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August 1, 2007
Half-Year Telephone Conference |
BASF post very strong results in second quarter of 2007
- Volume demand remains strong:
Second-quarter sales climb to €14.7 billion (up 19 percent) - EBIT before special items reaches €2.0 billion (up 6 percent)
- Further portfolio measures: Strategic options under review for parts of styrenics business
- Outlook for 2007 confirmed: Significantly higher sales, EBIT before special items to at least match the previous year’s record 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!
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Ladies and Gentlemen,
Thank you for dialing in to our telephone conference. We are pleased to report that BASF
– The Chemical Company – remains in top form. In the second quarter and first half of 2007, we have again exceeded the record results posted in the same periods of the previous year. In the second quarter, we increased sales by 19 percent and income from operations (EBIT) before special items by 6 percent. Investors have great confidence in the future of our company: Our share price broke the psychological €100 barrier for the first time in July.
Our significant earnings growth demonstrates that BASF has reached a higher level of sustainable earnings. We underline this with our statements that we aim to:- earn our cost of capital in any given year independent of the economic cycle, and
- increase our dividend each year or at least maintain it at the previous year’s level.
The economic environment in which we operate continues to develop positively with impulses coming from all regions. Asia, and China especially, remains the strongest growth engine. The U.S. economy is showing dampening effects in some sectors, but remains strong overall and continues to grow.
We have entered the second half of 2007 in stronger form than ever. Demand for our products is high, and there are no signs of a summer slowdown. The integration of the businesses we acquired last year is proceeding smoothly. These new activities contributed especially to the strong sales growth in our Chemicals and Performance Products segments.
We are continuing with our efforts to improve our global market position and reduce fixed costs. Examples are the restructuring of our fine chemicals business, which is showing tangible results, and the strategic restructuring of our styrenics activities. Here, we are currently conducting negotiations on the possible sale of parts of the business.
Let me now provide some details of our latest figures:- Second-quarter sales rose by 19 percent to €14.7 billion. EBIT before special items increased by 6 percent to €2 billion.
- Cumulative sales in the first half of 2007 amounted to €29.3 billion, or 18 percent more than in the same period of 2006. In the first half of this year, we increased EBIT before special items by approximately 10 percent to €4.1 billion.
This is a superb achievement, and I would like to thank the entire BASF team worldwide for this tremendous success.
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BASF confirms optimistic forecast for full-year 2007
We expect the economy to continue to develop positively. For 2007, we anticipate global economic growth of approximately 3.5 percent, although with large variations from region to region. We expect an average euro/dollar exchange rate of $1.35 per euro in 2007. Due to the rise in oil prices, we have increased our assumption for the average price of Brent crude in 2007 to $65 per barrel.
We consider risks to lie in the renewed significant rise in the price of oil, the weak U.S. dollar, and tension in conflict areas around the world.
In our outlook for 2007 we confirm our optimistic expectations: We are confident that we will grow faster than the chemical market. In 2007, we expect significantly higher sales than in 2006. Scheduled plant turnarounds, in particular in the Petrochemicals division, are likely to reduce earnings by €150 million in the second half of 2007. In addition, we plan to further increase spending on research and development. We nevertheless expect full-year EBIT before special items to at least match the previous year’s record level.
Sales in the Chemicals segment rise by 50 percent
I will now like to present a few highlights from our segments. In doing so; I will focus on the second quarter. Please refer to our interim report for further details and for cumulative figures for the first half.
Sales in the Chemicals segment climbed 50 percent due to higher sales volumes and prices and the contribution from the acquired catalysts business. EBIT before special items also rose significantly by more than 70 percent, with a considerable contribution from the Petrochemicals division.
In the Plastics segment, sales increased by 10 percent thanks to higher volumes and sales prices. Earnings rose by 15 percent. This was due to significantly higher earnings in the Styrenics division.
In the Performance Products segment, strong sales growth of 37 percent and earnings growth of 24 percent was due primarily to the inclusion of activities acquired in the previous year. The Construction Chemicals division grew very strongly in Europe.
In the Agricultural Products & Nutrition segment, sales increased by 3 percent compared with the second quarter of 2006; EBIT before special items rose by more than 44 percent. Higher sales volumes in the Agricultural Products division more than compensated for negative currency effects. The Fine Chemicals division posted a significant increase in EBIT before special items, in particular due to a reduction of fixed costs. In May, lysine production in South Korea was shut down as announced.
Sales and earnings in the Oil & Gas segment declined compared with the very high level of the second quarter of 2006 due to lower prices and currency effects.
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Double-digit growth in all regions
BASF’s sales increased in all regions in the first half of 2007. The strongest growth in percentage terms was seen in South America, Africa, Middle East and in Asia.
In Europe, our companies posted total sales of €17.4 billion in the first half. This corresponds to an increase of 14 percent. EBIT before special items rose by 6 percent to €3.1 billion. This was due to the acquired businesses and organic growth in the chemical businesses, in particular in Petrochemicals.
The transformation of BASF Aktiengesellschaft into a European Company (SE) is proceeding according to schedule. The constituent assembly of special negotiating body of employees was held on June 12. Its chairman is Robert Oswald, who is also chairman of the joint works council of the BASF Group. This 12-strong body has employee representatives from seven European countries. Starting in early September, management will conduct negotiations with it on the involvement of employees in the SE. We expect these negotiations to be completed by the end of the year. The SE could then be entered into the commercial register at the beginning of 2008.
Companies in North America increased sales by 26 percent in dollar terms and by 18 percent in euro terms. EBIT before special items declined by 3 percent to €544 million. This was due to the shutdown of the TDI plant in Geismar, Louisiana, for a number of weeks, as well as currency effects and the impact of divestitures in the Agricultural Products division. The acquired businesses and strong earnings in the Petrochemicals division were unable to offset this fully.
Overall, we are making extremely good progress in North America. In the past years, our team in the region has set itself ambitious goals and has achieved them ahead of schedule. For this I would like to thank Klaus Peter Löbbe, who retired from the Board of Executive Directors at the end of July, and who was responsible for returning BASF Corporation to the growth track. Kurt Bock has assumed the duties of Klaus Peter Löbbe in addition to his function as Chief Financial Officer.
Growth remains strong in Asia Pacific, where we increased sales by 34 percent in local currency terms and by 27 percent in euro terms. EBIT before special items also rose considerably by 58 percent to €380 million. Our investments in the Verbund sites in Kuantan, Malaysia, and Nanjing, China, are paying off. Capacity utilization rates are high at both sites, resulting in a significant increase in earnings.
The region South America, Africa, Middle East also made a positive contribution. Here, we increased sales by 57 percent in local currency terms and by 51 percent in euro terms. EBIT before special items rose almost threefold. This was due primarily to our business with agricultural products in South America. In particular, there was a rise in demand for insecticides for sugar cane in Brazil. In Africa and the Middle East, sales rose in particular thanks to the contribution of the Catalysts and Construction Chemicals divisions.
Kurt Bock will now shed more light on our latest figures.
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[Speech by Dr. Kurt Bock]
Ladies and Gentlemen,
As you may have noticed, BASF’s interim financial statements for the first half of 2007 are considerably more substantial compared with last year’s report for the same period.
This expansion is primarily due to the German Transparency Directive Implementation Act, which requires us to prepare a financial report for the first half for the first time this year. Since analysts and investors would also like to continue to receive a separate description of the second-quarter business, we have decided to comment on both the second quarter and the first half in the current interim report.
I will concentrate my remarks on developments in the second quarter of 2007.
As Jürgen Hambrecht already mentioned, net sales to third parties increased by almost
19 percent compared with the second quarter of 2006 and amounted to approximately
€14.7 billion.
Acquisitions again had a significant impact on sales growth in the second quarter, accounting for 13 percent of the rise in sales. This was primarily due to the activities of Engelhard Corporation, which were acquired on June 6, 2006, as well as the construction chemicals business acquired from Degussa on July 1, 2006.
Higher volumes were responsible for a 7 percent rise in sales in the second quarter. Higher prices accounted for a 2 percent increase, with prices being increased in the Chemicals and Plastics segments especially. In the Oil & Gas segment, on the other hand, sales declined as a result of lower prices and currency effects. The negative currency effect of minus 3 percent was due primarily to the weaker U.S. dollar.
Disregarding currency effects, sales rose by 22 percent compared with the second quarter of 2006.
Second-quarter income from operations, or EBIT, amounted to €2 billion. This was
€210 million more than in the same period of the previous year.
EBIT in the second quarter contained special charges of approximately
€23 million that were related to integration costs for the businesses acquired in 2006.
The financial result was negative in the second quarter. Interest expenses rose in particular in connection with the acquisitions made in mid-2006. Other financial result also declined; it contained gains from the sale of securities in the same period of 2006.
Income before taxes and minority interests rose by €122 million to €1.9 billion.
The tax rate declined from 48 percent to 45 percent as a result of the lower contribution to the BASF Group’s earnings from the Oil & Gas segment. Foreign taxes for oil production that are noncompensable with German corporate income tax amounted to €331 million in the second quarter of 2007 compared with €383 million in the same period of 2006.
Net income increased by 11 percent to more than €1 billion.
The continuation of our share buyback program also contributed to the 14 percent increase in earnings per share to €2.08.
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Cash provided by operating activities developed very positively in the second quarter. The cumulative value for the first half was in excess of €2.7 billion compared with €2.2 billion in the first half of 2006. This 24 percent increase was due to higher earnings and the higher depreciation and amortization of long-term assets contained therein.
The expansion of the business led to higher net working capital, in particular for trade accounts receivable. In the first half of 2006, miscellaneous items primarily reflects the reclassification of gains on the sale of securities as cash used in investing activities.
At around €1.1 billion, payments related to intangible assets and property, plant and equipment were higher than in the same period of 2006 but were again below the level of depreciation and amortization. In the first half of 2006, the item acquisitions and divestitures contained expenditures of approximately €7 billion for the acquisition of Engelhard Corporation, Degussa’s construction chemicals business and Johnson Polymer.
In the first six months of 2007, we bought back 9.2 million shares for €753 million. Together with an additional 1.4 million shares bought back in 2006, these shares were cancelled as scheduled in July. The total number of BASF shares thus declined to approximately
490 million. As a result, we have bought back and cancelled 23.6 percent of our shares since starting our share buyback program in 1999.
The goal of the share buyback program is to further optimize our balance sheet structure and increase earnings per share.
Compared with the end of 2006, the balance sheet total rose by €1.5 billion to €46.8 billion.
While long-term assets increased by €0.7 billion, inventories decreased. In the second quarter especially, days of inventory invested was significantly reduced compared with the same period of 2006. Trade accounts receivable increased by almost €1 billion as a result of the expansion of our business, but we were nevertheless successful in again reducing days of sales outstanding compared with the already low level in the second quarter of 2006.
At around €10 billion as a result of last year’s acquisitions, financial indebtedness is a major position on the liabilities side of the balance sheet. Deferred tax liabilities rose due to deferred taxation on actuarial gains. Despite the continuation of our share buyback program, the BASF Group’s equity ratio was more than 41 percent at the end of June 2007.
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I would now like to take a quick look at the positive performance of our share price. In the first half of 2007, BASF shares rose in value by 36 percent and significantly outperformed the
DAX 30 and Dow Jones EURO STOXX 50 indices. BASF shares also outperformed the global industry index Morgan Stanley Capital International World Chemicals.
To close, a few remarks about our plans to delist our shares from the New York Stock Exchange and to deregister from the Securities and Exchange Commission. We have decided to initiate the necessary steps as announced in a press release on July 30, 2007.
We currently expect the delisting to take effect at the beginning of September 2007. After the delisting, it will still be possible to trade BASF’s ADRs in the U.S. over-the-counter market.
BASF’s ordinary shares will continue to be traded on the stock exchanges in Frankfurt, London and Zurich. In practice, about 97 percent of our shareholders buy the company’s shares in European trading markets or on the electronic trading platform Xetra.
As a result of the delisting from the New York Stock Exchange we expect to save costs of at least €5 million per year and reduce complexity, in particular with regard to reporting.
We aim to maintain a high level of disclosure. For example, we plan to integrate information reported in the Annual Report on Form 20-F that we know to be particularly important to analysts and investors into BASF’s financial reporting according to IFRS. For example, we are planning to offer additional information on our Oil & Gas segment.
I’ll now hand back to Jürgen Hambrecht.
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[Speech by Dr. Jürgen Hambrecht continued]
Ladies and Gentlemen,
It was recently announced that the E.U. plans to approve commercial cultivation of Amflora, a genetically modified potato developed by BASF. We see this decision as a positive signal for what is one of the most important technologies of the future, and are therefore confident that Amflora will be able to be planted as a renewable raw material for the starch industry next spring.
EU plans to approve cultivation of Amflora:
Positives signal for plant biotechnology
Plant biotechnology enables product and process innovations that would often be impossible to achieve by other means. Healthier nutrition, renewable raw materials and more efficient agriculture are the key words in this context. Plant biotechnology can play very important part in all three of these areas. We will therefore continue to invest in this key technology, as we have demonstrated impressively with our recent research cooperation with Monsanto.
We are nevertheless aware that a lot still needs to be done in order to achieve the necessary acceptance for this technology in the political sphere and in society. Plant biotechnology can offer the key to many of the challenges of the future. BASF therefore seeks and facilitates dialogue with all stakeholder groups to promote greater understanding and to improve the transparency of this innovative technology.
We would now be pleased to answer your questions.
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