher volumes, positive currency effects or increased prices. Additional sales growth of 6% percent from the inclusion of the Cognis business as of December 9. We saw a bit of a seasonal slowdown, but the business environment remained favorable overall with strong momentum in all product lines.
In Q4, earnings were up more than 40% compared with the previous year but lower than in the third quarter of 2010. Towards the end of 2010, we intensified our restructuring measures, accelerated some maintenance projects, and incurred higher costs for employee bonuses. To cope with higher raw material prices, we continued to raise our sales prices. Finally, synergies from the Ciba integration were realized as planned and contributed positively to earnings. Special charges of EUR117 million resulted primarily from the Cognis acquisition and accelerated site restructuring in the paper chemicals business.
In January and February 2011, we have seen strong sales and earnings momentum. Looking ahead to the first quarter 2011, we are confident to top the level of earnings of the strong first quarter of 2010.
In Dispersions & Pigments, we posted significant sales growth. Thanks to the ongoing high demand for our products. Higher raw material costs could not yet be fully offset by price increases. Furthermore, earnings were negatively impacted by integration and restructuring measures. Moreover, earnings decreased compared to the third quarter of 2010 due to seasonal effects in the fourth quarter.
Sales in Care Chemicals increased substantially. Thanks to a continued favorable business environment as well as the acquisition of Cognis. Demand for hygiene products as well as detergents and cleaners was at levels not seen before. Earnings were well above the level of the fourth quarter of 2009 but below the previous quarter due to seasonal effects. Special charges were primarily related to an inventory step up following the Cognis acquisition.
In Nutrition & Health, which is a new division as you know, sales were higher than in the fourth quarter of 2009. Strong demand and the inclusion of the acquired Cognis businesses contributed to the increase in sales. Earnings did not match the excellent level of 2009 due to higher raw material cost and higher fixed costs mostly due to bonus packages. Special charges were related to the Cognis inventory step-up.
In Paper Chemicals, volumes were below the level of the fourth quarter of 2009. Higher raw material costs could be largely offset by price increases. Earnings improved compared with the fourth quarter of the previous year. In addition, we continued with our restructuring efforts. Following the divestiture of the European starch business, we announced the closure of our production of optical brighteners in Grenzach, in Germany, planned for 2011.
Volumes and sales rose in Performance Chemicals. Demand was particularly dynamic from the automotive and the plastics processing industries, especially for plastic additives, a business which we largely acquired from Ciba as you know. Earnings were far above the level of the previous fourth quarter.
Now, I am coming to Functional Solutions. Volumes in Functional Solutions were significantly higher than in the same quarter of 2009 reflecting the global recovery of our automotive customers. Demand from the construction industry increased slightly, primarily owing to the robust building activity in Asia. Nevertheless, harsh weather conditions as mentioned before towards year-end had a strong negative impact on our Construction Chemicals business. The price increase of 10% also reflects higher precious metal prices.
EBIT before special items was lower than in the fourth quarter of 2009 and much lower as you notice compared to Q3. As mentioned before, higher bonuses, accelerated maintenance as well as higher raw material costs contributed to this. In addition, precious metals trading generated lower earnings. After the holiday slowdown, we started into 2011 with very good momentum. And for Q1 again we expect to exceed the earnings level of the first quarter 2010.
Now to the individual divisions. Catalysts’ sales increased substantially, mainly due to higher sales volumes of mobile emissions catalysts and chemical catalysts. In addition, sales from precious metals trading almost doubled to EUR654 million. Earnings, however, decreased due to the above mentioned factors.
Our Construction Chemicals business in Europe and North America experienced a seasonal slowdown with again unusually harsh weather conditions, that’s the fourth time and the last time I’ll mention this. Nevertheless, we were able to increase sales year-on-year, especially in Asia and other emerging markets. Earnings did not match the level of the previous fourth quarter, mainly as a result of personnel-related provisions, intensified maintenance and restructuring efforts.
Volumes and sales in Coatings increased year-on-year in all business areas. The positive trend seen in previous quarters continued for automotive OEM coatings, automotive refinish coatings and architectural coatings. We have not yet been able to fully pass on substantially higher raw material costs. Earnings therefore declined despite higher volumes.
In Agricultural Solutions, sales in the fourth quarter significantly exceeded the level of the same period of 2009. Lower prices for certain products, particularly some fungicides, were offset by significantly higher demand for our products across all indications.
Sales in Europe were slightly below the level of Q4 2009. In the traditionally strong year-end business in France, demand for crop protection products declined. Sales in North America rose, mainly due to higher volumes in herbicides. In South America, we had a good start into the growing season. Increasing prices for soft commodities led to higher demand for soybean fungicides in Brazil and Argentina. In Asia, our sales increased. Thanks to higher demand from growth markets such as India and China. In particular, business with products based on our fungicide F500 were very successful.
Due to higher expenses for research and development as well as the expansion of our business activities in growth markets, EBIT before special items was only slightly below the previous year’s quarter.
And, finally Oil & Gas. In Oil & Gas, sales increased in comparison with the previous fourth quarter. Lower sales volumes in Natural Gas Trading were more than offset by higher selling prices for natural gas and higher crude oil prices. EBIT before special items and net income after minority interests were significantly higher as a result of higher oil prices. Valuation adjustments on oil and gas licenses in the North Sea resulted in special items.
In Exploration & Production, production volumes of oil and gas matched the level of the fourth quarter of 2009. Sales rose due to higher crude oil prices. The average price for Brent crude oil was $86 per barrel, compared with $75 dollars per barrel last year. In Euro terms, crude oil prices climbed to EUR64, which was an increase of 26%. As a result of higher prices, earnings exceeded the level of the previous year’s fourth quarter.
Sales volumes in Natural Gas Trading did not match the level of the strong fourth quarter of 2009. Overall, sales grew. Thanks to higher prices on natural gas. Margins were negatively impacted by the time lag effect for the adjustment of our sales prices according to our purchase prices, which led to lower earnings year-on-year, a mechanism which is well known by all of you.
In this context, let me give you a brief update on the situation in Libya. Over the past days, the events have been developing rapidly. Our foremost concern obviously is the wellbeing and safety of our 453 employees. We have advised all employees to remain at home. In the meantime, we were able to allow most of our expats and their families
Leave the country. A few delegates voluntarily stay in the country in Libya. As a precautionary measure, we stopped our production of oil and gas at the beginning of the week. At this moment it is very uncertain, when we can restart production. And as you can imagine, we will continue to monitor the situation very closely.
Now, I will try to explain the position “Other”. In “Other” income from operations before special items decreased by EUR190 million compared with the fourth quarter of 2009, despite the improved earnings of our styrenics business. Main reason for the decline was a significant increase in provisions for the long-term incentive program as a result of the 30% rise in the BASF share price over the course of Q4, something we had hoped would happen but could not predict when we last met here at the end of October.
Positive special items resulting from the allocation of restructuring expenses to the operating divisions in the fourth quarter were significantly lower in 2010 than in the previous year.
Let me briefly discuss our cash flow in 2010. At EUR6.5 billion, operating cash flow was again pretty strong, of which EUR1.4 billion were generated in Q4. The very high after-tax earnings more than offset the increase of EUR1.7 billion in net working capital requirements due to the expansion of business volume in 2010. Free cash flow amounted to EUR3.9 billion.
In 2010, we stuck to our priorities with regard to the use of cash. We spent EUR2.5 billion for capital expenditures. Net cash-out for the purchase of Cognis amounted to EUR0.6 billion. We paid EUR1.6 billion in dividends to our shareholders. And we used EUR2.3 billion for our repayment of debt, which includes the refinancing of EUR1.9 billion of debt taken over from Cognis. Despite the Cognis acquisition, dividend payments and capital expenditures, net debt increased by only EUR562 million compared to the end of 2009.
Let me finally briefly turn to our balance sheet. Compared with the previous year, total assets rose by EUR8.1 billion to EUR59.4 billion. Therefore, EUR4.1 billion were related to the acquisition of Cognis. This includes accounts receivables and inventories of EUR0.9 billion. The first time consolidation of Cognis led to a goodwill of EUR600 million as well as an increase of provisions for pensions by around EUR0.5 billion. Furthermore, currency effects, for example due to the appreciation of the US dollar and the Japanese yen versus the euro, inflated our asset base by roughly EUR2.2 billion in 2010.
Our equity ratio improved from 36% to 38% and is I think rock solid. Furthermore, with our A-rating and a well-balanced maturity profile of financial debt, BASF continues to have a very strong financial position.
And, with that, I would give back to Jürgen.
Ladies and gentlemen, let me conclude with the outlook 2011. After the strong global economic rebound in 2010 supported by major economic stimulus packages and programs and strong growth in Asia, the global economy will continue to recover in 2011.
However, in industrialized countries, the austerity programs necessary to trim public spending will start to dampen the growth dynamic. Increasing raw material costs and the uncertainty in the Northern part of Africa and the Middle East are risks we really have to closely follow up.
In 2011, we expect GDP growth of 3.3%. Growth will be weaker in the industrialized countries 2.2%, but production in most of these countries will reach and partly surpass pre-crisis level. We expect global chemical production without pharmaceuticals to grow by 5.2% percent. And for 2011, we expect an average oil price of $90 per barrel, and an average exchange rate of $1.35 dollars per euro.
Global chemical production will continue to grow in all regions, particularly strong in Asia, approximately 10% and especially strong in China is about 12%. All customer industries show normalized solid growth, especially strong in the automotive and information and communication technology industries.
If we translate all this into the outlook for our businesses in the respective segments, this means, in Chemicals, we expect sales in 2011 to be slightly above the level of 2010. However, additional capacities, especially Middle East and Asia will only increase pressure on margins, especially for cracker products. Earnings are therefore expected to be slightly below the level of 2010.
In Plastics, we expect sales and earnings in 2011 to slightly exceed the levels of the previous year.
In Performance Products in 2011, we expect stable demand and driven by the Cognis acquisition substantial sales growth, we aim for a strong increase in earnings.
In Functional Solutions, we expect rising demand from our key customer industries, especially construction and automotive industries. We aim for a significant increase in sales and earnings.
Agricultural Solutions, we will continue our successful innovation strategy in 2011. We aim for slight growth in sales and earnings. Based on our assumptions regarding oil price and euro, we aim in Oil & Gas for a significant increase in sales and improvement in earnings. However, we base this assumption on a restart of our operations in Libya in a relatively short period of time.
Finally, to the overall consolidated outlook for 2011, we expect – welcome, so this is the final word I have for you. Looking into the future, this is a promise or so, we expect to achieve in 2011 significant increase in sales and EBIT before special items, a high premium on our cost of capital, significantly higher sales and earnings in the first quarter 2011 versus previous year’s quarter.
We stick to our medium-term targets and we stick to our dividend policy, which I do not have to repeat to you. You know about that.
And, with this, thank you very much for your attention. And we just step into question and answers now.
Ladies and gentlemen, we would now to like to move to your question. We would like to ask you first to please limit your questions to maximum two at a time, so that we can take as many questions as possible. Of course, you’re always welcome to rejoin the queue for follow-up questions. Also, please press the button on your microphone, so that everybody in the room can listen and also the webcast works well.
So I think we are starting off with Rhian Tucker, then I have Norbert Barth, then I have Mr. Faitz, then we’ll move on to James Knight.
Hi there. I have one general question and one specific question. The more general question. Looking at BASF as a whole and raw materials, in principle, you should be more isolated from raw material increases than other firms in the industry, because you have production of oil and because you have production of petrochemicals. The only stage in theory you are missing is a refinery stage and naphtha prices are fairly reasonable in Europe, anyway. Can you just, looking at BASF as a whole, give us a run-down on how you see the whole business margins going because of raw materials? Do you think that’s true that you are more isolated from raw material movements?
The second question is very specific about the Catalysts subdivision. You said you saw weaker earnings in precious metal trading. But you also said you saw a doubling of sales in precious metal trading. Obviously that implies very substantially weaker margins and some of your competitors saw pretty good results in precious metal trading. Can you talk us a bit through that?
Okay. Let me start by taking the first one and Kurt will take the Catalyst piece. Generally, you are right. One can say BASF has a certain natural hedge by being in the oil and gas business. However, this is purely reflected then on the oil and gas business. We transfer all products at market price. So what you see in all the other businesses certainly is market reflected. So, all-in-all, I have to say the natural hedge might be about 50%.
Yes, we are lacking the refinery piece, which is not very attractive and not very profitable anyhow. So we sold this business, as you know, in the past. All-in-all, we are a little bit better off, but it’s not the super big advantage you may see or look at going forward, as we transfer prices at market price. And versus growth?
Yes, Rhian, as you probably know, when we acquired the Engelhard operations we also acquired the trading business which we continue to operate very successfully I have to say. They are in a couple of different businesses. One is simply a kind of margin trade. You buy and sell almost at the same time and you get your margin. You are certainly right, higher volumes. But also keep in mind: higher prices.
In last quarter mean that, in principle, we also should have higher earnings. At the same time we also have a little bit of a proprietary trading operation, which is quite successful, which was also positive in Q4, but less positive in the fourth quarter of 2009, and that basically explains what I said.
Sorry, I didn't understand why your earnings were substantially weaker in Catalysts in Q4. You said it was something that was in the report.
What I said was we have higher volumes and higher prices in precious metal. That does not translate automatically in higher earnings because we also have proprietary trading where we take positions. And sometimes we are very successful and sometimes we are slightly successful. And in Q4 we were slightly successful in that operation.
I have got two questions, one regarding write-offs, the second regarding more or less the outlook statement.
Can you explain what happened in Latin America with these write-offs on receivables and amount that, what that was, perhaps also, and I think the Revus write-down, some on-license in the North Sea? And could you give a little bit background there, how that should develop?
And second question is about generally the outlook statement. You said, what I was little bit – what I think it’s quite optimistic saying you want to significantly increase your EBIT in 2011. I would imply that it means at least double digit. And if you generally see that you already have 17.4% EBITDA margin already and you are looking for 18% in 2012 and also now you are taking in charge for CEO, is that not a little bit too less ambitious? Do you think about revising that figures, or what can we expect on that?
Norbert, as you have addressed this to Kurt, I just hand it over to Kurt entirely.
Thank you. As you can imagine, we discuss this quite a bit internally what kind of outlook we should provide for 2011 and what we said is what we believe we can achieve. What I have to stress again here, this was all based on certain conditions which we also described with regard to overall economic development, exchange rates, oil price, et cetera. If the year develops in a completely different way and fashion, we will probably see different results.
But based on what we see today, we are quite optimistic for 2011. As I said in my little speech, we also started into 2011 with very positive momentum, which I think is also important to keep in mind.
Rise of issue in the South America and the North Sea.
Yes, and maybe Hans takes the oil and gas piece and I take the South American piece, which is actually related to a customer which is pretty big and pretty important, and we had simply, let's say, a receivables issue and we had to write-off receivables with regard to that particular customer. That was pretty much behind that. It was unfortunate.
What was the amount?
It was a sizeable amount and that reflects – it reflected in the earnings in South America which were not at a level which we would like them to be.
Here we go with the Revus asset write-off. As you know, we acquired the assets in December 2008. We did our purchase price allocation. We only found out about the fact that certain assets in there that we had allocated certain values to did either not quite perform to our expectation or had less reserves than were originally expected for these respective assets.
What you can't do is you can't write up the other assets where we have significant finds, five in the North Sea coming with the Revus portfolio during the course of the year 2010. So I would say there is a certain imparity with respect to the assets where you made your allocation and on the other hand you can't write up and show the improved value for the others.
Now, the next question comes from Christian Faitz and then I have James Knight.
Yes, thanks. You kindly shared with us how the year started in Performance Products and also Functional Solutions. Would you mind sharing how Plastics and Chemicals started?
And I am also particularly interested in the Agrochemicals. How did you start there in terms of volumes and pricing? Last year, Q1 was not exactly the most optimal quarter. Thank you.
We split this. Kurt will take the Ag and I’ll take Chemicals and Plastics. Also in Chemicals, the start of the year was very favorable and the same applies to
Plastics. However, in Plastics, and you have seen this in the fourth quarter already there is margin pressure on certain product lines, especially TDI at this very moment, as aromatics have increased very substantially. Raw material price has increased very substantially.
I think in Ag it is always very early to talk about a season. We are still in February. But so far the start has been pretty good. What is our major effort right now is to really bring up prices. As you noticed, in 2010 we had some price decreases. I think the conditions for this effort are quite good, because soft commodity prices have gone up, farmers are quite positive for 2011 and that is what we are pushing for. But again, it’s very early in the season and so far we are well on track.
But do you see prices sticking in Ag?
That is too early to say. We are pushing very hard.
Yes, a couple of questions. Going back to Ag, could you describe what your Headline Advantage program is and whether that is going to be utilized or extended this year as well?
And secondly, on the coatings business, could you just talk about the input cost margin dynamics there, how quickly you would expect to recover margin in that business this year, maybe differentiating between the industrial and deco side?
Let me take the second part and Kurt will then address the Headline piece and Ag Chem.
Coatings, there is a very substantial increase in raw material prices. Some of the raw materials are at the super high, titanium dioxide. For example, they are difficult to push through. The automotive industry for example now I am now just talking about one of the industries is really being very tough at this very moment. Therefore, I think, it will take some time to get the prices further up. And mostly, you can just do it only via innovation.
If it comes to decorative, this is a little bit more easier, as we have our decorative business mostly in Brazil and not here in Europe. Kurt?
Headline is a fungicide. And the nice effect of that fungicide is also that it has a yield enhancing effect which was quite positive for the farmer. But for the farmer this only kicks in if the crop prices are above a certain level and that is really the precondition for making Headline a success.
With that respect, I think we are quite optimistic for 2011 that then the farmer would basically decide, “Okay, I have the extra costs, but those costs are justified essentially because I will have higher yields and that is a very easy calculation obviously.” And we suffered a little bit with Headline in early 2010.
So we’re now moving to next to Lutz Grueten and Oliver Schwarz, Sophie Jourdier, and Spengler. So we start with Lutz.
This is Thomas.
Thomas, just a little bit later.
Lutz Grueten – Commerzbank
Lutz Grueten, Commerzbank. And thanks for taking my question. First of all, regarding Libya: You have decided to run down the production in Libya. Just technically how long does it take to run it up again if you make the decision on one day? Are we talking about days or weeks?
And the second question regarding the cash flow, given the strong performance 2010 and also the quite sound outlook on 2011, what are your thoughts on relaunching the share buy-back programs again? Thank you.
Okay. Hans-Ulrich Engel with regard to production and then Kurt with regard to –
Yes, as you rightfully said, we shut in the production in the beginning of this week. And the way it shut in we are expecting roughly a week to restart it.
Yes, with regard to the share buy-back program, as you know, we stopped it in 2008 when the financial crisis hit us. In May of this year, when we have our shareholders’ meeting, we will not ask for a renewal of the buy-back program because we don't see a need right now. And we mentioned just before we have currently have a net debt position which is comfortable. But we would also feel a little bit better if we were able to – or will be able to reduce our debt load and that would be our first priority in 2011. And then we have some other ideas about R&D and CapEx.
Now we come to Oliver Schwarz please.
First thing, coming back to your Ag guidance, I am still trying to understand why that guidance is, what I see rather conservative as you guide for slight sales and earnings improvements. If we take into account that your prices would be stable, you would be guiding for just slight volume increases or if those prices would decrease further, you would be guiding for, let's say, mediocre sales increases due to higher volumes, which I think is a given. It seems to me that the inventory levels in the supply chain seem still to be a topic. Is that a correct assessment?
And my second question is a pure P&L related one. The tax rate was remarkably low in Q4. Do you have a guidance for the year 2011? Thank you.
First to Kurt.
Maybe I start with our tax rate. And you are right, our underlying tax rate in Q4 was quite low, and I mentioned a couple of special factors. But please keep in mind even if you deduct those special factors, we still had a record net income for a fourth quarter. So that effect is maximum about 100 million in Q4.
The problem with those special event is that you cannot really predict them, because sometimes it depends on sealing a deal with the taxman when they do their tax audits for instance. But if you look at these issues right now, the underlying tax rate for BASF fluctuates between 20% and 25%.
Our guidance has been pretty much in the order of magnitude of 25%. If you look at the entire 2010 year, it’s pretty much now 20%. This also reflects a stronger earnings contribution. For instance, from Asia we are still in many countries, we enjoy tax holidays due to our large investments, which might disappear or be reduced over time. But all-in-all, the 20% to 25%, I think, is a good guidance for the underlying tax rate.
With regard to Ag tax business, that has to be your assessment whether our guidance is cautious or too optimistic. I can also tell you – I can only tell you it’s very, very early now in 2011. We see – as you mentioned, we see some positive underlying trends which might provide us with a little bit of tail wind. But again, it’s too early to say.
And what also holds true and that is something Jürgen mentioned, we continue to invest in R&D and market development also in 2011.
Could you quickly comment on the inventory levels you see?
I am not aware of any special inventory situation at the beginning of 2011. It was an issue early 2010, as you know.
So this brings us to Sophie Jourdier.
Sophie Jourdier – Citi
Thanks. Sophie Jourdier from Citi. Just a couple of questions. First, two, I might have missed the introduction. Recently, you have given us a good sort of flavor through the divisions at the beginning of this year, but regionally, into the US, Europe and China, just what are you seeing at the moment, particularly on your chemical activities?
And then if I was allowed a second one, you mentioned raw material shortages in quite a few of your product areas in the statement, I wonder whether you could just elaborate on which raw materials and really what can be done to resolve that. Thanks.
Okay. This takes us a little bit longer, as you want us to go through the business and region at the same time. Let’s try to do it in a very rough picture. And Hans-Ulrich will talk about Europe, Kurt will talk about North America, and I will talk about Asia and contribute also maybe a little bit about South America. So, why don't you start, Hans-Ulrich?
Yes. With Europe being roughly 60% of our business, I think it’s fair to say that pretty much everything that we said with respect to the overall BASF Group is also reflective of what we see currently in Europe. So what do we see currently? We see strong demand across the entire portfolio.
We see some regional differences, in particular Eastern Europe has picked up strongly, already during the year 2010, and that goes also the same way into the first quarter of 2011. We see some weakness in parts of Southern Europe. But overall, if you look at the business that we have in Southern Europe, that’s nothing that we are too concerned about. And we see solid, good demand in Western and Northern Europe.
Yes, I think all of us are pretty much aware of the overall macroeconomic picture in North America. I do not really want to dwell into that one. What we see in our industry is we had a very good start actually into 2011, positive momentum going into the New Year.
The big question mark I still have is the construction industry, whether that industry will finally turn around or the real estate market will turn around maybe over the course of the second half of 2011. That would really provide a boost. So far, we don't see any indications for that to be happening. And I think that is pretty much our biggest concern. But overall, the manufacturing industry in North America has recovered remarkably well after the crisis in 2008 and early 2009.
So Sophie, let me try by addressing a little bit our customer industries because this translates into our growth at the end of the day. If we look into Asia, I would say, automotive strong, 8%. If we just take Japan out, Japan, of course, will be lower, but also in a rather high area about 7% even for Japan. If you look into ICT industry, Asia about 12% to 13%, what we see. Textile industry rather strong, about 8% to 9%. If you look into the paper industry, also 9% to 10%, the food industry also 8 to 9%. I am always talking without Japan. I really have to confirm this. Otherwise the picture is a little bit different. And if you look into construction, it’s also between 7% to 8%.
It really translates really for the chemical industry into a growth of 10% in Asia Pacific and, as I said before, about 12% in China. And if you then go into the countries, this is a rather strong picture throughout Asia. If we look into South America, things are also rather positive, even also in construction, in almost in all industries. The single one where we have an issue around the world with a little bit of an exception in Asia where it is strong, is really paper industry. This is a restructuring story, South America much better compared to Europe and North America.
Now, you also talked about raw material shortages. If we look into raw materials and real shortages, I have to say, on the upfront certainly are things and maybe Hans-Ulrich will complement to this. But what is really short are cracker products. We have a very extraordinary situation at this very moment. I don’t know whether you are aware of this. Ethylene and propylene, especially in North America, are in a ratio which we never have seen before. Ethylene about $0.44 per pound and propylene well above $0.70. With butadiene, we are reaching already $1 almost. And so propylene and butadiene, especially butadiene globally, propylene especially North America, but partly also in Asia, are relatively short.
Then it comes to aromatics where we cannot talk about real shortage because it’s a matter of the gasoline pool. And, therefore, I think this is not an issue we should talk about.
Other products are short because in high demand. If you look into certain – and you are aware of the rare earths topic which is certainly exaggerated to a certain extent. Certainly if you look into natural products, for example palm oil and these things, they are very high, also still highly speculative still. There is not a real shortage, but there is also not a lot of surplus. So as we go forward, I think we see it – in the first quarter at least, we will see raw material prices going up. Whether this will continue in the second half into the year I have personally my doubts, but Hans-Ulrich, what is your comment on this? He is responsible for purchasing and he knows it better than me.
The comment is an easy one. Jürgen, you are absolutely right. Maybe one addition, what have seen? In 2010 we have seen shortages here and there. As Jürgen said, as a result of high demand – and as a result of high demand not only with respect to these specific raw materials, but also due to the fact that in the entire supply chain there was a lot of capacity taken out, including transportation capacity. And as a result of that, it was here and there difficult to get access to the raw materials.
At this point in time, I would say the key issue in our portfolio is the rare earths situation where we have covered our base at a high price, I would say. And the question is how will that go forward? What will happen with the export quota in China? How quickly will we be able to find other solutions and other suppliers of raw material and rare earths?
Now we move on to Peter Spengler.
Yes, thank you, good afternoon. In the past you were a net gainer of a rising oil price, as far as I can remember. Would this apply if Libya production will be discontinued for the whole year? That’s my first question.
And second question is also on Oil & Gas. You booked something like EUR60 million net income in 2009 from your North African operation in Oil & Gas. Maybe you already have the number for 2010 already at hand; and I suppose that your net cash is much higher than this amount, it seems very low for this large operation. So maybe you can elaborate a little bit on that.
I have not yet done the calculation with respect to the overall impact on the BASF Group. Maybe Jürgen or Kurt can help there. With respect to 2010, the net earnings after tax and after minority interest is in the range of 70 million. And if you look at it from a cash perspective, always keep in mind that we have a situation in Libya where basically the sales are taxed in the order of magnitude of 93%, 94%.
Peter, we do not guide on impact [inaudible] of the oil price for BASF Group from the oil price. We just guide with regard to the Oil & Gas business. And, therefore, I think it would be misleading if we talk about the entire BASF Group because this is very difficult to find out and has very – as I talked before, what is a direct impact. As we transfer it at market price, this is certainly something which is almost impossible to calculate out. But you know our sensitivity in Oil & Gas which translates into $1 per barrel plus, minus 100 million in sales, and EBIT 35. And if it comes to earnings after tax, it’s about 12. This is the guidance we are giving. And this includes, of course, Libya. Yes.
Now we’re coming to the next group of four. There is Mr. Gilbert, then Ronald Koehler, Heine and Annett Weber.
Thomas Gilbert – UBS
Yes, thank you very much. Thomas Gilbert from UBS. Thanks for the two questions. The first one is if you look into how in with which hedging position you have entered 2011 on naphtha and now assume that the North African situation escalates, what does that mean for the hedging result and also the result in the petrochemicals business for the first quarter? Just a direction would be great under that scenario.
And the second question, as you know, we are always intrigued by the vocabulary of the
BASF guidance. You have to help me out on this again. Chemical production growth this year is seen at 5.2% by the Group. You aim to beat chemical production on average trend line by 2%, yet you guide for sales, slight increase in volume for 2011. There are two possible scenarios. A, you don't have the capacity to match market growth in 2011 or you are very conservative. Which of the two is the case, please?
The last one is a difficult one. But I think we need to help you out a little bit here. We will certainly outperform in growth. So this means slightly is going up to 10%. I hope this helps you a little bit. Not always very sharp, but this is direction and helps you quite a bit. Significant is still above.
And as we said, slight increase in sales. And if we add on top Cognis, it is certainly significant. This is how you have to translate it. Now, with this, I would like to hand over with hedging to Hans-Ulrich.
Yes, on the hedging result, to the extent we are hedged and looking at the oil price development that we’ve seen over the recent days, I think, last time I looked today, Brent was at 114. One thing is for sure our hedging results will go up. But don't overestimate the amount that we actually hedge in raw materials, since we are looking at it on a net basis.
That net basis meaning we are looking at our exposure. We are then looking at the hydrocarbons that we produce ourselves in our Oil & Gas business. And when we also looking at the fact to what extent can we pass on raw material prices under our respective contract formulas.
The last sentence is very important to understand.
The next question comes us from Ronald Köhler and then I have Heine and Annett Weber, and I have marked Bill Cross and Martin Evans.
Yes, hello. The first question is on Performance Products. Obviously, you have a rather positive guidance here of a significant increase. I would be interested in being a little bit – if you could elaborate a little bit if we would strip out Cognis contribution and if we would strip out Ciba symmetries, would you be still optimistic for the business to see an increase, despite higher raw material costs? And that would be the first question.
The second question is on seasonality and Chinese New Year. Obviously, China is getting bigger and bigger for you. So Q1 is, let's say, I would call it the low quarter in China due to Chinese New Year. How will that impact actually your business? Should we be aware of that? Is it getting more significant as China is getting more significant or how should we go for that?
Ronald, let me first say that I am not able to differentiate any longer taking Ciba out and so forth. Now this is impossible.
Ciba synergies obviously, cost savings. So meaning excluding cost savings and excluding Cognis consolidation effect.
Ronald, again, Ciba synergies are part of our business now. It’s now more than one year; it is basically almost two years now that we have that. So I do not want to deduct
Ciba. If we take Cognis out, certainly Cognis as we said as a guidance for the – it has been 3 billion sales. It has been – I don’t recall, I think it was in EBITDA terms 550 million and EBITDA margin of 18%. This is a guidance we can give at this very moment.
Looking into further details I think I would just refuse to do so. On the other hand I have to say, Performance Products are constantly increasing and improving its overall performance. And now I have to say, I cannot differentiate this pigments which has been within BASF and pigments which has come from Ciba or with additives which have been from BASF and additives which have come from Ciba any more.
On the other hand, these businesses are developing very nicely, as we more and more move those business, also the Ciba business, away from being commoditized towards system solutions. And certainly we would even grow Performance Products without that.
Second, seasonality with regard to Chinese New Year. I think this is basically always overdone. So we do not see a very significant – this is one week off, a little bit of preparing beforehand so to speak. January usually is a little bit stronger, February a little bit weaker. So if you take the entire first quarter, there is not a lot in Asia which makes a really big difference. If there are prices here, however, this has an impact, much stronger than we have it when you have, let’ say rather constant colors. So I do not think that this has a major impact on our Q1 results and sales.
So now we come to Andreas.
One question basically on Others again. In Others there were a profit booked. Is that in relation with styrenics or a rebooking on bonuses from the Others line to the operating lines? And then you have separated the assets for disposing groups and the liabilities for disposing groups, and the difference between is EUR400 million, is that what you can expect by putting styrenics into the joint venture as a cash proceed from the joint venture?
I am not completely sure if I got your second question right about the disposal group for styrenics. What we do here is basically an accounting rule to follow that we separate all the assets and the liabilities of styrenics in one position in our balance sheet and that obviously is then what will be moved into the joint venture which we will form with INEOS.
And the mechanism, how we transfer and at what price, I don't think we have discussed this publicly. But as Jürgen said, we are very, very optimistic for the formation of the joint venture and to create a very competitive, a very solid rock, solid new enterprise. And we will talk about this as soon as we have more information to provide, because as you know, right now we are in the process. We have to apply for antitrust approvals which may take some time as well.
And in Others, yes, there was an effect which we already had in 2009, that we reverse provisions which we made under Others because now we decided what specific measures will be applied and this then moves to the operating segments and divisions, and that number was lower than what had happened in 2009.
Apart from that, the major issue in Others was really our long-term incentive program. As you know, that is an options program and that is very much driven by both the BASF share price and the outperformance of the Morgan Stanley Global Chemical Index. And in both respects, we delivered quite nicely over the course of Q4.
And as I said before, we did not – we could not predict that to happen when we met here in October or talked on the phone. So the share price increase of 30% really made a big difference to this position Others. And then it is a mixture of many, many small items, as you all know.
And so now this brings us to Annett Weber.
I've got to two and a half questions. The first question relates to – it is an understanding question. Did you mention EUR100 million impact from the weather disturbances in Q4? Was that a net profit figure or an EBIT or special items figure?
And then the second question relates to the maintenance costs that you mentioned several times that hit your earnings in Q4. Could you possibly give us the number for Q4 2009 and the number for Q4 2010, i.e., the EBIT impact that you lost or additional cost that you incurred due to the maintenance shutdown?
And the second or third question is the percentage of your contracts that currently allow for at least quarterly pricing or cost pass-through, did you have a rough estimate for this –for the chemicals activity, ex oil and gas obviously?
The first one, I really didn’t get this first one.
The first one was about the one-time items in Q4 with regard to maintenance, the harsh weather conditions. It’s the fifth time that I mention this and the bonuses. Actually, I cannot tell you exactly what the weather influence was. What we can tell you all in all, we had an effect of about EUR100 million coming from higher bonuses, which we had not provisioned before until Q3 because, first of all, our results came in slightly higher than we had expected and we try to provision for the employee bonuses on a pro rata basis. And secondly, as Jürgen said, we had a special bonus of EUR50 million which we only decided upon in Q4. That is one effect. And the other effect, including the EUR100 million is essentially really the maintenance piece which we talked about, the accelerated maintenance.
I think looking into your face I think you would like to have a direct figure. We don't have this because this is a mixture of CapEx spending additional, maintenance work and delayed sales, which moves into the first quarter. And then we have the contract pressure.
And again, since you asked about understanding how this works here, the long-term incentive program, i.e. the options program, that is booked in Others. That is very, very important to keep in mind. Then your other question was really what is our ability to pass through higher feedstock cost? How long does it take us? Do we have long-term contracts in place?
As you know, in Europe in the past you pretty much had quarterly pricing mechanisms. That is pretty much the past, history. Most of Europe actually moved to monthly pricing. We are talking here about basic chemical products essentially, which are traded based on price only. There it is all about supply-demand. We do a very, very thorough calculation to understand what is our what we call “pass-through factor.” How long does it take us to pass on higher feedstock cost? And again, it depends on supply/demand in those markets. But normally within one quarter, two to three months, we are normally in a position to pass this through.
Having said that, there are other businesses, take automotive, OEM coatings, where we have long-term contracts and fixed prices. And obviously then it becomes quite tough to talk with our automotive customers about higher prices, because they will be turning around and say, “Okay, I didn't hear what you said.” But this is an ongoing process.
For instance, we talk now very, very vigilantly about rare earths, which is a real major cost driver for our automotive catalysts business. And certainly, we try to pass on these higher costs to our customers, but obviously this takes a little bit more time. And therefore you also see the profit shifting a little bit on our P&L, chemicals doing relatively well or very well actually and the businesses further downstream is still coping with some of the price and cost increases, which by the way is – again understanding for you, which is also caused by the fact that internally we pass on our raw materials at market prices. That’s very important to keep in mind. We pass on our internal captive supplies at market prices.
So now we’re moving on to Tim.
Timothy Jones – Deutsche Bank
Yes, thank you. Tim Jones, Deutsche Bank. Two questions, if I may. I think that is the rule now. The first one is on polyurethanes. You mentioned in your statements that pricing was broadly flat in 2010. But I just don't really understand the problem with this business, because if I look at it, it is going oligopolistic. You've got pretty much four Western companies that are disciplined, essentially theoretically controlling the market. And yet none of them can seem to make a huge amount of money when raw materials go up. So is it just because of construction or was it something else that is happening? So that’s my first question.
And my second one is a bit shorter. And simply it’s debottlenecking. Obviously, industry, particularly in the upstream industry is make huge amounts of money at the moment. And there isn't an awful lot of capacity coming on stream, apart from in some chains. How much do you think you could add in your key product change where you are very tight through debottlenecking, say, in the next 12 or 18 months? Thank you.
Tim, I’ll try my best to answer this. First of all, with regard to polyurethanes, there are two major effects to us. The one is what you mentioned construction industry certainly had a major impact in the fourth quarter, application for the construction industry. Very special weather conditions in Europe as well as and especially in North America, which is still the case up to today. And the second one is really looking into raw materials. Raw materials have gone up, especially benzene and toluene, let me say in a record speed, which is almost very difficult to pass those things through.
And then, I’m not sure, TDI is certainly a little bit longer than we anticipated this earlier. But I think it’s just going now through the trough and coming back. MDI is becoming better. So, all in all, high growth rates, not a lot of capacity coming on stream. So I am rather optimistic concerning those things.
Debottlenecking, second topic, we always say that we want to have productivity gains by about 3% per year. This is on average true, but it’s not in all product lines possible. So sometimes you have to invest. It takes a little bit time. We have certain product lines where we have been able to increase our capacity rather substantially, beyond what we have as name plate capacity. Just to name one is acrylic acid where we constantly are inventing, let me say, ourselves somehow. But all in all, Tim, I cannot say that this is applicable to all product lines. Still, it’s room to grow. And it’s our ambition to really get the 3% productivity gain every year.
So next four questions from Bill Cross, Martin Evans, Martin Roediger, and Mr. Gruber. Okay, so we start with Bill.
Thank you. Two questions. First, you mentioned the single Latin American customer causing a receivables write-off large enough to be noted in your annual analyst meeting. It does raise eyebrows and suggest an opportunity for a significant process improvement to reduce the risk of an event such as this recurring. And I wondered if you might just explain what the process improvement is that you doubtless have already implemented in response to this event?
And then, second, somewhat related to this, if you could explain the change in net working capital? If my calculation is correct, the $1.7 billion increase in net working capital over the course of the year is in spite of an 11-day increase in days payable from 27 to 38 days. And I'm sure that a part of that is increase in raw material pricing. But perhaps you could explain what your standards are, your targets for days inventory and days receivable and days payable, and how we might expect to see those evolve over the course of 2011?
I can assure this topic in South Americas did not just raise eyebrows. In our case also increased our blood pressure quite a bit and we are working very hard to make sure that this is not going to happen again. I don't want to go into too many details. But what the experience tells us is, you shouldn't wait for too long if you have an issue with a customer. Sometimes there is still hope and you provide additional products and financing in that case was simply too much and we learned from that. But it really is an isolated incident which has no importance for other regions or other businesses which we operate in.
And in terms of net working capital, yes, you are right. We had slightly higher payables at the end of 2010. That was a positive effect for the net working capital position. In general, our goal is to improve what we call days outstanding, both for receivables and for inventories year-over-year.
We made progress again in 2010. We measured this based isolation to price factor obviously, which we cannot really control. But if you just look at volumes, which we try to do, we have been able to reduce our inventories on hand quite nicely in 2010. Receivables to a certain degree is also a function of growing business volume. We improved in terms of receivables or of days outstanding. And we have the goal essentially to improve in both respects, receivables and inventories, by about two days in 2011.
The next question is from Martin Evans.
Martin Evans – JP Morgan
Yes, thanks. Martin Evans, JPMorgan. Just on the Functional Solutions division again. And I hear what you say about sort of one-off costs and so on to some extent in Q4. But is there any sense to which you are possibly slightly disappointed with this division, given the high hopes at the time Engelhard and the Degussa Construction acquisitions, which I think from memory, totaled around $8 billion plus. And is it a case that possibly, particularly maybe on Catalysts you are finding it more difficult and more challenging to manage than it appeared at the time of those acquisitions? Thanks.
We share this now, because Kurt takes care for the Catalysts. But let me just make a general remark. You may say, we are a little bit disappointed, but this is due to the fact that we just acquired and then we went into the crisis with both industries, which was not foreseeable. This is to start with.
And unfortunately, construction industry is not really coming back. We had a minus growth rate still in 2010, we should not forget. We do expect growth in 2011, about 3% growth globally now. So I think it’s going to change step by step by step. We had to restructure. This takes also a little bit of time, but we are doing rather well in this and you will see that this will improve.
With regard to catalysts, just as a side remark, we have taken a lot of new technologies from the Engelhard acquisition you cannot see in this business directly, which is for example also in electromobility, but also in totally other parts, in cosmetics, and so forth.
So all in all, I think, we have not been dissatisfied, besides the effect of just acquiring and then moving into the crisis. A similar question was in the past Ciba which has changed now because the business – entirely the scope of the portfolio is much broader, it’s just in the centre of where growth is today. Kurt, could you comment also a little bit on that.
Frankly, Martin, sometimes I am wondering whether it would be better to just open up our books and present our Catalyst business as it is and then we don’t have that discussion, because I understand your frustration. You can look at two of our competitors, but not at our BASF numbers. We have the benefit of being able to do that.
We very, very thoroughly look at what is going on in our competitive environment and I can tell you that we do not lose any share, we do not lose any margins. We have first-class technology. We know exactly what platforms we compete for and how successful we are, where we win, why we win, if we don’t win, we know why. This is all very, very carefully monitored. And I think we are in an excellent position.
From a technology point of view, this was really a marriage in heaven so-to-say, BASF’s long-term commitment to catalyst research and the more development, market-oriented focus of Engelhard. Bringing this together has really yielded excellent results for BASF.
In terms of margins, the problem which we are facing here, we only look at EBIT. And you have to keep in mind that that business is burdened by very, very high depreciation levels due to the purchase price. If you take that into account, that business generates an excellent EBITDA. It competes on technology which is really something we like.
It’s based on, what we call, megatrends people want to drive, and we have some very nice secondary effects like now looking at the battery business which is pretty much an offspring of the old Engelhard activities which we developed further on and we are now in a position for instance to build a plant in Ohio for battery materials, something we had not envisioned a couple of years ago and something which, I would say, probably would have been difficult to implement for BASF without that step of acquiring Engelhard.
So all in all, we are very satisfied with the business. There is always homework to do, no doubt about it. We are constantly working on our cost base. And finally, I have to say, the business environment provides a little bit of more tailwind. The automotive industry has come back. We have an excellent position in Asia, we are market leader in Asia, if you take into account that we also run very large joint ventures in Asia, both in Korea and Japan. And we also see now that the chemical catalyst business is coming back finally. So I think we are in a good position to further grow and also have excellent earnings in that business.
Kurt, just to complement because Tim has asked this question with regard to debottlenecking and capacity creep. Chemical catalysts and this you don’t see in the catalyst business, is all about catalysts, running our process with higher efficiency, higher yield, less side products, lower energy. The key to success is within the Catalyst business.
Well the next question is coming from Martin Rödiger and then I have Jaideep Pandya.
Martin Rödiger – Cheuvreux
Martin Rödiger with Cheuvreux. Two questions, first on nutrition and health. You mentioned in your report that vitamin E showed lower margins. Is this a pricing issue? And what is going on with the other vitamins in your portfolio and in the market in general?
Second is on agro. I was a little bit wondering that price pressure obviously is accelerating while your volumes is moving up very, very strongly in Q4. And did you buy market share or what’s is going on in this very favorable environment where crop prices are extremely high?
Let me take the first one and Kurt will take the agro piece. With regard to nutrition and health, yes on the vitamin side, especially vitamin E, we had rather tough competition, especially in China which is still continuing, but improving. But this is very specifically in vitamin E, less so in the other areas, although we are optimistic going forward. Kurt?
I hope I got your question correctly. We had excellent volume growth in Q4. As we all know, Q4 is a relatively small quarter for the Ag business, but we had excellent, double-digit volume growth in Q4. And price pressure, I talked about this before. We experienced price pressure starting early in 2010, also as a clean-up side effect, too many inventories out there in the field. That doesn’t seem to be case in 2011. And we have a pretty good overall environment. As we mentioned before, soft commodity prices have gone up, farmers are more optimistic, so that all in all, the conditions in 2011 are much better going forward than what we experienced 12 months ago. You don’t look happy.
To be very clear, we are enthusiastic about the business, also going forward. So there should be no doubt.
Jaideep Pandya – Berenberg Bank
Yes, hello. Jai Pandya, Berenberg Bank. If I look at the growth rates in Asia which you have mentioned overall for different industries and then if I just look at the raw material situation, do you think there is a tangible risk right now, that if raw materials keep going up that we might see a little bit derailment of the economic development, especially in Asia where you are very bullish or let’s say you are very positive? That’s the first question.
And the second question is related to Performance Products. Here, pigments basically had longer lead times last year and the chain was quite empty. Would you think that the back orders have more or less gone now or would you think there are still a lot of back orders here?
And then, just on Cognis, I mean you are still guiding for a rough 3 billion. Fundamentally, this is a very good growth business. So I was a little bit surprised why the guidance remained the same when it is part of the BASF family now.
Let me just try to answer this, going directly into Cognis. Of course and we will come to you end as I said, end of March when we have designed the integration plan and then we will tell you about cost synergies and top line growth synergies. For the time being, what can we plan? At the end of the year, when the Cognis acquisition is not yet done and not knowing about the business, we are in the midst of talking with each other intensively how to make the best out of it and this takes a little bit time. So therefore, I would like to ask you to wait a little bit and you will get all kinds of information. I am here very optimistic.
Second, Performance Products, pigments, pipeline filling. I have to say not all intermediates are really filled up yet. This will happen over time, step by step by step. So there is still some work to do. And lastly, with regard to looking into the growth in Asia and the risk of having even shorter raw materials I would say, now let’s really focus on the raw materials which are important to BASF. This is first of all oil and it’s gas. These are the basics and then you can talk a little bit about precious metals. We talked before so we don’t have to touch it anymore.
I do not see a real shortage in oil and I do not see a real shortage in gas either. So the question is what portion is speculative? Now if you look into – let’s just talk again about Libya. If Libya really ought to stop the entire manufacturing, this is maximum 2 million barrels per day. I’m just saying, it has been 1.7 million barrels per day, I’m just saying maximum 2 million barrels per day. But there is still capacity out from the OPEC countries of about 5 million barrels per day. Now is this readily available right at the very
moment? Maybe not. So you may see a little bit more volatility going forward to this end. But principally, I think, there is an additional of $10 to almost $20 dollars per barrel risk.
And going forward, assuming that the situation in the Middle East would smooth down very substantially, I personally believe, that the oil price will go down. And this is why we have in our calculation $90 dollar per barrel. You may say crazy these guys. Never ever it will happen, not today, $114. How can this be? But we should go back and think about 2008 and the years before. There have been huge ups and downs. And we know speculation is a bubble, explodes. The way down is very, very fast. Now I am not predicting this at this very moment, to be clear, but going forward, I think it was reasonable to have these $90 dollars per barrel.
And if you think about what we had on average in 2010, this was $86 per barrel, $80 flat in average. Yes, right, the last quarter was $86 per barrel. This is very reasonable and reflecting the additional demand which comes out of Asia.
So now we’re moving on to the next question, Harald Gruber and then Jochen Schlachter.
Harald Gruber – Silvia Quandt Research
Yes, thank you. Harald Gruber, Silvia Quandt Research. I have two issues. The first is touching the cash flow. Can you just tell us what the net working capital requirement in 2010 would be without Cognis? I saw working capital requirements adjusted for Cognis, but not the creditors.
And secondly, linked to that, what is your perspective for 2011 when we consider capacities are mostly fully loaded, and therefore also incurring possibly not too much volumes for materials to be used versus 2010. So that is the percentage change, of course.
And secondly and finally, what’s your view on free cash flow in 2011, when you also take into account, of course, higher dividends pay out, too much efforts again on refinancing debt, and possibly lower networking capital requirements? Thank you.
Kurt? Would you like to start with regard to –
I try to start with the Cognis effect. Please keep in mind we acquired Cognis on December 9. So the affect on cash flow was minimal because when we consolidate this number doesn’t go into cash flow, but it goes into other positions within our cash flow statement as part of the essentially the acquisition price which we paid for the assets obviously.
And Cognis had, I have to say, a pretty good system in place how to manage their working capital. There is always room for improvement which we try to do. So all in all, I don’t see a special factor coming from the Cognis integration in 2011 with regard to cash needs.
Free cash flow, that’s obviously a little bit more difficult question to answer. First of all, we made a statement or a kind of forecast about earnings. You can calculate our depreciation levels based on the announced investments for 2011 and beyond.
Net working capital very much depends on business volumes obviously, but as I said before, our goal is to improve further on. There should probably be a slight increase of net working capital financing, but really a slight increase. And then it’s all about the investments which we have to deduct. So I would foresee that, again, we will have a very positive net free cash flow which we have had also over the past almost 10 years now, and that is our ultimate goal to generate cash for our shareholders at the end of the day.
But we don’t really provide that number here publicly. Actually, we have a plan in place.
Jochen please and then Jeremy Redenius
Jochen Schlachter – UniCredit
Jochen Schlachter from UniCredit. Two more technical questions on the debt side. What is your optimal level of short-term debt relative to your total debt load? Of course, this partly relates to your usage of the CP program in the US.
And the second question is given that you have a couple of bulky cash outflows to cover in the first half, do you plan to visit the bond markets in 2011?
Short and long term, we try to optimize our interest expense obviously and also our risk profile. What you see right now is that we have a lower share of short-term debt than we would like to have. That very much reflects what happened between 2008 and 2009. And you are aware that we went to the bond market in 2009 to raise additional capital at times of very high uncertainty.
You might say, with the benefit of hindsight, this was too early, we should have waited. But frankly, from our point of view, the margin for error was simply too small, too slim. So we said as soon as the markets opened up, BASF went to the market, raised some money with bonds which from today’s point of view, frankly are relatively expensive. But just think about the alternative if the markets had really collapsed. And I tell you in 2009 there were times when hard to understand today when people got really scared about what’s happening in the financial markets. So essentially, we have more bonds on our books than we probably should have and we cannot really take too much advantage of the short-term commercial paper program where we have excellent interest rates, as you can imagine.
And having said that, in 2011, I think, one bond expires and then we have to make up our mind whether to tap the bond market or whether to finance short term. This is very much a question of risk profile and interest rate expectations. And we will make that decision at that point in time when the bond expires.
So this bring us to Jeremy.
Jeremy Redenius – Sanford Bernstein
Hi, this is Jeremy Redenius from Sanford Bernstein. I have a question about operational effectiveness. When markets are tight, I understand demand may be strong. But from the supply side, has operational effectiveness declined in the industry? Are your assets able to produce less than they were before in some cases? And are you seeing this being an issue for your suppliers as well? Thank you.
Jeremy, this is a question which is very difficult to answer. I have to say if we look into our operations and maybe this has to do with the overall approach we have taken throughout the crisis. I think we have managed very, very well. Operational effectiveness and efficiency has increased. Availability of plants is there. We stopped, however, a few capacities which we will not bring back on stream. Others may do, but we will have those operations closed. A typical example we talked quite often in the past about SB dispersion plants around Europe where we closed down almost 40% of our capacity, which has been in surplus. Anyhow, we will not open this up.
Operational effectiveness; as a matter of fact, we have quite, I would say, improved. However, if we look into the industry, yes, maintenance work has been postponed in 2009. Therefore, you see a little bit more outages in the industry. And I really believe this will continue to a certain extent. What we really did to the year end also is really accelerating our maintenance. We also reduced it a little bit. Now we have accelerated this to the year-end also in order to have a super start in 2011 as a margin momentum and most of our business has been very, very positive. And some of our customers, especially in Performance Products, towards the year-end have even asked to postpone some of the sales into 2011 and helped us to do this.
Now, we’re coming to our five last questions. There is one from – actually I have one from Christian Faitz, I have one from Norbert Barth, there is two questions via email. So we’ll start with Bill and I’m taking one from the email.
Great thanks. So my two questions in some ways piggyback on Jeremy’s. I didn't quite catch what your outlook is for capital spending in 2011. And second, could you also talk a bit about capacity utilization? It is surprising that in 2010 the capital spending for PP&E was flat with the previous year. Perhaps you could explain to what extent your plants are operating at over 90% on a name-plate basis, therefore, where you have a pricing tailwind that could be expected in your markets and where capacity increases would be economically sensible. Thanks.
With regard to CapEx spending, just looking into one year does not make sense from our perspective. We always refer here to a five years' time frame. And looking into 2011 to 2015 it’s 12.6 billion what we anticipate. It is an increase. And most probably we will have an increase in 2011 compared to 2010. I am not talking about specific figures here.
With regard to this 12.6 billion, about 8.2 billion is coming from chemical activities, but we still have a very heavy load on our Oil & Gas business, infrastructure for gas transportation, which is the rest of it. So capacity utilization, you know that this is a question I am always refusing to answer because I think it’s the number which people fiddle around quite a bit. I have to say, yes, we have some product lines which are heavily loaded. You know about the shortages in acrylics; you know about the shortages in oxoalcohols, for example in plasticizers and so forth. But there are also others which are, let me say, a little bit more lose and long; for example styrene is long.
Looking into what you can read out of 90+ capacity utilization is awfully difficult because is this name plate? Is it real? Is it just convincing your competitor that you are bigger than the others? Does not make sense. So, yes, there are products which are short and will remain short going forward. There is pricing and margin momentum quite substantially. And there are others where we have to struggle a little bit going forward.
So now we pluck in a question from Chris Willis, a long-term follower of BASF. He says, “Jürgen, congratulations on a great run. You mentioned EUR600 million of cost savings from efficiency programs. How much of that was from legacy BASF businesses and how much was from acquisitions? Thank you very much.”
Talking about NEXT, NEXT does totally exclude acquisitions. We have acquisition management totally separate from our NEXT excellent target program which is basically looking into BASF. So what we will report on is for example Ciba integration where we have the cost target of 450 million, as you know. This is well on track. But this is totally separate from this EUR1 billion, which is not only cost, it’s also top-line growth in some areas, coming out from NEXT.
And the next question is from Christian Faitz.
Christian Faitz – Macquarie
Yes, thanks for taking my question again. Christian Faitz from Macquarie. The question is actually twofold. First of all, in answer to James Knight’s question you said that the car industry has problems accepting higher coating prices, for example for car coatings. Do you see this in other areas in your talks with the car industry as well? I am thinking about catalysts, plastics, whatsoever.
And the second product question in that context is, I mean if the car industry was to pass on all the price hikes they have to face, whether it’s the car supplier or the OEM manufacturer, to their customer, I would guess the average passenger car would go up from EUR20,000 to EUR25,000. Do you see that the customer is willing to accept this, especially in still rather shaky times? And how do you tackle your pricing structure in that way?
I think, generally speaking, the automotive industry is very often the most difficult one to cope with. Tradition of having longer-term pricing mechanisms. Therefore it is more difficult to push things through. The most important thing is, and this I mentioned before is, you need to offer something – innovation, cost savings. You know about our coatings process for example, where we save quite substantial amounts. And if you are able to share it, you then also can cover raw material increases.
On the other hand, I have to say, also with regard to catalysts, there are mechanisms to take this into consideration, especially on rare earths, what alternative do they have? If there are no rare earths any more, they need to accept the higher price. So I think they are learning together with us, but our solution is not just the price. It has to be a little bit more. It has to be added value and we will try very hard to achieve this, whether it is catalysts, whether it’s plastic materials for air-intake manifolds or for seats or what you have, or it is coatings.
There came one question in from Richard Logan, Goldman Sachs. If the oil price remains above $100 dollars per barrel during the whole of 2011, how confident is BASF that it can pass through higher raw material cost to customers excluding oil and gas?
Difficult to predict. We will do our utmost to achieve it. And there are quite a lot of product lines where this is possible. Sometimes, as Kurt has mentioned, it will take time. As we just talked about automotive, it may take us more than a quarter once in a while. But if you offer a differentiation potential with your products, you will be able to pass those things through. And market momentum for the time being is very strong. The other part is if oil price stays very high, inflation, as you said it with the car for example, it’s refrigerators, what you have will go up, inflation will go up and will eat into our overall growth rates. And then we have to look into what are the consequences out of it. It is too early to predict.
Now the final question from Norbert.
I have a question on Oil & Gas. This week there was a, I think a statement from the President of the Russia Gas Association saying perhaps the second stream of Nord Stream will not be built. Is there something behind that, or is it only a typical political discussion because you know better than me?
And secondly, there is also often speculation about your contribution on South Stream. Can you elaborate a little bit on that? And the third part of this is regarding the contracts with Gazprom about gas spot prices. So it looks that a German competitor has failed. Have you been more successful? Can you tell us something about that?
I just wanted to answer head on, but now these have become three questions head on, and I have to transfer this to Hans-Ulrich.
Okay. Let’s start with question number one. I also read the newspaper. Here is my conclusion based on the comment that North Stream will not be built. Either there was a mistake in translation or the statement was made very, very late at night. In any case, all I can tell you is, with respect to the first pipe, it's being built. 1,000 kilometers of pipe are laid. There is 200 kilometers left and we think that the first pipe will be laid completely some time in the month of April, which then will give us the time to test and there will be first gas in as planned on October 1st, 2011, for the first pipe. And I am also sure, since there is a significant part of the second pipe already laid, both in Russia and in Germany that will see gas in the second pipe by October 1st of the year 2012.
With respect to our contract portfolio, we have flexibility in our contract portfolio both on the Eastern side and on the Western side. With respect to competitors, I cannot comment what kind of conditions they have. But if you look at the result of our gas business in the fourth quarter, you see that, yes, we have 20% less EBIT compared to Q4 of the year 2009. But I’d say, overall, in a difficult environment we did okay.
Your third question was the South Stream question. That’s asked many, many times, come often. All I can say with respect to that is, there are no concrete projects with respect to South Stream.
A final from Laurent Favre in the back. Please state your question.
Thanks. Actually it’s two questions, on Oil & Gas and E&P. You have talked about significant sales growth in E&P for 2011. Now, with pricing from $80 to $90 dollars per barrel, you already get above 10%. So I am just wondering, excluding Libya, where you are factoring in production growth? And then I think you made a comment on not being able to write up assets on the E&P side. Is that comment, I guess, reflected in the reserves down 1% year on year? So for some assets you are now more positive than you were?
The second part of your question I will have to ask in a second again to specify that please for me. On the first part of your question, did we plan an increase overall in our oil and gas production in 2011? Yes, we did. Now, with Libya, we will have to see what the outcome will be and how long the production will be actually shut in.
And on the second part of your question, could you please be –
Write up assets be reflected as we do not have the right to write up, whether this is reflected in the reserves.
That will be reflected in the reserves, once we are able to show it in our reserves. At this point in time, the five activities that I have mentioned earlier that we found in the year 2010 are not yet included in the reserves.
So ladies and gentlemen, this concludes our conference this afternoon. But before I let you go, I have to give you a couple of important dates.
We will next report on our first quarter 2011 results on May 6th, 2011 at 8:30 in the morning. The reason why it’s so early, because this is also the day of our Annual General Meeting. And there we will have a conference call.
And then, secondly, I would also like to invite you to our next events. We will have an Oil & Gas Investor Day. That will take place on May 23rd in London and a couple of days later, on May 25th in New York.
And, furthermore, ladies and gentlemen, we will go West. Then we’ll invite you to our Annual Round Table on Agricultural Solutions on August 8th, 2011 in the US. I think it will be a great pleasure because Monsanto will join us for the day and also they have invited us that we can visit their field trials in Illinois. So you are all very welcome to join us for this.
So at this point, I think in the name of all of us I would like to say thank you for coming today and thank you for listening via the web. And should you have any further questions that we couldn’t answer right now, the entire IR team will be very happy to help you.
So, with this, we would like to say good-bye and have a good day.
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