BASF Se

Stefanie Wettberg - Senior Vice President Investor Relations Martin Brudermüller - Chairman of the Board of Executive Directors and Chief Technology Officer Hans-Ulrich Engel - Vice Chairman of the Board of Executive Directors and Chief Financial Officer

Paul Walsh - Morgan Stanley & CO. LLC.

Andrew Stott - UBS Ltd. Thomas Wrigglesworth - Citi Investment Research Tony Jones - Redburn (Europe) Limited Christian Faitz - Kepler Cheuvreux SA Andreas Heine - MainFirst Bank AG Gunther Zechmann - Sanford C.

Bernstein & Company LLC Patrick Lambert - Raymond James Euro Equities Laurence Alexander - Jefferies Group Peter Clark - Société Générale Chetan Udeshi - J.P. Morgan Cazenove Markus Mayer - Baader Helvea Martin Evans - HSBC

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the second quarter of 2018.

With me on the call today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans Engel, BASF Chief Financial Officer. Martin will explain the financial performance of BASF Group in the second quarter and comment on recently announced investments and transactions, while Hans will present the segment results and financial figures in more detail.

Martin Brudermüller will conclude by providing BASF outlook for 2018. Please be aware that we already posted the speech on our website at basf.com/Q22018.

With this, I would like to hand things over to Martin.

Ladies and gentlemen, good morning and thanks for joining us. In Q2 2018, we raised sales prices in all segments.

Volume development was solid, supported by all segments, except Performance Products, which was negatively impacted by the supply shortages in our citral value chain. Currency headwinds persisted.

EBIT before special items of BASF Group increased by 5% compared to Q2 2017 and amounted to €2.4 billion. We recorded strong earnings in the Chemicals segment, albeit slightly below the prior year figure.

In the Oil & Gas segment, we considerably increased earnings, while Agricultural Solutions and Performance Products slightly improved earnings. In Functional Materials & Solutions, the business remained challenging and earnings declined considerably.

Turning to BASF Group’s financial figures for Q2 2018 compared to the prior year quarter in more detail. Sales in the second quarter of 2018 increased slightly to €16.8 billion.

Volumes increased by 3%, and prices were up to 6%. Currency effects amounted to minus 6%, mainly due to the appreciation of the euro versus the U.S.

dollar. Overall, portfolio measures had no impact on sales.

EBITDA before special items and EBITDA were on the level of the prior year quarter figures, at €3.3 billion and €3.2 billion, respectively. EBIT before special items increased by 5% to €2.4 billion in Q2 2018, mainly attributable to considerably higher earnings in Oil & Gas.

Earnings in Agricultural Solutions and in Performance Products improved slightly, with minus €65 million special items in EBIT were related to restructuring and integration measures and were on a comparable level with Q2 2017. EBIT increased by 5% to €2.3 billion in Q2 2018.

The tax rate increased from 22.1% to 27.1%. This increase was mainly driven by higher earnings contributions from the high tax countries, particularly Norway.

The net income almost reached the level of the prior year quarter and came in at €1.5 billion. Reported earnings per share decreased by 1% to €1.61 in Q2 2018.

Adjusted EPS amounted to €1.77 and this compares with €1.78 in the prior year quarter. Cash flows from operating activities amounted to €2.2 billion in the second quarter of 2018 compared to €3 billion in the prior year quarter.

The decrease was largely driven by a negative swing in miscellaneous items and a lower cash flow from changes in net working capital. Free cash flow decreased from €2.1 billion to €1.4 billion.

Let me now briefly touch on our announcement of July 9. BASF has entered into negotiations regarding the establishment of a Verbund site in the South Chinese province of Guangdong.

BASF would be the first foreign company to use the opportunity to establish a fully-owned and operated Verbund site, including a steam cracker in China. What is the rationale behind this step?

Well, we intend to further invest in China because the country, with a world market share of around 40%, is already today and even more so in the future, the key market for the chemical industry. If you aim to be the leading chemical company, which is BASF’s ambition, you have to participate in this growth market.

Furthermore, the new Verbund site is an important step to participate in the ongoing opening up of the chemical industry in China. The total investment is estimated to reach up to US$10 billion by completion of the project around 2030, with the first investment expected in 2021 at the earliest.

The first plants could be completed by 2026 at the latest. Please keep in mind that the signing of the Memorandum of Understanding is only the first step.

Many further steps will have to follow. The immediate next step is the completion of a pre-feasibility study.

Today’s conference call gives me also the opportunity to provide you with some further details on the transactions we agreed to with Bayer in October 2017 and April 2018. We expect to close these transactions in August.

By combining our existing crop protection business, biotechnology and digital farming activities with the new businesses and asset we are purchasing from Bayer, BASF will become an even stronger partner for farmers worldwide. The acquisition marks BASF’s entry into the seeds business.

In the future, we will have a meaningful position in seeds for key row crops such as canola oilseed rape, cotton and soybeans as well as vegetable seeds. We extend our herbicide portfolio by adding glufosinate-ammonium-based nons-elective herbicides.

Our seed treatment offering will be strengthened by a leading portfolio in key markets in North and South America. And we will use our extended digital capabilities to further enhance our offerings for farmers.

It is important to note that we do not only acquire fully-enabled businesses and assets, but also very promising research projects that will amplify our innovation potential in Agricultural Solutions. Furthermore, over the last decade, BASF Plant Science research has developed a strong trait library.

In future, we will be able to commercialize these traits also through our own seeds business. BASF now has an even more comprehensive portfolio for farmers in all key markets worldwide.

In North America, we will offer a very broad portfolio and will become a provider of integrated solutions. In South America, we will significantly enhance our offering for soybean and cotton growers.

In Europe, the transaction marks our entry into the seed markets for vegetables, oilseed rape and cotton. In Asia, we entered the seed markets for vegetables and significantly enhanced our herbicide portfolio.

Farmers around the world will benefit from our more comprehensive and attractive offering with access to more tools to increase their yields, crop quality and profitability. On this slide here, Chart number 7, we provide you with a pro forma overview on our new Agricultural Solutions segment.

Based on 2017 figures, the combined business had sales of almost €8 billion and generated an EBITDA of €1.8 billion. The acquisition enhances BASF’s Agricultural Solutions business in several aspects.

It significantly improves our position in the large markets in North and South America, where seeds, seed-treatment solutions and non-selective herbicides are additions to our existing portfolio. Let me also stress that we will remain strongly committed to providing innovative solutions and products.

Our business model is and will continue to be innovation-driven. We will keep R&D expenses at a high level, because investing in innovation pays off in this industry.

An attractive EBITDA margin of around 23% clearly demonstrates that. And finally, let me provide you with some insights on our integration plan.

We used the nine months since the announcement in October last year to very clearly prepared for the integration. We now have a concept in place for the seamless transition of businesses and smooth on-boarding of employees.

We are very much looking forward to welcoming about 4,500 highly experienced new colleagues to the BASF team. We are happy that particularly all Bayer employees in the scope of the transaction accepted the offer to join BASF.

The integration concept focuses on strengthening and developing the acquired businesses. We want to ensure business continuity and a seamless transition for our customers.

In our first step, we will create a new global business unit for seeds and traits. It will also include the vegetable seed business, which will be managed rather independently.

The glufosinate-ammonium business will be integrated into BASF’s existing herbicide business. The next three to four months will be used for the so-called discovery phase.

During this phase, we will also rely on the know-how and the expertise of our new colleagues to further develop the strategy for our Agricultural Solution business and fine tune our organizational setup. The structural integration will begin in January 2019.

So let me summarize. This is an important step for BASF to significantly strengthen our portfolio of agricultural solutions for farmers.

The market for crop protection products and seeds is highly attractive and provides a lot of opportunities. I’m convinced that BASF is well positioned to further accelerate profitable growth in this segment.

Let me also provide you with an update on the further M&A activities we recently announced. In December 2017, BASF and LetterOne signed a letter of intent to merge their respective oil and gas businesses.

We aim for a signing of the contracts within the next weeks. If an agreement is reached, closing could be expected in Q2 – in Q1 2019, subject to customary regulatory approvals and approvals of the mining authorities.

Beginning of May 2018, BASF and Solenis signed an agreement to join forces by combining BASF’s paper wet-end and water chemicals business with Solenis, a global producer of specialty chemicals for water intensive industries. Currently, necessary merger control filings are being prepared or have been submitted.

Pending approval by the relevant authorities, closing is anticipated for the end of 2018 at the earliest. At the end of June 2018, the EU Commission informed BASF that it will continue to review the planned acquisition of Solvay’s integrated polyamide business in an in-depth investigation.

The EU Commission will gather and evaluate more data during this in-depth investigation and will likely take a decision in Q4 2018. BASF will continue to respond to the concerns of the EU Commission and evaluate different scenarios.

And with this, I will now hand over to Hans, and he will give you more details regarding the business development of our segments.

Yeah, thank you, Martin. Good morning, ladies and gentlemen.

Let me summarize the financial performance of each segment in the second quarter of 2018 compared with the second quarter of 2017. Let’s start with Chemicals.

Sales in Chemicals increased slightly. Higher prices in all divisions, particularly in Monomers and Intermediates, more than compensated for negative currency effects.

Volume growth in the segment was slightly positive, driven by Petrochemicals and Intermediates. EBIT before special items decreased slightly, but still came in at a high level of almost €1.1 billion.

Higher volumes and strong margins in Monomers and Intermediates could not fully compensate for overall higher fixed cost and lower cracker margins in all regions, particularly in North America. Sales in Performance Products declined slightly, mainly due to negative currency effects.

All divisions of the segment were able to increase prices. The unplanned shutdown of the citral plant in Ludwigshafen and the respective Force Majeure declarations for citral, isoprenol-based aroma ingredients, vitamin A and E as well as several carotenoid products continued to negatively impact the segment’s volume development.

At the end of April, we restarted the citral plant. Production is stable, and on July 2, we were able to lift Force Majeure for vitamin A and E products in our animal nutrition business.

Slightly negative portfolio effects were related to the transfer of BASF’s leather and chemicals business to the Stahl group and the divestment of a production site for paper dispersions in Austria. An insurance payment related to the unplanned shutdown of the citral plant compensated for lower earnings contributions and Force Majeure-related costs in the Nutrition & Health division.

Overall, we could slightly increase EBIT before special items due to lower fixed costs and higher margins. Sales in Functional Materials & Solutions increased slightly.

Higher prices and volumes more than offset negative currency effects. We were able to raise prices in all divisions, but Construction Chemicals.

In this division, prices were on a level with the prior year quarter. Volumes increased mainly in transportation, which is the largest customer industry of the segment.

Fixed costs went up, in particular, due to the startup of new production plants. For example, we continued to expand our offering in Catalysts and Coatings with assets in Shanghai and globally started up several plants in Performance Materials.

Higher raw material costs put additional pressure on margins. Overall, this resulted in a significant decline in EBIT before special items compared to the prior year quarter.

Sales in the Agricultural Solutions segment declined slightly compared to Q2 2017. This was attributable to strongly negative currency effects in all regions.

However, especially in South America and Asia, we were able to increase volumes. Sales prices were raised slightly.

Sales in Europe decreased slightly as a result of negative currency effects. These could not be completely offset by higher volumes, particular for herbicides in Central and Eastern Europe.

In North America, sales were considerably lower than in the second quarter of 2017. Sales were reduced by lower volumes, particularly of fungicides in Canada due to the late start to the season and higher inventories at our customers.

Negative currency effects also contributed to the decline in sales. We recorded considerable sales growth in Asia, thanks to higher sales volumes of fungicides in India and China as well as a slight increase in prices in the region.

Currency effects had a negative impact on sales. Sales in the regions South America, Africa, Middle East rose considerably, mainly due to higher volumes.

Volume growth in Brazil was driven by fungicide and insecticides, while Argentina saw particularly strong increases in herbicide volumes. Significantly negative currency effects had an offsetting effect.

EBIT before special items was slightly higher than in the previous year quarter. Despite the negative currency effects, a more favorable product mix lifted our average margin.

This more than compensated for the slight increase in fixed costs. Sales in Oil & Gas were up considerably, mainly due to higher oil and gas prices and increased volumes.

In Q2 2018, the average price of Brent crude was US$74 per barrel, US$24 higher than in the same period of 2017. In euro terms, the increase was €17.

Gas prices on the European spot markets were also significantly above the level of the prior year quarter. The combined price and currency effect was plus 18%.

The volume increase of 5% was mainly driven by higher volumes in Norway. EBIT before special items increased considerably from €183 million to €391 million.

This was largely attributable to higher oil and gas prices. In Norway, we also saw volume growth and recorded lower depreciation as a result of higher reserves.

Net income in Oil & Gas increased from €122 million to €151 million. Now to Other.

EBIT before special items in Other improved from minus €151 million to minus €134 million in Q2 2018 due to lower contributions to provisions and an improved foreign currency result. Let me now turn to the cash flow development.

In the first half of 2018, cash flows from operating activities decreased by €347 million to €3.5 billion. This was largely due to a negative swing in miscellaneous items.

The cash outflow related to changes in net working capital amounted to minus €1.2 billion compared to minus €1.7 billion in the first half of 2017. At €1.7 billion, cash flows from investing activities were €630 million lower than in the first half of 2017.

In the prior year period, the increase in other financial assets tied down higher amounts of cash spend in 2018. Payment made for tangible and intangible assets decreased by €193 million and amounted to €1.4 billion.

Free cash flow came in at €2 billion compared to €2.2 billion in the first half of 2017. Financing activities led to a cash outflow of €518 million compared to a cash outflow of €886 million in the first six months of 2017.

And with that, back to you, Martin, for the outlook.

Thanks, Hans. Global economic risks increased significantly over the course of the first half of 2018, driven by geopolitical developments and the trade conflicts between the U.S.

and China as well as between the U.S. and Europe.

We are monitoring these developments and the potential effect on our business very closely. At this time, however, our assessment of the global economic environment in 2018 remains unchanged, with one exception.

We increased the expected average oil price for 2018 from US$65 per barrel to US$70 per barrel. Based on our assumptions regarding the economic environment, we confirm our outlook 2018 for BASF Group as provided in February.

We anticipate a slight sales growth. EBIT before special items is expected to increase slightly.

EBIT is forecast to decline slightly. And we expect to earn a significant premium on our cost of capital with a considerable decline in EBIT after cost of capital.

This will be mainly due to the lower EBIT, including M&A related special charges as well as the additional cost of capital from the agreed acquisitions. Please keep in mind that the intended merger of our Oil & Gas activities with the business of DEA Deutsche Erdoel AG and its subsidiaries is not taken into account of this outlook.

Upon signing of the final transaction agreements, the Oil & Gas segment’s earnings would no longer be included in sales and EBIT for BASF Group retroactively as of January 1, 2018. And now, with this, Hans and I would be glad to take your questions.

Ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions] Paul Walsh, Morgan Stanley, is the one to start.

Please go ahead, Paul.

Yeah, thanks a lot, Steffi. Morning everybody, Martin, Hans.

Two questions from me would be, firstly, I think you mentioned there was an insurance payment for citral in the second quarter, I wondered if you could just quantify that for me. And maybe you could just comment on how you see that business progressing now that the capacity is coming back up.

I think some of the pricing has come down, so just to give us some context around that, please? And, secondly, Martin, you sort of mentioned the global economic risks sort of escalated in the first half.

I’m assuming not, given your guidance is unchanged. But are you seeing any evidence of that manifesting itself in your end-industries?

I’m particularly interested in whether or not you’re getting any feedback from the automotive space around production schedules and ordering patterns. Thanks very much.

So Hans will take the first one. I’ll take the second one.

Yeah. Good morning, Paul.

On your citral insurance question, you will understand that we will not quantify this for you. But I give you the following information.

What we received is compensating us for the additional cost that we have as a result of the force majeure situation. So that when I compare to how we have budgeted the division for Q2, that compensation that we receive from the insurance leads us to being on budget.

Got it.

So, Paul, with respect to our statements here about the economic risk, I mean, you know that we have a certain visibility into the future on one hand. But on the other hand, we all follow the news going on about the – particularly also about the trade frictions between the U.S.

and China, and EU and U.S. I mean, I think we got some relief maybe from the two gentlemen meeting in the last days and maybe de-escalated some further tax on the car industry, which is certainly a very determining one for not only Europe’s industry, but certainly also for BASF, because it’s our largest customer industry.

So far, if we look on the first half year, actually, the car production globally is pretty much on exactly that was forecasted. So we have some 97 million cars projected and I think we have 48.5 million more or less being produced in the first quarter of the year.

We also do not currently get any signals or in the order pattern from the automotive industry, which would lead us to any corrections in this. But as I said, we have also only a certain visibility on one hand, and that is why we made these statements; but on the other hand, a very clear statement that we stay with our forecast.

So we see still, on a global level, the automotive industry being strong and performing as expected.

That’s very clear. Thanks a lot, gentlemen.

The next question is from Andrew Stott, UBS. Please go ahead.

Morning, thanks, Steffi. Good morning, Martin and Hans.

So I’ve two as well. And the first one was really on the timing of the turnaround in margins in FMS.

So, I mean, I guess on Performance Materials and Construction, it’s less of an issue, because now it’ll be to some extent dictated by raw material trends upstream. I’m more thinking about your own thoughts into 2019, and indeed, the second half on both Catalysts and Coatings where EBIT was clearly well down in Q2.

So, just a roadmap on the turnaround potential for those two. Thanks.

The second one was a much sort of different question, a high-level question. I saw this week that the EU have decided to treat gene-editing in the same regulatory context as GMO.

I’m just wondering what that means for your newly assembled seeds and traits business.

Yeah, Andrew, this is Hans. I’ll take your first question on the margin turnaround that you asked about in Functional Materials & Solutions.

When you look at the quarter-over-quarter developments that we have, we’re obviously still faced with increasing raw material prices. You’re well familiar with the fact that it takes the time it takes in order to pass these on.

Typically, when raw material prices increase, you go through a phase of margin pressure. That was very pronounced in Q1 of this year when Functional Materials & Solutions, on a quarter-over-quarter basis, Q1, Q1 was down by €200 million compared to prior year quarter.

When you look now at Q2, it’s €80 million down, so margin compression continuing, but at a lower degree than what we experienced in Q1. In addition to that, we have, as you know, significant growth measures in Functional Materials & Solutions with a number of planned start-ups around the globe, in Catalysts, in Coatings, in Performance Materials, and also to a smaller extent, in Construction Chemicals.

That adds to the fixed cost at this point in time, and it does so pretty much in two ways, which is very typical in a situation where you grow business. On the one hand side, you have the additional fixed costs coming from the new plants, new employees that you have in there, additional depreciation.

And you’re also burdened with the cost of not fully utilizing the plant. So all that needs to be factored in.

We see a trend of improvement in the Functional Materials & Solutions segment. And we expect this to continue in the second half of 2018.

And once we have budgeted the year 2019, I think we can give clearer guidance on that.

Andrew, with respect to CRISPR-Cas and the ruling the European High Court has done, I mean, that has to be evaluated at the very end in detail what that really means. But on the other hand, very clear statement; this is a pretty revolutionary tool, additional tool for the whole biotech and genome editing technology.

It’s a very precise tool to basically generate mutations. And with this, is also the expectation that in future you can accelerate and make developments cheaper.

And in that respect, I think someone who runs a state-of-the-art biotech platform has to use this technology. We have also taken a global license from the Broad Institute of MIT and Harvard.

So we are enabled and we have people who can use this instrument, and it is certainly planned and has to be used in our platform. Now with the new additions we have from the Bayer business, which will basically complement our platform from biotech and plant biotech on one hand, but also our enzyme activities, and now the whole seed business.

This will be a very important tool. If it’s really true what the Europeans have done here, then they have again basically given us green light for the precautionary principle and not evaluating on the same moment also the innovation principle, which means it’s a pure risk-based assessment and not a risk, an opportunity based one.

It would be a pity for the European industry and the European scientific community, because it will take away one other opportunity for innovation. For us, as a company, that would mean at the very end that such tools would be applied in our U.S.

operations. And you know that the plant biotech activities have been already in the past from BASF, mainly been relocated from Germany to the U.S.

So, as we run a global platform, that would mean that basically this application of these instruments would not be used in Europe and Germany. So overall, that will not impact us as a company too much, but as a European, I’m worried about what that means to the Europeans and its innovation power.

Okay. Thank you very much.

The next question is from Thomas Wrigglesworth, Citi. Please go ahead.

Okay. Good morning, gentlemen.

Thank you very much. Two questions, if I may.

The first is just a follow-on. Hans, could you try to quantify what you think the ramp-up cost impact was in the second quarter?

That would be very helpful. And I’m wondering just on the – both in Performance Products and in Functional Materials & Solutions, what was the total cost increase that you’ve seen year to date?

And when do you think, across both of those divisions, will you be able to fully offset both the cost increase for 2017 noting that Functional Materials & Solutions was down, what €200 million at EBIT, and still seems to be down in the first half as well. So when can we expect in both Performance Products and Functional Materials & Solutions full margin offset?

Thank you.

Yeah, Thomas, I’ll take your question on the ramp-up cost. So startup cost in Q2, and I give you BASF Group.

Q2 about a mid-double-digit million figure higher in Q2 for the group. Then in Q2 2017 and for Functional Materials & Solutions, it is a lower double-digit million figure that the cost, the startup cost is higher than in Q2 2017.

So in other words, yes, growth comes at a cost. We see that at this point in time, but we have obviously, the plan to use these capacities, grow into them.

And at this point in time, it is a slight burden for the BASF Group and also a slight burden for the Functional Materials & Solutions business.

And a few more comments on the two downstream segments. I mean, if you look at the Performance Products part, I think there we have not less – much less a cost issue than it was actually than a growth issue.

I mean, we had prices going up, but very much counterparted by the FX impact. And if you assume on the volume part here, I really have to say that this is basically totally connected with the citral value chain outage.

If we would not have had that, we would have had a positive volume development. I think, this is very important to say.

So we are moving on the volume side and we’re also moving son the price side. I would also expect that the FX impact in the second half of the year will go down, because we’re simply comparing ourselves to a more favorable basis in the second half, so that’s on the PP part.

On the FMS part, you see actually that, really, on the market-related things, we went forward quite well, 4% volume, plus 6% prices. So we really move over there.

And that means we can increase prices. But on the other hand, we also can, in the same moment, raise volumes.

We are here also lost more than half of that by the FX headwind. And the other part is really connected with cost.

And let me also say here that on the raw material cost, which impacted quite significantly on the Coatings part, for example, where you have on one end, a price pressure certainly from the automotive companies, which you have to resist and you have to digest the raw material price increases here. And let me connect that also with something you have maybe never heard.

For example, the shutdown of several suppliers in China due to environmental issues have taken out of the market some resin players, more or less, so quickly that you could not adapt to this, led to a significant double-digit increase of some resin prices, which are raw material prices for the Coatings part. So you cannot raise prices that quickly and basically react in one quarter.

You heard also about the startup costs, which I think were mentioned already by Hans. We have started some plants also in China.

We have also ramped up our teams to get these volumes into the markets, and that basically all counteracted to this. Let me also make one final comment, which you cannot see.

The combination in the value chain of the polyurethane, so the Performance Materials and the Monomers division. If you look on the total earnings of that value chain, it was three-digit plus, million-plus in the first quarter.

And it’s still a good double-digit increase in EBIT in the second quarter, which is, however, to a large extent visible in the Monomers division and not in the polymers part, because if you look on overall, we had a 5% raw material increase, and we passed over 4% on the market. And let me really say this again and reiterate what Hans said.

Certainly, this development has to go on into Q3 and Q4 to pass these high raw material costs over to the customer. But we always pointed out that the pricing model in these businesses is sometimes with contracts of one, two, three quarters, and it’s not raw material formula related.

That means if you keep up the logic that you sell value and not connected with the raw material rises, you need some time to pass this over. You cannot go to the customers and now last month my raw material increased, that’s why I increased your price.

Because then in the opposite direction, it also goes very quickly. So overall, I think we diminish the difference in FMS also in comparison to Q2 in 2017 compared to the delta on Q1, so I think we are on the right direction, and it just takes more time.

For that reason, these two segments have to contribute more on the pricing side in the coming half year. So I maybe leave it with these comments.

We have quite some analysts in the line. The next three ones will be Tony Jones then Christian Faitz then Andreas Heine.

So now, please, Tony Jones, Redburn. Go ahead.

Thanks very much. Good morning, gentlemen.

I’ve got two. Going back to added cost, but this time in Chemicals.

You called out that fixed costs were up. Could you tell us what that roughly was and maybe split it up into recurring and non-recurring costs associated with shutdowns?

And then secondly, on Ag Solutions, volumes were good. You certainly point out there was better demand in Q2, particularly in Brazil.

Are you able to split out the revenue growth into volume and price, and perhaps talk about what actually is underlying demand, or whether just this was a restocking after inventory was reduced in the channel last year? Thank you.

So fixed cost in Chemicals, I don’t see a big effect here, honestly spoken. There’s always a little bit on turnarounds, which shift from one quarter to the others, but we did not have a major startup over there in the quarter here.

And it’s roughly up – in a not very significant manner over here. So for the second question about Ag, if you look a little bit here on the regional part and you’re particularly interested in the South American part, then we had a very, very strong volume growth here, more than 70% volume growth and more or less almost doubling in prices, 90% on prices – sorry, sorry, wrong.

Volume almost doubled, prices 14% plus. But a big headwind of the foreign exchange rate with the real of 35%.

So you see that I think we have positioned over there very well, also good starting platform basically from the last year, where all these inventory effects were. And I think with this, we are very well doing in South America at that point of time.

Thanks very much. Thank you.

So now it’s Christian Faitz from Kepler Cheuvreux. Please go ahead, Christian.

Yes, hello, Steffi, hello, gentlemen. I’ll stick with the [Martin Brudermüller] [ph] and just ask one question.

Coming back to Agricultural Solutions, can you please give us an assessment of channel inventory actually in the Northern Hemisphere? I’m asking this question in particular with a view on Europe and the drought situation in outer parts of the region, which in my view could have led to some channel inventory.

Thanks.

Yeah, Christian, you’re obviously well familiar with the industry. And the situation that we are experiencing in the Northern Hemisphere this year is actually a challenging one.

Thinking about Europe, and in particular Western Europe, late start of the season, overall a compressed season, when we saw each other last time, I said I’m not yet sure what’s going to happen here. But by now we know that was a compressed season.

And we didn’t get, as a result of the continued drought like conditions that we have right now, we didn’t get the disease pressure that you would actually hope for from a business perspective towards the end of the season. So our expectation, even though the, as you know, the final on-the-ground numbers are not yet out, our expectations is that channels will be relatively full at the end of the season.

And the same provider there, not yet sure, but the same may be true for North America, where we’ve also experienced weather-related, very, very late start, in particular in Canada. So overall, it’s a challenging situation right now.

But then you look at our business and you see that, yes, on a first half year basis, we’re down. But Q2-over-Q2, we are slightly up.

And as Martin said, the indications for the season in the Southern Hemisphere, or in other words, Brazil and Argentina in particular, at this point in time, look pretty good.

That’s very helpful. Thanks, Hans.

So now we have Andreas Heine first with one or two questions. Following him, it will be Gunther Zechmann and then Patrick Lambert.

So now Andreas Heine. Please go ahead.

Yes, one very brief one and then a second one. I would like to know whether the trade research, which is currently put in the corporate line, will that now move to the Agro in 2019 as you have, let’s say, the full value train from seed and crop protection and also trade research with the bio-agro business?

That’s the first one. And the second one, I’d like to understand a little bit more what has changed in Performance Products and Functional Materials & Solutions.

In your outlook provided at the beginning of the year with your annual report, you expected these two segments to be up considerably, so more than 10%. Effectively, they were down 20% in the first half by €300 million.

If it had been in line with your forecast then it would be up €150 million, so €450 million short. You were probably aware at that point, when you made the outlook about the FX and the fixed cost.

So is this difference of what you were expecting at the beginning of the year and what the outlook at least in the first half here is all related to the raw material cost increases, which came then as kind of a surprise in the first half? Thank you.

So, Andreas, to the first one, the trait cost, I mean, I think, I said it earlier we have now to look into this discovery phase where we take three months to really understand in detail what’s going on. But one thing is also clear: If we acquire in a segment a business for – then they have also to carry the major part of research, because that is an integral part of the business.

And overall, it will complement the skills and the competence we have in the Ag business very well. How we do it at the very end?

In all the detail, I cannot tell you. There might be also a part which is, let’s say, more forward-looking, which we have to support by corporate skills up.

Then it could be supplemented, and a part of that with the time horizon, let’s say, which is more than five years or something, that we partly carry something like this also on the corporate part, because that we have about 20% of our research cost paid by corporate. In order to ensure that we do not lose opportunities and capabilities in the long-term buildup, and that they are not sacrificing the P&L on the short-term outlook.

So we always balance this. How we exactly we do this?

We have to wait until we have the discovery phase. So with regard to the performance here again, yes, I mean, one thing is very clear.

If you look on the first half year, Chemicals performed better than expected, and certainly, PP and FMS performed behind expectations. We still say, and you know that we don’t correct our guidance throughout the year.

But what that means in confirming our guidance basically, means that certainly FMS and PP have to catch up in the second half year. And I think if you ask what is different, I think, I mentioned already some parts.

Raw material is certainly higher than I think we might have expected. And I said also, if you take for the Performance Materials alone, we have expected a certain decline in the isocyanates, which is also visible, but it is much slower than we anticipated.

But that also means, for example, the materials – Performance Materials have a higher raw material basis in the first half and year than they had expected. And I mentioned earlier, overall in the chain we still earn more, but it is mainly coming with the Chemicals part than it is attributed to the segment here.

And I have to say, I’m a bit more relaxed here, because what counts for us is, do we get the money in our pocket, whether it’s the left or the right pocket is second or important only for us. So I think there’s the raw material part, there is maybe the one or the other resistance on the customer that price increase takes a little bit longer.

There is certainly the one or the other business environment, which is different. I mean, the one where we have changed in ourselves and have constrained the industry was our citral outages.

I mean, that totally changed the market dynamics and also how people react. And on the other hand, just to mention the second one, which is the superabsorber business, which is a tough one, but which is – has gotten even a little bit more tougher than better, so I mean you have – at the very end you have a composition of all that.

And I would say it is really a combination of all that. It’s what we said earlier, it’s fixed cost increase, it’s raw material increase, but it is also some dynamics in some of the market, so it is a mixture.

I would not boil it down to only one factor. But to conclude, very clearly, both segments have to catch up in the third and the fourth quarter.

Thanks.

So now it’s Gunther Zechmann, Bernstein. Please go ahead.

Good morning, everyone. Your Catalysts business grew quite strongly in the quarter, up 13%, that’s including the currency headwinds.

What drives the volumes there, please? And maybe you can rank order the automotive catalysts, the battery materials and the chemical catalysts.

Yes, Gunther, this is Hans. I’ll take your question.

We have, as you say, 13% sales growth in Catalysts. Out of that, we have about 7% volume growth.

And we have significant price growth, which, to a certain extent, is driven by precious metal prices and there in particular by the price increases in palladium. So overall, very nice volume development and that is what counts, obviously offset again by currency impacts.

If I look at the businesses, and I start with the automotive catalysts business, that has, as you would expect in the current environment, that has the one or the other challenge in light duty diesel in Europe, but then that’s compensated by light duty gasoline. And overall, the automotive industry performs as we had expected it in the beginning of the year.

So we see on a volume basis, light vehicle grow by 2% for 2018. And we have our fair share of that growth in our automotive catalysts business.

Chemical catalysts business and refinery catalysts business, both performing well, and to expectations. And as you know, our battery materials business is a business that’s set for growth.

We are targeting significant sales growth there year-over-year. And we support that by way of strong volume growth, so they’re fully in line with expectation.

Can I just clarify, within the battery materials, which has the strongest growth, does that mean the NCA driving that growth?

This is to a large extent, that is NCA, yes.

Thank you very much.

We move on to Patrick Lambert, Raymond James. Following him, we will have Laurence Alexander, and then Peter Clark.

So now, Patrick Lambert, Raymond James.

Hi, Steffi. Thanks for taking my question, and good morning, gentlemen.

One quick question on the ramp-up or startup cost I think you commented on Q2. Could you help us bridge H2 2018 versus H2 2017 in terms of the biggest chunk of startups, how it would phase into H2?

And the second question also, can you update us on your KPI ramp-up in Ludwigshafen? Thank you.

So with regard to the TDI situation, that we had this major period now to change the reactor and build-in and connect everything and overhaul, the one or the other thing. Can inform you that the plan is up and running.

It is running on all the steps in the indices of TDI. It also produces inspect material.

So we are going to ramp and stabilize this up then to market needs. Just keep in mind that we still have our Schwarzheide plant running, which at a certain time then, we will shut down and then these volumes transfer to the Ludwigshafen plant.

We run that, as you also know, in a global grid. And I think I mentioned earlier that the TDI margins have, particularly in Asia, gone down a bit.

So we have also to drive this whole thing from our side in a very balanced way to preserve value, and on the other hand, to take volume growth. So we now ramp this up basically according to the market need.

So it is a very good situation on the TDI side in the moment. So – and I think the startup cost will be covered by Hans.

Yeah, I gave you earlier already, Patrick, the figures for the BASF or the guidance for the BASF Group for Q2. If I look at the first half of 2018, that is again a low-triple-digit million higher than what we had in the first half of 2017.

And then the second half of 2018 compared to the first half of 2018, that is slightly higher in the second half of 2018 than it was in the first half of 2018. And it’s not...

H2 2017?

No. No, this is H2 2018 compared to H1 2018.

And H2, H2-to-H2 is – that’s also a low-triple-digit million figure higher, when I compare second half to second half.

So higher in 2018?

Higher in 2018, correct.

Thank you.

So now we move to the U.S., Laurence Alexander from Jefferies. Please go ahead.

Hello, I guess two questions. One, for the pro forma Ag portfolio, can you give some perspective on our benchmarks for the combined R&D pipeline, peak sales or NPV, or however you think about it?

And where digital Ag or precision Ag fits in that pipeline? And I’m thinking there in terms of the spends that you have.

And then the second question is, when you think about your steam cracker margins and your ability to capture dislocated feedstocks, how do the marine regulation change at the end of the decade, how will that affect the steam cracker positions for your business?

Laurence, I mean, concerning the pipeline consideration, I think it’s really too early. We have to look into that.

Certainly, we did not buy a black box. We had certain information about that in the due diligence, but – and information we got for the package, but we have not really looked how that goes together.

But the only thing I can tell you and you know that, that I think the pipeline of BASF traditional business or legacy business is formidable. So it’s really a great pipeline.

And all what we know, it should go very, very well together. And we are very happy, because we get really, 2,500 excellent scientific people joining now our platform.

When it comes to digital, I only can say at that point, we have a very nice digital, let’s say, kind of startup business. And we get this Saviyo [ph] platform from Bayer, which I think is also very respected in the market in terms of their capabilities.

And I can only predict for the future, if we bring these two pieces together, we certainly can make something very nice out of it. But also here, I mean, it’s too early.

We have really to see about capabilities and approaches and how we bring this together. With regard to your question, I’m not sure whether I totally caught it, what you really asked for, but – [bank of euro] [ph] regulation – is that what you wanted to know?

Correct, yes, yeah.

I mean, I don’t know really what the impact will be here. I cannot see really that it has an impact on our cracker business, because at the very end, yes, most of our crackers are NAFTA driven.

On one hand, we have driven projects and partly also executed already of flexible feedstock here. And what you mean is basically how the usage in the shipping is basically adding or changing, let’s say, the availability and the pricing of the transportation sector and with that impact on, let’s say, for us.

That’s really too early to say. I think there are a lot of activities going now on this LNG enablement for the ships, building even terminals.

Even in Germany, we build here one for the future ship fuel. But I think it’s really too early to put that in numbers.

Please understand that I cannot do that.

Okay.

Given the time, we have to speed up a little bit. We will now have Peter Clark, Société Générale.

And then, we still have Chetan Udeshi, Markus Mayer and Martin Evans. We close the queue with that.

And now it’s Peter Clark, Société Générale.

Yeah, good morning. I’ll be very quick then.

Two questions, the first one, on the raw material pressure, you’re making it very clear, Coatings is seeing acute pressure at the moment. That’s likely to continue in the second-half.

Just wondering your view on the Functional Materials & Solutions division – segment excluding Coatings, do you think that margin could be up in the second-half year on year? And then the second question, I realize you can’t say much on the Solvay deal where we are at the moment.

But I’m assuming you’re still pretty confident you can address the commission concerns as we go through that process? Thank you.

I mean, Peter, starting with the large one. We have now to look into detail what that means.

And it’s actually a three chapter exercise, because the market is basically divided in three different layers. So it is about the precursors, and it’s about the polyamide, and then it’s about the engineering plastics.

And we are now in the discussions with the EU what we have to do here. We are still confident that we find an arrangement that makes sense for us and it does not destroy value at the other part.

It will delay now a little bit our time schedule. But I think over the next months, after the summer break, we will have intensive discussion with the EU Commissioner and we will see how we go forward.

But I’m still very confident that we find a solution. With regard to your question about FMS, and then excluding Coating and what it means for the rest, at the very end I would say for the whole segment I can only repeat what I said.

Yes, the margins have to go up. I mentioned, I mean they have to catch up in Q3 and Q4.

They have to even work harder to accelerate their margin development and that is also including Coatings, because we have not – now, that Coatings is in, let’s say, a challenging situation, because of raw materials, because they have also to work on this. So it is true for the whole segment, very clearly.

Okay. Thank you.

The next question is from Chetan Udeshi, J.P. Morgan.

Please go ahead.

Yeah, hi, thanks. Just maybe quick two questions.

First one is, just looking at second half at this point, do you see a reason why the earnings growth, EBIT or EBITDA will be higher or lower versus first half? Just any puts and takes you probably want to highlight on second half growth.

And second question is just on Functional Materials, again, I appreciate startup costs and raw material pressures. But at the same time, I think you also had some benefit, as you pointed out, from higher metal prices, which have flown almost entirely in terms of EBIT contribution.

You had a big jump in catalysts sales. A big part of that was metal prices so I’m still sort of struggling why the margin is still down so much despite the benefit from metal prices as well.

Thank you.

I mean, on the comment for the second half, I mean we said there is – I think Chemicals is ahead, but the downstreams are having to catch up. We think if they do that job right, they have to be able to manage this catch up.

I mean, you said can I mention anything particular? Maybe what I can mention is that the citral plants are back.

So we have lifted the force majeure on the first step, and now, we’re basically, piece after piece, doing this. Then there are the downstream products in the fragrance area, and then there is also the human nutrition part, which then comes later.

So we’ll lift them force majeures going forward. And I think this will bring us back in this, in the health and nutrition part.

It’s just one element, because we have been basically very much hindered in that business to go forward, which had an impact on the whole portfolio certainly. So if you look on the FMS part where you ask, again, and I think we have given already some information.

I mean, the logic is in each of these businesses separately. I mean, if you mentioned precious metal that is in cost that is carried through.

I mean, if the level of palladium is higher, your pricing for the catalysts is higher, so that not really contribute much. It is a little bit on the draining side, but that is not that huge lever so.

And then, on the Construction part, that is still a relatively small business compared to the others also. But on the other hand, I think what we mentioned is and what is the important driver in that segment is really automotive business.

And we think automotive business is still in good shape and will be in good shape for the second half, and that will drive our businesses. So I think I cannot add much more to what we already said.

I think we are still in a good mood that the guys can catch up and will deliver in the second half.

Understood. Thank you very much.

So now it’s Markus Mayer from Baader Helvea. Please go ahead.

Yeah, good morning. Two questions remaining.

Firstly, on your Construction Chemicals, it looks like the competitors at least [indiscernible] further there. Is this still due to your high Middle East business and/or do you think you might have to consolidate the markets further to get critical scale?

And then the second question is on Nord Stream. Do you fear any kind of impact from this political discussion on Nord Stream?

Or you also expect that this discussion might fade as long as there is trade war discussion between the U.S. and [Europe phasing] [ph]?

Thank you.

Yeah. Markus, I will start with your question on Nord Stream.

In today’s political environment, always difficult to predict what will happen tomorrow and where the political mood will swing to. I understood the comments after the Helsinki meeting in a way that there will be competition between pipeline gas from Russia and LNG from the U.S., at least this was how it was positioned at the meeting.

So I guess that’s all that I can say with respect to that. Obviously, we’re following closely the developments.

But somehow, the tone seems to change there on a daily basis. With respect to Construction Chemicals, you pointed in the right direction.

As you know, we have a stronger footprint than our competitors in the Middle East. And the Middle East has not yet recovered.

Despite the fact that oil prices have gone up, we have not seen an improvement in pricing and in conditions there. We have, if we think around the developments around the globe, we have seen good strong business development in Europe.

We’ve seen good development also in North America where also the ThermoTek acquisition that we did in Mexico last year is contributing. But as I said, Middle East is pulling us down.

And what is strong in our portfolio is Asia Pacific. And if I compare how we’ve done in Asia Pacific compared to our, and let me just say, most important competitors, we don’t have to hide.

It’s actually looking quite positive. I hope that helps.

Very good, thank you.

So now we have the final question from Martin Evans, HSBC. Please go ahead.

Yeah, thanks very much. Just a final question, I’m just trying to understand all the kind of moving parts here.

And there’s been a – there’s been numerous references to higher fixed costs through the quarter, plant turnarounds and start-ups and so on, plus obviously raw material pressures. And the overall outcome in the second quarter was relatively flat to the earnings line or in fact slightly down.

So is this – essentially, are we entering a new albeit temporary phase of BASF being largely ex-growth, while these investments are commissioned and so on? Or is this something more structural, whereby potentially you’re losing your competitive edge?

Because the second quarter economically was a good quarter, and yet, you’ve reported profits that are down. And that was what I’m trying to understand, the impact of sort of higher fixed costs in particular.

Thanks.

I mean, look, on one hand, you should think if a company is as broad and big as ours, that somehow these effects level out, because one is doing here and the other one is doing that. Unfortunately, that’s not always the case.

So sometimes, you have these stuff accumulating and then you have kinds of effects where you see something. I mean, mainly the start-up cost and what we mentioned, I mean there’s also a lot of investment of plants, which at a certain moment you start them up and you really have to step up in your fixed costs and then you have to fill these plants.

I mean, if we look really now, for example, in the FMS segment again, if you really look on what we, for example, talk about here, we have investments in the emission catalysts in China and in Poland. We have started their new plants.

They add up a fixed cost base. We have, basically, the startup of the battery plants there in Japan.

With the total activities we mentioned that. The FCA business, which grows nicely, has [already dedicated] [ph] by capacities.

So we have to invest that. We have bought, built up and started up a new plant in the Coatings area in Shanghai, because automotive, 27 million cars in China, we fortunately enough, paint a lot of them.

So that means also we have to build the capacities for that. So it is just not all the time distributed regularly.

I mean, if you look on this, yes, we have all and you know that. I think fixed cost management is normally something which is somehow a brand of BASF.

We have, over the years, done that very well. And you also know from the equity story, very nicely is curved over 10 years that we really have been managing to grow sales and EBITDA quite significantly, while we have kept fixed cost under control.

So I think it is not an element which we have to worry about. I think what it is, what I mentioned this, once again, maybe also at the end, that the businesses we have talked about, they have to look that they participate nicely in the growth – in the volume growth, because that is share and that is where we want to participate.

And they have to work on the margin and the price side. I think that is what we have to take our look on.

I’m not worried now that something under the fixed cost part is getting out of control. It’s a future investment, which has now to be filled with business, that pay for it.

So I think that is what I would say there. So I don’t see a worrying component that something goes out of control here.

It is just normal future investments.

Okay. Thanks very much.

Ladies and gentlemen, this brings us to the end of our conference call. We will report on our third quarter results on October 26.

Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today and goodbye for now.

Enjoy the summer break.