 |
| |
August 2, 2006
Half-Year Conference, Ludwigshafen |
Dynamic BASF on course for profitable growth
- Strong volume demand: Sales rise to €12.3 billion (up 16%)
- EBIT before special items of €1.9 billion (up 15%)
- Integration of new businesses proceeds smoothly
- Challenging business environment for Agricultural Products & Nutrition
- Optimistic outlook for 2006: Sales and earnings above previous year’s strong level
Speech by Dr. Jürgen Hambrecht, Chairman of the Board of Executive Directors of BASF Aktiengesellschaft, Ludwigshafen
Speech by Dr. Kurt Bock, Chief Financial Officer of
BASF Aktiengesellschaft, Ludwigshafen
The spoken word applies!
|
 |
Ladies and gentlemen,
Welcome to our telephone conference. Today, we are pleased to present new records for the second quarter and first half of 2006. We once again exceeded the previous year’s very strong results. Moreover, we reached important milestones on our path to profitable growth in the first six months. Key events were the purchase of Degussa’s construction chemicals business, our takeover of Engelhard Corporation and the acquisition of Johnson Polymer and CropDesign. These portfolio expansions are important elements of our strategy of making BASF even more resilient to cyclicality.
The business environment was favorable for us in the first half. The economic situation has improved, the outlook seems positive. Asia is growing rapidly, especially in China, India and Korea. The economic climate is stable in the United States. And domestic demand in Europe, and in the meantime in Germany, is on the upturn. There are virtually no signs of the usual summer lull.
Continued strong volume demand for our products confirms the enormous confidence of our customers in BASF – The Chemical Company. Our strategy is one of value over volume. We prefer profitable businesses instead of trying to gain market share through low prices. We therefore offer our customers a competitive edge through innovative products and system solutions that help make them more successful.
Risks, however, persist in the form of persistently high oil prices, which have again reached unprecedented levels. At the same time, the markets are troubled by geopolitical tensions – in particular in the Middle East. Record costs for raw materials have further increased the pressure on our margins. Sales prices increases were therefore necessary in many product lines. Price increases to reflect rising costs will also be necessary in the future. To further improve BASF’s market position, we will continue to optimize our portfolio, strengthen our service offering with innovations and continue with our restructuring and cost reduction measures worldwide.
Please let me now comment on our results:
- Second-quarter sales climbed 16 percent to €12.3 billion and income from operations (EBIT) before special items rose 15 percent to €1.9 billion.
- Cumulative sales in the first half of 2006 amounted to almost €25 billion, or 20 percent more than in the same period of the previous year. Compared with the first six months of 2005, we increased EBIT before special items by 17 percent to approximately
€3.8 billion.
I would like to thank the entire BASF team, which put in another outstanding performance in the first half of this year. Thanks are due in particular because a lot of additional work was needed as a result of our acquisition projects. The rapid and efficient integration of the acquired businesses will continue to demand a great deal from us in order to ensure that they bring the optimum benefit to BASF.
|
|
BASF reiterates its optimistic outlook for full year 2006
We expect the economic situation to continue to develop positively. In the chemical industry, we anticipate global growth of more than 3 percent, although this will differ considerably from region to region. We want to grow faster than the market. For the full year, we expect an average euro/dollar exchange rate of $1.25 per euro. As a result of persistently high and increased crude oil prices, we are increasing our forecast for the annual average to $65 per barrel of Brent crude.
In view of the strong business performance in the first half of 2006, we remain optimistic for the full year: We expect to post significantly higher sales and higher EBIT before special items compared with the previous year’s strong level.
Furthermore, our acquisitions will contribute to sales in the second half, bringing total sales to considerably more than €50 billion. We anticipate an additional contribution to EBIT before special items.
I have already mentioned possible risks.
I will now hand over to Kurt Bock, who will provide more details about our second-quarter results.
|
|
[Speech by Kurt Bock]
[chart 1]
Ladies and gentlemen,
BASF’s sales and earnings continued to develop positively in the second quarter.
At €12.3 billion, net sales to third parties were up 16 percent compared with the second quarter of 2005.
Income from operations, EBIT, before special items was €1.9 billion – €250 million more than in the same period of the previous year.
[chart 2]
Compared with the second quarter of 2005, we also increased net income significantly to €920 million.
In the second quarter, we again increased volumes by 7 percent. The price effect was also 7 percent, which was below the average of recent quarters.
Price levels are already high in some markets, making it more difficult to increase prices further. Nevertheless, costs for raw materials and energy have risen further and we will strive to pass on these increases in the form of higher sales prices in the coming months.
In the Oil & Gas segment, however, persistently high oil prices had a positive effect on sales and earnings.
Acquisitions and divestitures contributed only 2 percent to sales in the second quarter. This was due primarily to the acquisition of Engelhard Corporation as of June 6, 2006, which brought additional sales totaling €288 million. The 150 companies acquired from Engelhard are already taken into account in BASF’s consolidated financial statements.
One consequence of this acquisition is the creation of the new Catalysts operating division, which is reported as part of the Chemicals segment. Engelhard’s non-catalyst activities – primarily pigments for a wide range of applications – have been assigned to the Functional Polymers, Performance Chemicals and Fine Chemicals divisions.
EBIT amounted to approximately €1.8 billion in the second quarter and was thus 13 percent higher than in the same period of the previous year. We recorded net special charges of €113 million. This figure includes special income of €66 million resulting from the reduction of a fine imposed by E.U. that we reported as a special charge in 2001.
[chart 3]
Special charges totaled €182 million. Of this amount, €65 million was related to restructuring measures that will be defined in the further course of the year and will then be assigned to the relevant segments when the measures are implemented.
The acquisition of Engelhard Corporation in the second quarter resulted in special charges of approximately €90 million. About €50 million was associated with the expected cost of integrating the business into the BASF Group. The remaining €40 million was associated with the use of step-up on inventories. This is purely a valuation effect.
The financial result was positive in the second quarter. At the end of 2005, we transferred the pension obligations of BASF Aktiengesellschaft to an external contractual trust arrangement. This had the effect of reducing net financing costs for pension obligations. In addition, we recorded proceeds from the sale of securities that were held as part of our liquidity and which have now been tendered into a public offer.
Net income rose by 18 percent to €920 million. At 47.6 percent, the tax rate in the second quarter was slightly higher than the rate of 46.3 percent recorded in the same period of 2005. The further increase in the earnings contribution from the Oil & Gas segment led to higher taxes for oil production that are non-compensable with German corporate income tax. These taxes amounted to €383 million in the second quarter compared with €267 million in the same period of 2005.
Further share buybacks in the last 12 months contributed to a 23 percent rise in earnings per share to €1.82.
While the recent acquisitions will not have a noticeable effect on the income statement until the second half, their impact on the balance sheet is already visible as of June 30.
[chart 4]
The increase in the balance sheet total by €8.8 billion to €44.5 billion is due exclusively to the acquisitions – in particular Engelhard Corporation, Degussa Construction Chemicals and Johnson Polymer. This also shows that we continue to focus on further reducing cash tied up in assets, in particular in current assets.
The net effect of acquisitions and divestitures in the first half of 2006 resulted in additions to assets amounting to €10.4 billion. This figure comprises €3.3 billion in intangible assets,
€1.3 billion in tangible fixed assets and approximately €5.6 billion in short-term assets.
The rise in short-term assets results primarily from the acquisition of Degussa Construction Chemicals and Johnson Polymer. In accordance with the purchase agreements, we transferred the purchase price – which totaled about €3 billion for both businesses – to the sellers on June 30. The rights concerning the transfer of the businesses are recorded in the balance sheet as of June 30, 2006 under “Other receivables.” The companies acquired in the course of these two acquisitions will be included in BASF’s consolidated financial statements with effect from the closing date of July 1.
The remaining amount is almost entirely associated with the acquisition of Engelhard Corporation. As part of a preliminary purchase price allocation, the purchase price for the shares of Engelhard Corporation of $4.8 billion or approximately €3.8 billion was allocated to acquired assets and liabilities.
Intangible assets, which rose by €3.3 billion as a result of the acquisitions, contain goodwill amounting to €2.1 billion that cannot be amortized under IFRS. The remaining intangible assets and tangible fixed assets acquired were recorded at estimated market values and thus contain a step-up compared with Engelhard’s book values. Within the BASF Group, this step-up results in higher depreciation and amortization.
The effects of the acquisitions on BASF’s assets are shown in detail on page 21 of our interim report.
The acquisitions were to some extent financed using existing liquidity. In addition, we issued two bonds with a total volume of €2 billion and maturities of between 3 and 10 years. We increased our commercial paper program from $5 billion to $7.5 billion. Commercial paper equivalent to approximately €4.4 billion was outstanding as of June 30.
As a result, we have increased our financial indebtedness by €7 billion to around €11 billion. The rating agencies have also confirmed that BASF can cope with this level of debt. Both Standard & Poor’s and Moody’s have confirmed their very good AA- and Aa3 ratings. We can live with Standard & Poor’s “outlook negative” supplement because our equity ratio is still extremely high for this industry at just under 40 percent, and because our cash flow has strengthened further.
[chart 5]
Cash provided by operating activities was over €2.2 billion in the first half of 2006 compared with approximately €2.1 billion in the same period of 2005. This increase was primarily due to the rise in earnings.
[chart 6]
Payments related to tangible and intangible assets were approximately €980 million in the first half. This was higher than in the same period of the previous year but below the corresponding level of amortization and depreciation. The item “Acquisitions/divestitures” contains a cash outflow of approximately €7 billion for the acquisition of Engelhard Corporation, Degussa Construction Chemicals, Johnson Polymer and CropDesign.
In the second quarter, we also bought back shares for €285 million. Between January 1, 2006 and June 30, 2006, we bought back shares for a total of €681 million or an average price of €63.04 per share.
Of this amount, €342 million was used to buy back shares under the €500 million program that was announced in February 2006 and is scheduled to run until the Annual Meeting in 2007. As a result, we have bought back approximately 21.5 percent of our shares since starting the share buyback program in 1999. We also plan to buy back shares in the future.
[chart 7]
To close, let me take a quick look at BASF’s share performance: Although the stock reached a new high of €69.49 in April, its performance of minus 0.14 percent in the second quarter cannot be anything but unsatisfactory for shareholders. For some, a little consolation may be provided by the fact that the performance of important indices such as the DAX 30, EURO STOXX 50 and MSCI World Chemicals was even worse. At all events, we will continue with our efforts to achieve absolute performance.
Jürgen Hambrecht will now provide some information on developments in our segments and regions.
|
|
[Speech by Jürgen Hambrecht continued]
I would now like to provide a few highlights from our segments. Further information on the operating divisions is provided in our interim report:
In the Chemicals segment, we increased sales by 22 percent. This sales growth was due primarily to higher volumes, the additional business from the new Catalysts division and our new plants in Nanjing, China. EBIT before special items declined by 15 percent due to high margin pressure as a result of significantly higher prices for raw materials, as well as turnarounds and outages at important plants.
We increased sales in the Plastics segment by 8 percent thanks to higher volumes, in particular for styrenics and polyurethanes. Earnings rose 15 percent.
In the Performance Products segment, all divisions contributed to sales growth of 5 percent. High margin pressure due to partial oversupply and rising raw material costs led to a 23 percent decline in earnings compared with the very strong second quarter of 2005.
Sales and earnings declined in the Agricultural Products & Nutrition segment. Lower sales in the Agricultural Products business were caused by lower volumes and the sale of major parts of our generics business in North America. In the United States, demand for fungicides was severely impaired by climatic conditions in the course of 2006 to date. The appreciation of the Brazilian real contributed to the decline in earnings in South America.
In the Fine Chemicals division, we increased sales and earnings due to strong business with aroma chemicals and as a result of the contract manufacturing and personal care activities we acquired. Overcapacities and high raw material costs continue to put pressure on margins for lysine and vitamin C. The division’s earnings rose thanks also to our continued cost reduction measures.
Sales and earnings in the Oil & Gas segment climbed 50 percent due to persistently high crude oil prices and considerably higher sales volumes in the natural gas trading business.
|
|
Sales growth in all regions
The strongest impulses for growth in the second quarter came from Europe and Asia, where sales by location of company rose by double-digit amounts.
In Europe, our companies posted second-quarter sales totaling €7.5 billion. This corresponds to an increase of 21 percent compared with the same period of 2005. EBIT before special items in this region rose by 26 percent, due above all to the contribution of the Oil & Gas segment.
We have further expanded our successful partnership with Gazprom. In April, in Tomsk, Russia, we signed an agreement on BASF’s participation in the huge Yuzhno Russkoye gas deposit in western Siberia. Our share in the economic success of this 600 billion cubic meter field is just under 35 percent. The first natural gas is expected to be produced in 2008. In return, Gazprom is increasing its stake in our very successful WINGAS joint venture and will receive a significant minority share in a Wintershall subsidiary with interests in exploration and production activities in Libya.
In second quarter, we took a major step in another important project to produce natural gas in Siberia: The ZAO Achimgaz joint venture between Wintershall and Gazprom started with the first production wells in the second quarter. Production is scheduled to start at the end of the year. Over a period of 40 years, the German-Russian joint venture is expected to produce a total of at least 200 billion cubic meters of natural gas and 40 million metric tons of condensate from a part of the Urengoy field in western Siberia.
In combination with the planned North European Gas Pipeline, both of these projects will help ensure secure supplies of natural gas to Europe and will expand our oil and gas business over the long term.
Sales in North America (NAFTA) rose by more than 5 percent. This sales growth was due primarily to the acquisition of Engelhard Corporation and higher sales volumes in the Polyurethanes division.
EBIT before special items declined by 25 percent to €263 million. Among other things, this was due to the planned turnaround of the steam cracker in Port Arthur, Texas, and lower sales volumes of agricultural products.
In South America, Africa, Middle East, sales by location of company increased by 8 percent. EBIT before special items was negatively impacted by higher costs associated with the significant revaluation of the Brazilian real.
The Asia Pacific region remains the growth market, and our sales climbed by 18 percent. Our new Verbund site in Nanjing, China, made a significant contribution to this sales growth. A few weeks ago, we signed a $500 million agreement with our partner Sinopec to invest in further downstream plants and expand the capacity of the steam cracker. This will enable us to better use the Verbund potential of the site. In Nanjing, we will also produce specialty chemicals such as precursors for fuel and lubricant additives, surfactants for detergents, and superabsorbents.
At the Chemical Industry Park in Caojing near Shanghai we are currently starting operations at our new MDI/TDI complex. With partners we have invested approximately $1 billion in these plants and in infrastructure. MDI and TDI are important starting materials for polyurethanes. In the period up to 2015, we expect the Chinese market for these versatile products to grow by about 10 percent per year to become the world’s largest market.
At our Verbund site in Kuantan, Malaysia, we have successfully started operations at our polybutylene terephthalate (PBT) plant. The PBT plant is operated as a joint venture with the Japanese company Toray. PBT is a high-performance polymer that is in high demand in automotive and engineering applications, as well as in the electrical and electronics industry.
EBIT before special items in Asia Pacific rose by 32 percent to €125 million.
|
|
Rapid integration of newly acquired businesses
Ladies and gentlemen,
The integration of the newly acquired business activities into the BASF Group is a key task that will demand our tireless dedication in the course of 2006 and beyond. As different as these three businesses are, they have certain things in common: They offer a good strategic fit with our existing activities. They extend our product range for industrial customers and end-consumers. And they make BASF as a whole more resilient to cyclicality. All of these three businesses have performed very well in the first half of 2006: Sales grew by 45 percent at Engelhard, by 18 percent at Degussa Construction Chemicals and by 12 percent at Johnson Polymer.
We have formed joint integration teams in order to rapidly incorporate the individual business areas and functional units. This process is one of open dialogue and mutual respect. In a short time, we will thus be able to form the best team in industry and create even more profitable growth. According to our current estimates, we expect special charges of approximately €500 million in 2006, of which about half will be associated with the acquisitions. We have set ourselves the ambitious goal of completing the integration of the new businesses by the middle of 2007.
Through the acquisition of Engelhard Corporation, BASF has become a leading supplier in the rapidly growing catalysts market. Our combined activities offer a unique technology platform with an enormous potential for innovation and growth.
The catalysts business will be managed in our new Catalysts division, which will be headquartered in New Jersey and reported as part of the Chemicals segment. Engelhard’s remaining businesses will be integrated primarily in the Performance Products segment and in the Fine Chemicals operating division. In the United States, the company has been renamed BASF Catalysts LLC.In other regions, the renaming or integration into existing BASF companies is expected to take place in the coming months.
With effect from the beginning of July, the activities acquired from Degussa became BASF’s new Construction Chemicals division in the Performance Products segment. BASF is now a market and technology leader in the highly innovative construction chemicals business, which is relatively cyclically resilient and grows at approximately 5 percent per year. Additions to our portfolio include products and technologies to ensure optimal concrete properties, materials for waterproofing and sealing, as well as adhesive systems. As a result, we now offer our customers an even greater variety of innovative products to help them to be more successful in the competitive construction sector. BASF’s strong presence in Asia will additionally create growth opportunities in this region’s booming construction industry. Worldwide, the new business area has a team of more than 500 employees in research and development that has brought approximately 100 new products to market each year in recent years.
The world’s leading producer of water-based resins for coatings and printing inks, the U.S. company Johnson Polymer, is currently being integrated into our Performance Chemicals division. As a result, we are supplementing our resins portfolio with water-based technologies and strengthening our market presence in North America. We now offer our customers in the automotive, wood and packaging industries a unique product portfolio with new technological perspectives.
|
|
Our successful research should also benefit Germany
By integrating these new businesses we are bringing together different skills and different corporate cultures. We do this in the certainty that we will create a new and even better BASF for the benefit of our customers.
In German politics, the current grand coalition also combines a range of perspectives and opinions. The people of Germany have placed high hopes in this coalition producing better results than those of the previous government.
Unfortunately, what we are seeing is a coalition of grand compromises based on the lowest common denominator. This will not bring Germany forward. We urgently need further steps to be taken in the reform process. We need non-wage labor costs to be reduced, social security systems to be overhauled and modernized, and a tax reform that reduces the burden on German companies to an internationally competitive level. And we don’t have much time left. There is the danger that issues that are not tackled in 2006 will be put off because of the prospect of elections in 2007.
We see with great concern that there has been almost no movement with regard to the legislative reassessment of plant biotechnology. In Germany, we have outstanding researchers and excellent research establishments for this fascinating future-oriented technology. But the commercial use of research findings has so far been hampered by very restrictive legislation.
BASF will continue to invest significant sums in this area. We want our successful research to fully benefit Germany as a location for business. To achieve this, we count on support from the political system. I simply cannot believe that farsighted political decision-makers again want to hand over the key to one of the most creative and innovative technologies to companies outside of Germany.
Let us therefore make a courageous choice for change and success together. We at BASF are ready to do so.
Kurt Bock and I would now be pleased to answer your questions.
|
|
|
|
|
|
