BASF (BASFY) Q2 2016 Results - Earnings Call Transcript

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BASF SE ADR (OTCQX:BASFY) Q2 2016 Earnings Conference Call July 27, 2016 5:00 AM ET

Executives

Stefanie Wettberg - Head of Investor Relations

Kurt Bock - Chairman of the Board of Executive Directors

Hans-Ulrich Engel - Chief Financial Officer

Analysts

James Knight - Exane BNP Paribas

Tony Jones - Redburn

Paul Walsh - Morgan Stanley

Lutz Grueten - Commerzbank

Martin Rodiger - Kepler Cheuvreux

Jeremy Redenius - Bernstein

Mutlu Gundogan - ABN AMRO

Patrick Lambert - Raymond James

Peter Spengler - DZ Bank

Laurence Alexander - Jefferies

Markus Mayer - Baader Bank

Peter Clark - Societe Generale

Andrew Benson - Citi

Andreas Heine - MainFirst

Andrew Stotz - UBS

Martin Evans - JPMorgan

Laurent Favre - Bank of America

Lutz Grüten - Commerzbank

Operator

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operation. Welcome and thank you for joining BASF Analyst Q2 2016 Conference Call. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

This presentation may contain forward-looking statements that are subject to risks and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. Forward-looking statements may include, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation and supply and demand.

BASF has based these forward-looking statements on its views and assumptions with respect to future events and financial performance. Actual financial performance could differ materially from that projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, reader should not put any undue reliance on these forward-looking statements.

The information contained in this presentation is subject to change without notice, and BASF does not undertake any duty to update the forward-looking statements and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations.

I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.

Stefanie Wettberg

Good morning, ladies and gentlemen. Welcome to the BASF conference call on the second quarter of 2016. With me on the call today are Kurt Bock, Chairman of the Board of Executive Directors and Hans-Ulrich Engel, BASF’s Chief Financial Officer. We already posted a longer version of the speech on our website at basf.com/share. As in recent years, we are also publishing our new BSAF Factbook today; it is now available on our website.

With this, I would like to hand over to Kurt Bock.

Kurt Bock

Yeah, thank you, Stefanie and also welcome from my side to our Q2 call.

The macroeconomic environment improved slightly in the second quarter and there seemed to be some modest improvement in market confidence. The increase in oil price and a slight pickup in demand since the end of March underline these developments. We experienced robust demand from the automotive and construction industries. However, the macroeconomic situation remains fragile. In particular the UK’s recent Brexit decision has added to the overall economic uncertainty and market volatility. More recently, the situation in Turkey contributed to the political uncertainty.

Let’s look at the development in the regions. In Europe, we saw moderate growth across all sectors. Demand in North America was slightly lower than expected. However, the economic environment can still be characterized as robust.

Economic development in South America remained very weak and business confidence continued to be low. Brazil is still in a deep recession, although that appears to be leveling off. While fundamentals in Argentina improved, the country still suffered from weak export demand, fiscal consolidation and high inflation.

In Asia, we saw an upward trend since the second half of March and an overall improvement compared to the second half of last year. Growth in China remained below the high levels of previous years, but was slightly higher than we had expected at the beginning of the year.

Let me now highlight BASF’s business performance in Q2. Sales in the second quarter decreased by 24% to EUR14.5 billion, in particular due to portfolio effects of minus 16%. These were mainly related to the asset swap with Gazprom, which we completed at the end of September 2015. The disposed gas trading and storage activities had accounted for EUR3.0 billion of sales in the previous year quarter.

We were able to increase our sales volumes in all operating segments, except for Agricultural Solutions, which continues to face a tough market environment. In the chemicals business, volumes were up by 4%, mainly driven by Functional Materials & Solutions and Chemicals.

Sales prices declined by 7% following lower raw material prices. Currency effects amounted to minus 3%. The headwinds were in particular related to the U.S. dollar, Argentine Peso and Chinese Renminbi.

EBITDA declined by 7% to EUR2.8 billion. EBIT before special items came in at EUR1.7 billion, 16% lower than in the prior-year quarter. Significantly higher earnings in our chemicals business were driven by Performance Products and Functional Materials & Solutions. However, this could not compensate for the significant earnings drop in Oil & Gas.

Special items in EBIT amounted to plus EUR11 million. Disposal gains from divestitures, including the sale of our polyolefin catalysts business, were partially offset by expenses related to restructuring measures and other operating charges.

EBIT also declined by 16% to EUR1.7 billion. Income taxes amounted to EUR414 million. The tax rate of roughly 27% was at the level of prior-year quarter.

At EUR1.1 billion, net income came in 14% lower than in the second quarter of last year. Reported earnings per share decreased from EUR1.38 to EUR1.19 in Q2 2016. Adjusted EPS amounted to EUR1.30.

At EUR2.3 billion, operating cash flow in Q2 was above Q1 2016 but lower than in the prior-year quarter. Free cash flow increased by about EUR130 million compared to the prior-year quarter and came in at EUR1.3 billion. This resulted from lower payments for investment projects in the second quarter.

Ladies and gentlemen, let me highlight a few milestones of Q2. At the end of April, we started up our plant for the production of specialty amines in Nanjing. This asset complements our existing facilities in Germany and the U.S. and improves our ability to flexible our serve to customers in Asia Pacific.

In mid-June, we signed an agreement to acquire Albemarle’s global surface treatment business. Chemetall is a global technology and innovation leader in the metals surface treatment market and operates 21 production sites worldwide, 10 R&D locations and 24 sales offices. The company offers a strong strategic fit for our coatings business by complementing our current coatings portfolio. The acquisition will support our aim to grow profitably in downstream, innovation and solution-focused businesses.

The purchase price is U.S. $3.2 billion. Closing is expected by the end of this year. The transaction is subject to approval by the relevant authorities.

End of June, we closed the previously announced transaction to divest our polyolefin catalysts business to W. R. Grace & Co. The transaction comprises technologies, patents, trademarks and the transfer of production plants in Pasadena that’s in Texas, and Tarragona in Spain. The disposal gain is in a double-digit million euro range.

In early July, we started commercial production in the PolyTHF plant in Korla in Western China, which is part of our joint venture with Xinjiang Markor. The plant provides an annual capacity of 50,000 tons and complements BASF’s existing Asian production facilities in Shanghai and Ulsan in Korea and also in Europe.

In Korla, BASF and Markor are now jointly operating an integrated PolyTHF production, following the startup of the BDO plant in January of this year. BDO is a precursor of a PolyTHF.

And now Hans will comment on the performance of the individual business segments.

Hans?

Hans-Ulrich Engel

Yeah. Thank you, Kurt. Good morning ladies and gentlemen also from my side. Let me highlight the financial performance of each segment in comparison to the second quarter of 2015.

I’ll start with Chemicals, where our sales in the Chemicals segment declined considerably. Lower prices in all divisions, resulting from lower raw material prices, and negative currency effects, were the drivers for this development. In all divisions volumes grew, supported by our new capacities. High cracker margins in Europe and a significant improvement of the equity result from our joint venture of BASF YPC in Nanjing could not compensate for lower cracker margins in North America and continued margin pressure on key commodity product lines.

EBIT before special items therefore decreased considerably compared to the prior-year quarter. Despite the costs for planned turnarounds and the startup of new plants, fixed costs came in at the prior year level.

Sales in Performance Products declined significantly. The slight volume increase was more than offset by lower prices, currency headwinds and negative portfolio effects resulting from the divestiture of several businesses in 2015. Prices decreased due to lower raw material costs.

The competitive pressure in the hygiene business also contributed to the lower prices. Despite this, we were able to increase EBIT before special items by about EUR200 million or 65%, supported by lower fixed costs, improved margins and higher volumes.

In the Functional Materials & Solutions segment, sales slightly decreased. This was mainly driven by lower prices, especially in precious metals trading, as well as negative currency effects.

Sales volumes, however, increased by 5% due to continued high demand from the automotive and construction industries. EBIT before special items rose by 17%. All divisions contributed to this considerable increase, particularly Performance Materials.

Agricultural Solutions continues to face a challenging market environment, particularly in South America. Sales decreased considerably due to lower volumes and negative currency effects, while prices increased slightly. EBIT before special items declined considerably, mainly due to lower volumes.

Sales declined considerably in Europe, mainly as a result of lower sales volumes. This was particularly true for fungicides in Germany and Poland, where demand was dampened by high customer inventory levels and by the cool, wet weather in broad parts of the region.

In North America, sales were slightly below the level of the prior second quarter owing to negative currency effects and lower prices. We were able to raise volumes slightly, thanks primarily to increased demand for the fungicides Xemium and F500 in Canada and the United States.

Lower volumes in the insecticides and fungicides businesses were primarily responsible for the considerable sales decline in South America. These in turn were largely attributable to high inventory levels and the still critical situation of many customers, especially in Brazil. We were only partly able to offset negative currency effects with price increases.

Sales in Asia were slightly reduced by negative currency effects, which could not be offset by considerable volumes growth, especially of fungicides in China.

Looking at the first half of 2016, sales decreased by 9%, EBIT before special items came in 3% lower than in the same period of last year. For the remainder of 2016, we do not foresee a significant improvement in the agricultural market.

Sales in Oil & Gas decreased significantly, mainly due to the missing contributions from the natural gas trading and storage business following the asset swap with Gazprom. In addition, lower oil and gas prices contributed to the drop in sales. Higher production volumes could not offset this price decline.

The average price of Brent crude in Q2 2016 was U.S. $46 per barrel compared with U.S. $62 in the prior-year quarter. Gas prices on the European spot markets also fell sharply compared with the second quarter of 2015. Compared to Q1 2016, the average price of Brent crude increased by 34%, while gas prices on the European spot markets were almost stable and remained on a low level of about EUR13 per megawatt hour.

In the continuing oil and gas business, price and currency effects together were minus 18% in Q2 2016. A strong volume increase of 9% driven by higher production in Norway was not able to compensate for this.

Overall, EBIT before special items decreased from EUR431 million to EUR94 million. Strict cost-containment measures partly counterbalanced this decline.

Please keep in mind that throughout 2016, we will have lower earnings from our share in the Yuzhno Russkoye natural gas field. This year, the excess amounts received over the last years will be offset by lower volumes, as contractually agreed with Gazprom. Net income in Oil & Gas decreased from EUR250 million to EUR100 million.

Sales in Other decreased to EUR485 million. This was largely attributable to lower contributions from raw material trading. EBIT before special items declined to minus EUR212 million, down from minus EUR63 million. This was driven by a swing of over EUR200 million related to our long-term incentive program. While earnings in Q2 2016 were negatively affected by an increase in provisions, the prior-year quarter benefitted significantly from the release of provisions for our long term incentive program. Special items in Other amounted to plus EUR65 and were mainly related to portfolio measures.

Let me now turn to our cash flow in the first half of 2016. Cash provided by operating activities decreased to EUR3.3 billion. Please bear in mind our initiative to reduce net working capital in 2015. This resulted in an extraordinarily high cash inflow in the prior-year period. In addition, the divestiture of our natural gas trading and storage business led to a new seasonality with respect to our inventories and trade accounts receivable.

Cash used in investing activities declined by EUR1.3 billion to EUR2.0 billion. Payments related to tangible and intangible assets amounted to EUR2.0 billion compared to EUR2.8 billion in the first half of 2015. Acquisitions and divestitures resulted in a net cash inflow of EUR51 million.

Financing activities led to a cash outflow of around EUR1.8 billion, mainly due to the payment of the dividend.

Free cash flow amounted to EUR1.4 billion compared to EUR2.3 billion in the first half of 2015, reflecting the new seasonality and inventory reduction impacts that I mentioned for the first half of 2015.

Free cash flow in Q2 2016 exceeded the prior-year quarter by about EUR130 million and came in at EUR1.3 billion.

Finally, let’s look at our balance sheet. Compared to year-end 2015, total assets grew by EUR1.3 billion to EUR72.2 billion. This was mainly due to the usual seasonal increase in trade accounts receivable in our agricultural solutions business and higher deferred taxes due to the increase in pension obligations. Long-term assets were relatively stable at EUR46.5 billion.

Total equity decreased by almost EUR2.6 billion to EUR29 billion, driven by non-cash actuarial losses related to provisions for pension obligations following the decline in interest rates.

As a result of the lower interest rates, provisions for pension obligations increased by EUR3.3 billion.

Short-term liabilities increased from EUR14.2 billion to EUR15.6 billion due to a reclassification of bonds from long to short-term and a higher utilization of our commercial paper program.

Due to the dividend payment of around EUR2.7 billion, as well as the seasonal pattern of our business, financial debt rose by EUR700 million to EUR15.9 billion. Net debt increased by roughly EUR1.2 billion to EUR14.1 billion. Our equity ratio remained at a healthy level and amounted to 40%.

And with that, back to Kurt for the outlook.

Kurt Bock

Okay, I’ll now finish with the outlook for 2016. Our expectations for the global economic environment remain unchanged. We are confirming our 2016 sales and earnings outlook for BASF Group, as provided at the end of February.

Sales in 2016 will be considerably below prior year due to the divestiture of the natural gas trading and storage activities as well as lower oil and gas prices.

Excluding the effects of acquisitions and divestitures, we aim to increase sales volumes, supported by our increased capacities.

We expect EBIT before special items to be slightly below the previous year level due to significantly lower earnings in Oil & Gas. In the current volatile and challenging macroeconomic environment, we continue to regard our outlook as ambitious and particularly dependent on further oil price development.

With this in mind, we remain focused on cost-containment and restructuring measures, which have proven effective in the first half of this year. Our recent portfolio measures will contribute to the mid and long-term success of BASF.

And now, we are happy to take your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions]

Stefanie Wettberg

[Operator Instructions] I would now like to open the call for your questions. The first question comes from James Knight, Exane BNP Paribas.

James Knight

Good morning. Thanks of taking my question. In chemicals, did you have an influence in the second quarter from the condensate splitter in North America? You mentioned that in the first quarter the headwind on volumes. And I guess the follow-up would be if there was a negative influence, even you reported pretty good volumes in the second quarter, do you think any of that was driven by restocking? Thank you.

Hans-Ulrich Engel

Yeah, James, this is Hans. First one on your condensate splitter question, similar situation as in Q1 2016 due to the price of condensate in the U.S. and the way we won the cracker in Port Arthur. The condensate splitter did hardly run or in other words did not really run, first thing.

Second thing that you may want to keep in mind when you look at the Q2 results in chemicals is that we had turnarounds both in Ludwigshafen and Antwerp, it’s the steam cracker two and then the downstream plat that we have down for the usual turnarounds plus and the ammonia plant in Verbund. And overall, I would describe the demand situation in our chemicals segment as overall pretty healthy.

Stefanie Wettberg

The next question is from Tony Jones, Redburn. Please go ahead.

Tony Jones

Good morning, everybody. Thanks for taking my question. And I just wanted to understand the drivers R&D margin improvements and performance products to be better, so it looks like cost savings are taking effect but those volumes are up a bit and there must be some raw material gain in there. So on that point it looks like the EBIT margin is sequentially lower in Q2 and Q1. And so to help us understand what’s going on, could you perhaps wait each of those contributions in terms of how important they are and how should we think about them as we move into the second half of the year? Thank you.

Kurt Bock

Yeah. Hi Tony, this is Kurt. Couple of factors and you mentioned them all those volume growth that were certainly helpful. Overall we have an improvement in earnings of roughly 200 million. And I’d say half of that approximately is margin a quarter comes from volume and a quarter comes from cost containment measure.

Tony Jones

Great, thank you very much.

Kurt Bock

Welcome.

Tony Jones

Perhaps maybe any thoughts on what could reoccur in the second part of the year, I mean how much of raw materials still be there or will that fall away?

Kurt Bock

It’s fair to say also depends on the raw material cost development or price development, what you normally can expect is that some contracts are renewed and then customers in some cased might look for lower prices, but that’s too early to say. Our goal is obviously to continue the journey which we had in Q1 and Q2. We will certainly also continue with our cost improvement measures which are under full swing.

Tony Jones

Thank you very much Kurt.

Kurt Bock

Welcome.

Stefanie Wettberg

The next question comes from Paul Walsh, Morgan Stanley.

Paul Walsh

Yeah, morning guys. Thanks very much. Hi Kurt and Stefanie, just two questions please. The volume growth that you reported in the second quarter, have you seen anything so far in Q3, is that would warrant any concern given the increased volatility out there, automotive, construction, electronics and if more cyclical markets showing a bit more nervousness in supply chain. And if so, which divisions you are seeing that across?

Second question just around vitamin pricing in particular, obviously performance products had a great performance in the second quarter, vitamin pricing is up both A and E. Could you help me understand how sustainable you think that is and the fact is that are allowing you to secure those price increases where over recent years they’ve more or less out fell to gain traction? Thanks very much.

Kurt Bock

Yeah, thank you, Paul. I’ll start with the question, demand go into Q3. So our concern always has been you know it’s little bit restocking and maybe then it’s tempering off. So far we haven’t really seen this, so it continues into July, but it’s always at July and August are relatively weak month as we all know. So it’s really important how we get all of the summer at the end of August and best to always we say that at this in point it looks like it’s okay. But I repeated several times you know we had uncertainties due to the macroeconomic and political factors and that is probably too early to judge when those really might kick in. Hans?

Hans-Ulrich Engel

Yeah, hi Paul. Vitamin A and E up, certainly I would say that’s good news. Your question on how sustainable is that, I’d like to answer being cautious remains to be seen. We’ve seen nice price improvement in particular in E where we were below EUR5 Euros per kilogram in the beginning of the year. There were first rumors about Chinese competitors shutting their activities either in or down. It’s pretty that something happen there. But what this means and whether these capacities will come back to the market? Frankly we don’t know at this point in time. But the price developments in A and E are certainly welcome after many years where we’ve seen nothing but declines first half of this year the trend was up and we hope that this will continue.

Paul Walsh

That’s great. And just did you say Kurt that you needed the oil price to go up from here to guidance or not, so I just not sure if I interpreted that rightly or wrongly?

Kurt Bock

You know that would be over interpretation. We have said we continue to sink with the oil price with stay on average at 40 and our guidance is based on that $40 per barrel. If the oil price goes up that would be only welcomed.

Paul Walsh

Understood. Thanks a lot guys, thank you.

Kurt Bock

And also gas prices goes up.

Paul Walsh

Yeah, absolutely. Thank you very much.

Stefanie Wettberg

The next question is from Lutz Grueten, Commerzbank. Please go ahead.

Lutz Grueten

Yeah, thanks for taking my two questions. The first one is on volumes, China has announced that they on the G20 summit and there will be shutdowns in the region for I think two weeks or so and you also had the shutdown yesterday at least in lubricant. Is there anything we should expect on the third quarter regarding lower volumes and regards to do these things?

And the second question is on the T20 oil price which is quite helpful to get in the Factbook, so also any chance to get us in T20 regarding the gas price? Thank you.

Kurt Bock

Hi Lutz. I try to answer the question I guess, originally kind of difficult. External effort of T20, actually I am not aware of any upcoming products and shutdown for us in China, I don’t think this is any material impact that hasn’t been raised by anybody of our folks in Asia and in China in particular. And in lube, we had a little trip yesterday which has the resource by now. I don’t think this is material either.

Hans-Ulrich Engel

Hi Lutz, it’s Hand. On your gas price question, frankly if we could provide you with something that is reliable, we would do so. But when you look our gas portfolio, you see that we have regulated prices, we have non-regulated prices, we have Russian domestic prices, Russian export prices, we have Argentinean prices regulated then Argentinean prices on the new gas prices, we have market prices for production in Northwestern Europe. And frankly there is so much noise in that system that we don’t feel comfortable with providing clear guidance there with respect to gas price sensitivity.

Lutz Grueten

Okay, thank you.

Stefanie Wettberg

The next question is from Martin Rodiger, Kepler Cheuvreux. Please go ahead.

Martin Rodiger

Yes, on the outlook for the segments, that we hear you saying in Reuters that the solution business could be somewhat weaker this year than previously expected. Could even in this segment also drop this year as it was down 3% in the first half and I know that first half is much more important than the second half, do you speak to your previously given outlook for the solutions segment in spring that the EBIT will increase this year?

Kurt Bock

Okay. Yeah, hi Martin. Volume is weak in first half of 2016. We see some channel inventory going into the third quarter. Europe actually was a little bit disappointing mostly weather related I have to say. This could lead to the conclusion that it might become a little bit more difficult than previously anticipated to achieve the slight increase, so we kind of rule all that maybe earning in slight below last year’s numbers but that is really too early to say. The entire team is working very, very hard to make the numbers and you can also when you look at the cost structure, you can also see that self-help measures which we have implemented get traction, so we are working really hard, but you can rule it, completely be forecast today is certainly more ambitious than six months ago.

Martin Rodiger

Thank you.

Stefanie Wettberg

The next question comes from Jeremy Redenius, Bernstein.

Jeremy Redenius

Hi, it’s Jeremy Redenius from Bernstein. Thanks for taking my question. And I am just wondering if you could elaborate a little bit more in your - about China’s contribution to the business in the first half of the year versus the second half. In the report you talked about it, let’s say growing faster than you expected at least slowing less than you expected with the automotive benefiting, automotive industry benefiting from stimulus as well as housing market. And could you talk about how much that helped you in the first half and does that persist into the second half? Thanks.

Kurt Bock

Jeremy, I couldn’t hear exactly what you asked. This is about China, right?

Jeremy Redenius

Yeah, it’s right.

Kurt Bock

Okay, prefect. We had relatively good development in Asia in the first half and the Q2 as well. Actually local EBITDA is already at the level of last year’s entire year, which is not a development, couple of reason we have pushed more volume. I think this is possible and necessary, possible also because we have the capacity available in a couple of start-ups in particularly in China, and they get traction now and we have worked also very, very diligently on our cost base. So this is a combination of sectors, which helped to improve earnings considerably. China continues to grow, however a little bit slower than what we had previously expected. For our businesses, automotive we see good and healthy development overall, and this is obviously not just the equation of market development but also equation of market share development and in those businesses I think BASF is quite competitive and we are quite optimistic about pushing and moving these downstream businesses further ahead. We have - we continue to have in some of the upstream markets unsatisfactory modules obviously in China being the acrylic acid or the isocyanates. And this will take some time not just one year to be resolved.

Jeremy Redenius

Yeah thank you. Also I was trying to ask was the first half results boosted to some degree by stimulus measures that you might expect to fall-off in the second half of the year.

Hans-Ulrich Engel

Very, I cannot say yes, I cannot say no. So it’s very difficult for us to make a judgment call here. We are not aware that we have benefitted in any particular [indiscernible] from a specific incentive programs, there have been incentives in the automotive industry obviously, I don’t think it has had material effect.

Jeremy Redenius

Okay, thank you very much.

Stefanie Wettberg

The next question comes from Mutlu Gundogan, ABN AMRO. Please go ahead.

Mutlu Gundogan

Yes, good morning. I have a question specific one on your JV with Petronas Chemicals. I was wondering if you can update us on the progress of the Integrated Aroma Ingredients plant in Malaysia, whether that’s still on track. And also because of the soaring vitamin prices, is it possible to produce Vitamins on that site?

Hans-Ulrich Engel

On-time on-budget raises start up in the second half, so we are - our teams are working very, very hard, not to make this happen. We are quite satisfied with that development in Kuantan, yeah.

Mutlu Gundogan

And is it possible to produce Vitamins on that site or is it only for the - what is for the consumer chemicals.

Hans-Ulrich Engel

The idea is - also what we call the Citral value chain, based on Citral you could produce all kinds of - produce 50kg of chemicals including Vitamins. This complex in Asia is really directed at Aroma chemicals.

Mutlu Gundogan

Right, thank you.

Stefanie Wettberg

The next question comes from Patrick Lambert of Raymond James.

Patrick Lambert

Good morning everybody. Thanks for taking my questions. Very broad one, the short term regarding Brexit and have you had the occasion to discuss especially with OEM automotive markets, the short term trends in terms of production exposed to UK and potential impact on your overall exposure to automotive in the second half. In very short term, is there any increased volatility in terms of order patterns or projection that you have to do in automotive exposure? Thanks.

Hans-Ulrich Engel

We have no information at this point in time actually we will follow the same news obviously as you do, the automotive industry as you raid roll and connecting the UK and the continent are very, very important at this point in time. I am not aware of any possible changes. From our point of view we have production all over Europe, so as long as the cars are being produced regardless of where we should participate as BASF.

Patrick Lambert

But at this moment, you haven’t seen any cancellation of orders or different patterns of orders?

Hans-Ulrich Engel

No, we haven’t.

Patrick Lambert

Thanks.

Stefanie Wettberg

The next question comes from Peter Spengler, DZ Bank.

Peter Spengler

Hey, good morning gentlemen. I have a question on your new TDI Plant in Ludwigshafen and what’s the current status of this plant and maybe you can elaborate how you ramp up in the second half and how is the status with your second plant Schwarzheide which you want to close down at the moment.

Hans-Ulrich Engel

Well thanks Peter for the question. Both, obviously related as soon as we ramp up as quickly as possible, Ludwigshafen then we go into the shutdown mode in Schwarzheide. This is an ongoing process, it’s what I can say at this point in time, it’s going to happen any day.

Peter Spengler

Okay, thank you very much.

Hans-Ulrich Engel

And then the real question, the real question is how fast can you ramp up and we are aware 80,000 tons available in Schwarzheide which we then will discontinue, and then also we currently have exports from Asia into Europe for TDI. Those trade flows also well would change as soon as we have full capacity availability here in Europe.

Peter Spengler

Okay, thank you very much.

Hans-Ulrich Engel

Welcome.

Stefanie Wettberg

The next question comes from Laurence Alexander, Jefferies.

Laurence Alexander

Good morning. Could you flush out a little bit the volumes that you are seeing in construction, chemicals, and automotive catalyst? Are either of those seem disproportionate to share gains, and also can you give a little bit more detail on agricultural inventory levels, and whether you think that that can be worked down over the next season or whether it might take a couple of seasons to get worked through?

Hans-Ulrich Engel

Hi Laurence, this is Hans. Let me start with your question with automotive. We have seen overall Q1 and Q2 pretty healthy development in line with our expectation. Global growth in production roughly 3%, also distributed the way that we thought it would be very healthy development in North America and little bit slower in Q2 than in Q1 but still healthy, very weak in South America, good strong development in China, also positive development in Western Europe, Russia as South America weak and actually with lower volumes, even lower volumes than what we experienced there last year. With respect to share gain, I assume you are referring to other business. It is always difficult to say, are you winning or are you losing share but if you look at our automotive business overall, and how it has performed over the years, you see it with volume increases in excess of global car production, so that it gives you at least a very good indication of what’s happening with other business. On construction, good positive development in particular in North America, also solid development in Europe, and again I have to say confirming what we already said in the first quarter, there is construction going on again in the Southern part of Europe which we see quite positive. In Asia, we are experiencing there in particular in China, there have to be increase in construction activity in Q1, which may have been driven by stimulus measures. We have seen a certain decline in Q2.

Kurt Bock

And obviously, Laurence construction is a very local, very regional market. I will give you just one example in sort of where we are - financing is very, very tight and an important market for BASF and we have seen a considerable decrease in that market, just to give you a little bit of flavor here. Ag, different development, regionally as well for us, as I said before Europe is relatively slow, we believe they are relatively high channel inventories at least for fungicides in Europe that makes us a little bit cautious for Q3. South America, we don’t see any eminent recovery. Farmers are in relatively weak position and we have to be very, very careful also to manage our financial exposure, which we do quite smartly and again relatively high channel inventories. North America overall from our point of view okay, and Asia, good development for BASF this year but as you know Asia for us is relatively small market, because we don’t have extremely broad portfolio in insecticides which play a big role in MDI market.

Laurence Alexander

Thank you.

Kurt Bock

Welcome.

Stefanie Wettberg

The next question comes from Markus Mayer, Baader Bank.

Markus Mayer

Yeah. Good morning gentlemen. One add-on question to this TDI ramp up, can you update us on the ramp up cost I suppose is there any change there? And then secondly on your hygiene business and the chemical and metal, so how long do you expect this is a very competitive environment. Thank you.

Kurt Bock

I will maybe start with Markus with hygiene that well they are competitive for quite some time because it’s added capacity is essentially for superabsorbent and they were waiting in the market for quite some time. As you know some of the products have been commoditized over time for BASF. The solution has been innovation and we have launched a new product. Actually, we introduced it to the market, we are building currently the plant in Antwerp, a product which is called SAVIVA, if I remember correctly, I think we have introduced it at one of our Investor’s Day. Well you can clearly see there is a benefit, quite a big benefit for consumers and therefore also for the producer of the baby diet process and then we are currently pushing this into the markets. TDI start-up cost, I think in Q1 call, Hans said something like 200 million of start-up cost in chemicals and that encompasses everything from the start-up as well, and that number is still valid from today’s point of view.

Markus Mayer

Okay perfect.

Stefanie Wettberg

The next question comes from Peter Clark, Societe Generale. Please go ahead.

Peter Clark

Yes good morning, thank you. Hey, a quick one on CapEx is my first question. It’s down 30% in the first half, obviously you have guidance for the year, but just want to know the fact would it actually be toward 4 billion or below this year. And then the follow-up is actually to Tony’s question, I think quite casually you expect how the margin was made up in the performance products in advance, but I think the raw materials could have been in the quarter or so below the variable cost, just wondering assuming volumes are okay, you must be pretty confident then that all the work that you have done there has produced a structural step-up in the margin here, so you are pretty confident with a decent margin rate moving forward. Thank you.

Kurt Bock

Yeah with regards to the performance products, certainly objective to have a structural earnings leap, we are working extremely hard with the entire team to achieve this. We had a little bit, and I mentioned this little bit of tail wind from the margin development that will never be taken as granted. So the idea is to continuously improve the business further on and so far it worked quite modestly in Q1 and Q2. CapEx, the run rate is currently slightly below of what you would expect for the half of the year, 50% of the time is already behind us, but we also know that December and November are quite busy months for CapEx spending, the goal is to reduce this spending overall about 1 billion and I think we are on track to achieve that.

Peter Clark

Okay thank you.

Stefanie Wettberg

The next question comes from Andrew Benson, Citi.

Andrew Benson

Yes, thanks very much. Now you mentioned on the call about Ag not being for sale, does that include any sort of potential joint ventures. And I guess the other side, you presume that you would be interested in bold-on acquisitions at least in that area. And then secondly, if you just talk a couple of points on the tax rate, it’s a little bit of tough in first quarter and second quarter, if you can sort of provide some guidance there and also just on financials, you talked about one-off costs in terms of high shut down start-up costs, can you just try and quantify those for us in the second quarter and what’s the run rate for the full year. Thanks.

Kurt Bock

I think Andrew, Hans will take you through the question that relates to Ag. Even if I sound like a broken record, I mean we have a good business, a good performing business, always fluctuations, and we have seen this in Q2, underlying growth and earnings capabilities are very, very good. We have an excellent pipeline, we have some good product coming to the market where we are very, very optimistic about this, really will propel additional growth for BASF. Having said that, nevertheless we are certainly looking for bolt-on acquisitions, if possible if businesses will be offered to the market that needs to be seemed due to ongoing consolidations, there might be some opportunities and then we take a look as I am certain some other companies will do as well. Other than that I can’t really comment, and I have said the business is not for sale, again this sounds like a broken record, it has been towards stay true.

Stefanie Wettberg

The next…

Kurt Bock

If I may, Steffie. Of course, you also had a question on the tax rate.

Hans-Ulrich Engel

So Andrew this is Hans. On the tax rate, I think with respect to Q2, your comment is not really correct, because the tax rate in Q2 is almost exactly where it was in last quarter, 26.9 versus 26.8 if I remember that correctly.

Andrew Benson

Oh percentage sequentially, I am sorry.

Hans-Ulrich Engel

But you are absolutely right, when you look at the developments that we have between Q1 and Q2 as well as on a half year basis, and that volatility that you are addressing there that’s driven by the oil and gas business and in particular by all the Norwegian activities, where we had last situation where we were taxed, gains were taxed at 78% and this year as a result of extremely low oil prices there are no gains to be taxed, and in fact in Q1, we had a situation where there was actually a tax gain in oil and gas business. So factoring all of that together, I understand that it’s difficult to see the full development in the full picture, but that’s the underlying developments that we have in the oil and gas business.

Andrew Benson

Thanks and just if you can just shutdown start-ups and reduce the one off-ish cost, I have put it as my third question.

Kurt Bock

Shutdowns and start-ups cost but please understand that I don’t provide you with exact figures. Cost for turnarounds in Q2 of this year higher than in Q2 of last year. We have turnaround in - we had a turnaround in Ludwigshafen, Steam Cracker 2 and then downstream plants as well as the ammonia plant, Verbund.

Andrew Benson

Thanks.

Stefanie Wettberg

The next question comes from Andreas Heine, MainFirst.

Andreas Heine

Hi, yes the first is basically on the balance sheet. Looking on the financial data, 14 billion pension provisions, almost 10 billion in metal at the top of the end of this year, it’s quite a debt load, quite unusual for BASF. Could you put in context what your fire power for potentially external gross is, and whether if you still look for external gross and how important the A rating for BASF is, and if I may one second question on Functional Materials & Solutions, that was the sector, it was priced on the strong performance in the second quarter that was already on EBIT in the case, but the D&A was unusually behind, so that EBITDA was even better, so maybe you can explain a little bit how we have to model the D&A going forward, and how do you see this into the second half, is that something really special in the second quarter or is it really that good also going forward. Thanks.

Hans-Ulrich Engel

Andreas, this is Hans. I will start with your question on debt load. Actually if you look at our net debt end of Q2 2016 and compare it to net debt that we were at the end of Q2 2015, we are a billion lower, we were 15.1 billion net debt end of Q2 last year and are right now at 14.1 billion. Our A rating is important to us based on the guidance that both Moody’s and Standard & Poor’s did after we announced the chemical transaction. They did not feel compelled to change our rating. Pension, yes, we have seen an increase there, I think it’s roughly 3.5 billion compared to the end of the year. Well that’s basically also the same situation that we were in at the end of Q1 2015 where we also pension obligations in the range of 9.5 billion, 9.6 billion. And your follow-up, what happened with the interest rates during Q2 of this year, we saw a drop of interest rates in the main geographies where pensions are relevant for us, which Germany, the UK, Switzerland and the United States to the tune of 100 basis points. So we are pretty much in the same territory with respect to interest rates that we were in at the end of Q1 2016. Do you want me to do the other question also?

On your question with respect to Functional Materials & Solutions, yes there is a bit of an uptick in our depreciation and amortization. Please keep in mind there that we had a number of new plants that’s contributing to that and in addition - we had a smaller double digit impairments in one of the businesses in functional materials and solutions and that’s the explanation for the higher depreciation and amortization that we had in Q2.

Andreas Heine

Thanks.

Stefanie Wettberg

The next question comes from Andrew Stotz, UBS. Please go ahead.

Andrew Stotz

Yes, thanks for taking my question. Good morning. It was actually just around the costs, you’d mentioned fixed cost flat despite the startup cost of 200 million. I mean actually very impressive was the D side of that, so selling expense is down 7 and general down 10 and R&D, which is very unusual to be a step down double digit year-on-year. So I guess my question is fairly simple, are we getting to a level now where you sort of done what you can before you start to maybe move into some of the muscle?

Hans-Ulrich Engel

It’s a good question, but I don’t think we have come to a point where cost management reaches a limit, the numbers. Please keep that in mind. Also include a little bit of a currency effect that needs to be taking all, but nevertheless cost has come down and we will continue to do so. I don’t think there’s any reason to be less aggressive going forward.

Andrew Stotz

Specifically on R&D, can I just follow up on that? That’s unusual to see down that much and obviously you’ve got a commitment to grow R&D in line with sales or keep the ratio constant. So should I guess that’s a slight backup?

Hans-Ulrich Engel

Yeah, we don’t think that R&D is going to grow in 2016. At the end of the day, it’s really good. It again depends on currency exchange rates. We have a couple of programs in place to take cost out and we have also some structured changes. One is, for instance the lower spending on plant biotech, which is a U.S. operation by and large. So there’s a little bit of a structure effect, but going forward R&D cost probably stay where they are in nominal terms.

Andrew Stotz

Okay, thank you.

Hans-Ulrich Engel

Welcome.

Stefanie Wettberg

We’ve two more questions. First one comes from Martin Evans, JPMorgan.

Martin Evans

Yeah, thanks. Is this time of the year when the industry to come and finish the offence [ph] focuses on August and potential customer shutdowns, plant shutdowns as we saw particularly in auto obviously. And have you had any indication so far as to whether this year will be sort of any better or worse than last year for your customers. I’m assuming given that in some areas the volume situation is a little bit better, you’d anticipate a shutdowns will be any longer than last year. Thanks.

Hans-Ulrich Engel

Yeah. Hi, Martin. As I said before July so far - it’s where we expected it to be. There’s a typical some are alive very much remember the automotive industry obviously, but we haven’t seen anything special here. We still believe that the automotive industry this year will grow globally by something like 3%, 2.6%, so from our point of view this is still moving in a right direction.

Martin Evans

Thanks.

Hans-Ulrich Engel

Welcome.

Stefanie Wettberg

We have a follow up question from Martin Rodiger, Kepler Cheuvreux. Please go ahead.

Martin Rodiger

Thanks. On human nutrition, you mentioned volumes went down. Can you tell us the background for the lack of demand in human nutrition?

Stefanie Wettberg

Sorry, could you repeat?

Martin Rodiger

In your quarterly reports, you mentioned that the volumes in human nutrition went down in the second quarter. Can you tell us about the background, why demand was so poor for human nutrition?

Hans-Ulrich Engel

They’re trying to find the respective number for the volume development in that particular business and I don’t have it hand. Yeah, some timing effect obviously with some shut downs, shift in Q3, this is the turnaround we had in nutrition [ph], a big turnaround as we speak about it, I start to remember what’s happening. There’s a big turnaround in nutrition [ph]. It is again the trial plant, which was down for quite some time, of course we all see every five year turnaround and that is only one of the best explanation for that development, yeah.

Martin Rodiger

Thanks.

Stefanie Wettberg

Now, we have second line, Laurent Favre with his question, Bank of America. Please go ahead

Laurent Favre

Yes, good morning gents. Good morning Steffi. My questions are related to the Chemetall acquisition. I was wondering if you could flash out where you see the strongest growth opportunity beyond the underlying market growth in autos. You do think this is a market that can actually grow the autos industry, so it’s first question. And the second question is on the synergy that you see from that deal. Basically I’m wondering what kind of synergy you expect, so that return on capital on the deal approaches cost of capital for BASF. Thank you.

Hans-Ulrich Engel

Laurent, I think your question is Chemetall, as I said in my little speech we believe this is a strategically very nice fitting acquisition for BASF. The price didn’t come cheap, so we had to match it very, very successfully obviously to create value for our shareholders. It’s a very well-run company and operation. We see certainly opportunities to grow the business apart from beyond of what we’ve seen so far especially because you can combine the surface treatment technology with the our coatings technology and this is quite an important trend in the automotive industry, how to take out additional - at the end of the day additional layers of the coating process and there the surface treatment also plays an important role. Please keep in mind that this is not just about auto. Auto is important, but Chemetall is active in many - sometimes relatively small, but also very important in very attractive markets like the - I’ll give you one example, aircraft construction industry where they’re very important for treating the blades for the turbines of aircraft and this is really high tech and interesting and fascinating technology.

Synergies, we have set industry typical. You can best assure that BASF goes through each and every potential synergy, but we haven’t even yet closed the deal. We just signed it and published it, so I think it’s also fair to wait for the process to start and together with the new collogues which will join us hopefully as soon as possible and as soon as the authorities have - wave through the deal.

Laurent Favre

If I may, can I ask you something that’s changed from your perspective in this business since the time it was for sale a few years back. Is it just that you didn’t quite sense the package of Chemetall plus lesion or has something changed within the Chemitall business?

Hans-Ulrich Engel

As I said, it’s a well-run company, but I’m not aware that it has - ever has been offered separately, that I’m not aware. Now, it was offered separately and that gave us the opportunity to go after it.

Laurent Favre

That’s very clear. Thank you.

Hans-Ulrich Engel

Thank you.

Stefanie Wettberg

We have two more follow up questions, which we would take and then conclude the call. The first one is from Patrick Lambert, Raymond James. Please go ahead.

Patrick Lambert

Yeah, thanks for the follow up. Just oil and gas, if I treat the gas distribution contribution, were you a bit positive on the production and exploration? Thanks.

Hans-Ulrich Engel

Were we positive in Q2, is that the question?

Patrick Lambert

Yeah.

Hans-Ulrich Engel

In the exploration and production business, yes we were. Yeah, we were.

Stefanie Wettberg

Okay, that was a short one. So now the last and final question is from Lutz Grüten, Commerzbank. Please go ahead.

Lutz Grüten

Yeah, thanks again and also a short one on MDI, the joint venture you have with Huntsman and its local partners in China and together the capacity to form 80,000, is it still on budget, is it still on time? I think you got all the permissions, but would be great to get an update on the timing here. Thank you.

Hans-Ulrich Engel

Sure, this is a joint venture operation, has quite a few partners as you’re aware. I would refrain from making a comment here too. From our point of view I think this would be [indiscernible] Huntsman.

Lutz Grüten

But you’ve got the majority with Huntsman at 70%, haven’t you?

Hans-Ulrich Engel

We are working on the project, yeah.

Lutz Grüten

Okay, thank you.

Stefanie Wettberg

Ladies and gentlemen, this brings us to the end of our conference call. We will report on our third quarter results on October 27. In this regard, I would like to inform you that the German legal requirements for financial reporting in Q1 and Q3 have been eased. From October 2016 onwards, we will publish quarterly statements for the first and the third quarter based on this new legislation. These statements will be more condensed, but will of course continue to provide you with the relevant financial information. The formats of the half year and full year financial reporting will remain unchanged and our analyst conference call will also take place as usual. One final reminder, BASF will host a Roundtable Asia Pacific on September 23 in London. If you have not yet registered and planning to attend, please send us the completed registration form by July 31. Thank you for joining us today. Should you have any further questions, please contact the member of the IR team and we will be happy to help you.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephones. Thank you for joining and have a pleasant day. Good bye.

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