Annual Press Conference 2006

BASF in top form:
Record earnings in 2005, confident outlook for 2006

1. We are investing in growth markets. In Asia, our new Verbund site, which we plan to expand, successfully started operations in 2005.
   
   With our partner Gazprom we are investing in the security of gas supplies and hence energy supplies to Europe. We are extending our cooperation along the entire value-adding chain: From the production of gas in Siberia, its transport – for example via the North European Gas Pipeline now under construction – through to marketing in Europe.



2. We are making our portfolio more resistant to cyclicality by adding businesses that are even more customer-oriented and driven by innovation and growth. Examples here are:
   
   
   • the acquisition of Merck’s global electronic chemicals business;
   • the purchase of the Swiss fine chemicals company Orgamol, through which we are strengthening our contract manufacturing business for the pharmaceutical industry;
   • the planned acquisition of Engelhard Corporation in the United States, which would make us one of the world’s leading producers of catalysts; and
   • the planned purchase of Degussa’s construction chemicals business, which would ideally complement our performance products business.
   
   All of our acquisitions are subject to strict financial discipline. If they do not contribute to profitable growth, they will not be pursued further.
   
   
3. We are sharpening our customer focus. In Europe, we want to continue to grow faster than the market. That applies both to our established market in Western Europe as well as to the dynamic Eastern European market. We are further intensifying cooperation with our customers so as to provide our business partners with a competitive advantage.
   
   In North America, we aim to increase our efficiency in marketing our products and services. Through our associated Commercial Effectiveness Program we plan to increase our income from operations by $200 million per year by 2007.
   
   Our growing Verbund of world-scale production plants in Asia guarantees just-in-time supplies of cost-effective standard chemicals, tailor-made specialties and system solutions for our customers. We want to expand in this region. As a result, approximately 20 percent of our commitments for investments in 2006 are targeted at Asia Pacific.



4. We are expanding our Research Verbund. Innovations that are driven by customer needs and technical progress are essential for profitable growth. We are therefore further expanding our research and development activities. In 2005, we increased R&D expenditures by 8 percent. In 2006, we want to raise spending by a further 9 percent to €1.15 billion. We therefore plan to create approximately 180 additional positions for research scientists worldwide.
   
   To open up new business opportunities for us and our customers, we plan to invest about €800 million between 2006 and 2008 in research in our five growth clusters – energy management, nanotechnology, white (industrial) biotechnology, plant biotechnology and raw material change.

• Europe (plus 11 percent),


• North America (plus 17 percent) and


• Asia Pacific (plus 23 percent).

1. In the past year, we succeeded in stabilizing our margins at the high levels already seen in 2004 – despite the subdued economic environment in Europe and substantially higher raw material costs.



2. Cash provided by operating activities before external financing of pension obligations was again high at €5.25 billion. Even after taking into account capital expenditures of €1.95 billion, we generated a free cash flow of €3.3 billion that offers us plenty of scope.



3. BASF Group’s total assets remained virtually unchanged. The higher working capital due to growth of our business and the stronger U.S. dollar was more or less compensated for by the transfer of €3.7 billion of liquid funds into a Contractual Trust Arrangement.



4. Our shareholders are directly participating in the successful development of 2005 through the continuation of our share buyback program and the proposed increase in the per-share dividend by 30 euro cents to €2.00.



5. I would also like to announce that we have successfully implemented Section 404 of the Sarbanes-Oxley-Act – one year ahead of the deadline set by the SEC.

1. The accounting of pensions at BASF is performed in accordance with IAS 19, whereby actuarial gains and losses are netted out immediately against retained earnings in the period in which they occur, and do not flow through the income statement.



2. For qualifying assets with a lengthy construction period, we capitalize interest on the project expenditures in order to avoid a difference between IFRS and U.S. GAAP. The capitalization of this construction period interest is obligatory under U.S. GAAP.



3. IFRS requires derivatives to be accounted for at fair value and shown as other assets and liabilities on the balance sheet. Changes in fair value will generally affect the income statement. Under German GAAP, gains in market value of swaps and other forward contracts cannot be recognized until realization, whereas losses must be immediately recognized.



4. Goodwill was formerly amortized over its expected useful life, according to German GAAP. According to IFRS goodwill is to be examined annually. According to impairment tests carried out, impairment write-downs were not necessary.



5. Starting 2005, expenses in the Oil & Gas segment related to exploration for oil and gas deposits and to dry holes are recorded as other operating expenses rather than as research expenses.


As you can see, we have aimed to increase transparency for all of you, as well as fulfilling accounting requirements.


Now to BASF’s results:

A look at the business year 2005 shows that sales and income from operations developed very positively in all four quarters.

We were able to increase sales by €5.2 billion to €42.7 billion in challenging market conditions. Income from operations before special items increased by 17 percent to €6.1 billion. After deducting taxes and minority interests, we posted net income of €3 billion. This represents an increase of 50 percent in comparison to the previous year.

Apart from a sustained, satisfactory increase in sales volumes of 2.5 percent, this positive development is due primarily to higher prices in nearly all areas of our portfolio.

Currency effects once again played an important role in the fourth quarter, but had only a minor overall impact on sales for the full year.

Income from operations was €5.83 billion in 2005, and was €308 million less than before special items.

Of this amount, €295 million was incurred for restructuring measures chiefly related to measures to increase efficiency at the production site in Ludwigshafen, Germany, as well as the partial closure of the site in Feluy, Belgium. Other special charges were related to the restructuring program for the Fine Chemicals and Intermediates divisions, for example, for the closure of a vitamin C plant in Grenaa, Denmark, as well as plants for THF and PolyTHF® in Yokkaichi, Japan.

The financial result was €96 million – an improvement of €942 million. This reflects among other things the gains from the sale of our 50 percent stake in Basell, which closed in the third quarter of 2005. In contrast, write-downs on participating interests were necessary in 2004.

Income before taxes and minority interests was €5.9 billion and net income was €3 billion. Both values show once again significant increases in comparison with the previous year.

The tax rate, a figure that still remains difficult to interpret at BASF, was 46.5 percent compared with 50.9 percent in 2004. This was due above all to the tax-free gain from the sale of our stake in Basell. The relatively high overall tax level is due to taxes on oil production that are noncompensable with German corporate income tax. These taxes were in excess of €1 billion in 2005, compared with about €670 million in 2004.

BASF’s total assets rose slightly by €220 million to about €35.7 billion. The increased working capital due to higher sales and currency effects was offset by the transfer of €3.7 billion in liquid funds into a Contractual Trust Arrangement (CTA).

Net debt rose from €1 billion to €2.85 billion due to the continuation of the share buyback program and the transfer of assets to finance pensions externally.

The equity ratio rose to 49.1 percent from 46.8 percent as a result of higher earnings and despite the buyback of further shares.

Cash provided by operating activities was €5.25 billion. The increase of 13.3 percent is above all due to higher earnings. According to IFRS, the €3.7 billion in assets transferred to the CTA must be deducted from the above amount. This one-time impact on the cash flow must also be seen as an annual relief of about €200 million in subsequent years because the assets in the external trust will cover the pension payments.

We were able to further reduce net current assets despite the increase in business volume. This underlines our ongoing efforts to optimize our working capital. The number of days of sales outstanding in the fourth quarter was 53 compared to 54 in the same quarter a year earlier. We were able to reduce the number of days of inventory valued to 68 in the fourth quarter 2005 from 74 in the same quarter of 2004.

“Miscellaneous items” primarily reflects the reclassification of the gain from the sale of our stake in Basell, which is included as part of cash inflows in cash used in investing activities.

As in the past years, additions to tangible and intangible assets were below the corresponding level of depreciation and amortization. The net effect of acquisitions and divestitures in 2005 was a cash inflow, mainly due to the sale of our 50 percent stake in Basell.

Dividend payments to shareholders of BASF Aktiengesellschaft totaled €904 million, while shareholders of fully or proportionately consolidated companies received €78 million.

Finally, we have returned €1,435 million to our shareholders in the form of share buybacks. In 2005, we bought back a total of 26.06 million shares at an average price of €55.05. As a result, we have reduced the number of outstanding shares by 19.8 percent since starting the share buyback program in 1999.

In 2006, we have continued with the €1.5 billion share buyback program that we announced in April 2005. Between the start of this year and mid-February, we bought back just under 5.4 million shares for €339 million, and therefore completed the program as planned. We will request further authorization to repurchase shares at the Annual Meeting in May.

The overall positive development in earnings has led to a further improvement in our most important key ratios.

Earnings per share, which were already strong in 2004, once again rose significantly from €3.65 to €5.73. The earnings per share according to U.S. GAAP were €5.83 compared with €3.39 in 2004. The convergence of EPS according to the different accounting standards reflects our efforts to take U.S. GAAP into account as far as possible in the framework of IFRS accounting and valuation options. We expect – like all companies that are listed on U.S. stock exchanges – that the Securities Exchange Commission will recognize IFRS in the foreseeable future. We consider the current coexistence of German GAAP, tax methodologies, consolidated statements under IFRS and the reconciliation to U.S. GAAP to be far from ideal.

Getting back to the key ratios.

The return on assets rose to 17.7 percent from 13.2 percent in 2004. This is also good news for our employees, since their performance-related bonuses largely depend on whether we earn a suitable return on the capital we employ.

We increased EBIT after cost of capital – our key performance indicator – by €370 million to €2.35 billion. As in the previous year, we have therefore achieved our goal of earning a premium on our cost of capital and have created value for our shareholders.

Let me close by taking a look at the performance of BASF shares: Our shares once again performed very well in 2005, increasing by 26.2 percent. They outperformed the Dow Jones EURO STOXX 50 index, which rose by 24.3 percent. The DAX 30 index rose by 27.1 percent in the same period.

An investment in BASF shares is also worthwhile from a long-term perspective. Shareholders who invested €1,000 in BASF shares at the end of 1995 and reinvested the dividends would have increased the value of the holding to €5,343 by the end of 2005. This increase of 434 percent corresponds to an annual return of 18.2 percent. This is significantly higher than the corresponding return for the EURO STOXX 50 of 11.2 percent and for the DAX 30 of 9.1 percent.

So much for the past. As you can see, the foundations for our present plans are solid.

Dr. Hambrecht will now provide you with some more details on the outlook, which I’m sure you’re all waiting for.

• Global economic growth of 3.2 percent and an increase in global chemical production (excluding pharmaceuticals) of 3.0 percent


• An average oil price of around $55/barrel for Brent crude in 2006, with a downward trend from the second half of the year


• An average euro/dollar exchange rate of $1.25 per euro

• The brilliant colors of the teams’ strips are provided by Bafixan® colorants from BASF.
• Optical brighteners like Ultraphor® make white jerseys – like those worn by the German team – whiter than white.
• Non-skid studs made from Elastollan® provide safe traction.
• And the leather chemical Densodrin® keeps feet dry in rainy weather.


The winner of the 2006 Soccer World Cup is still a matter for speculation. But you can rest assured that we are again aiming to be chemicals world champion in 2006. In the coming year, BASF’s team will do its utmost to ensure that The Chemical Company stays ahead of the game.

So now, I’m going to pass the ball to you for your questions.