BASF Se

Ladies and gentlemen, on behalf of BASF, I would like to welcome you to our analyst and investor conference call. Today, we will provide you with a comprehensive overview of our performance in the second quarter and the first half of 2019.

On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans Engel, BASF’s Chief Financial Officer. Please be aware that we already posted the speech on our website at basf.com/Q22019.

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

Ladies and gentlemen, good morning and thank you for joining us. On July 8, BASF released preliminary figures for the second quarter and lowered its full year outlook.

Today, we will provide you with further information. We have structured our presentation as follows: first, I will elaborate on the key drivers for the earnings decline and the adjustments of our outlook; second, I will go into the strategic measures we are systematically implementing; third, Hans will provide you with more financial details on the second quarter of 2019; and finally, I will reiterate our adjusted outlook and present the updated underlying macroeconomic assumptions.

First, I would like to explain the main drivers of our earnings decline and the adjustment of our outlook. As you will remember, we conditioned our outlook for 2019 in the BASF Report 2018 on several assumptions, many of them did not materialize.

First of all, let me emphasize that we are operating in an environment with high uncertainty and very low visibility. Global industrial production has slowed down to around 1.5% in the first half of 2019.

Growth in our customer industries, especially in automotive, was considerably lower than we had expected at the beginning of the year. Globally, automotive production declined by around 6% in the first half of 2019.

In China, the decrease was more than twice as high at around 13%. Compared to the prior year period, chemical production declined by around 0.5% in our home market, Europe.

With around minus 3.5%, the decline was particularly pronounced in Germany. Furthermore, we did not expect the exceptionally severe weather conditions in North America, which impacted our Agricultural Solutions business.

Finally, the trade conflicts, particularly between the U.S. – United States and China, did not ease as we had assumed following the general view at the beginning of this year.

Looking at BASF, our assumptions regarding the upstream businesses only partially materialized as expected. Isocyanates margins declined even more than we had assumed.

Steam cracker margins in the first half of 2019 were weaker than we had expected in February. Overcapacities in North America did not only affect that market, but had significant spillover effects on other regions.

The heavy burden on our earnings from the scheduled turnarounds of our crackers in Antwerp and Port Arthur was considered in our planning. Let me now look at our performance in the first half of 2019 compared to the prior year period.

Sales in the first half of 2019 were at the prior year level and amounted to €31.3 billion. As a result of the uncertainty in the market and the cautious ordering behavior of our customers, we did not experience a recovery in demand from key customer industries.

BASF’s sales volumes decreased by 4% compared to the first half of 2018. All segments reported lower volumes except for Nutrition & Care.

I will comment on the volume development in more detail on the next slide. Prices decreased by 2%, driven by the Materials, Chemicals, Nutrition & Care segments and others.

Higher prices in the Surface Technologies, Agricultural Solutions and Industrial Solutions segments partially offset the decline. Portfolio effects amounted to plus 4% and were related to the acquisition of Agricultural Solutions businesses from Bayer.

The transfer of BASF’s paper and water chemicals business to Solenis at the end of January 2019 reduced the positive portfolio effect. Currency effects amounted to plus 2% and were mainly related to the appreciation of the U.S.

dollar against the euro. EBIT before special items came in at €2.8 billion, 35% lower than in the first half of 2018.

As indicated during our full year 2018 conference call in February 2019, we expected a strong decline in the first half, driven by considerably lower contributions of the Materials and Chemicals segments. However, we had not expected such a sharp decline in margins of isocyanates and cracker products.

In total, the Materials and Chemicals segments stand for 97% of the overall earnings decline in the first six months of 2019. Considerably higher earnings in Agricultural Solutions and in Industrial Solutions as well as slightly higher earnings in Surface Technologies could only partially offset the decline.

Let me add to that, EBITDA before special items was down by 19% and amounted to €4.6 billion in the first half of 2019. The decline was less pronounced than in the EBIT before special items because depreciation and amortization in the first half exceeded the prior year level due to the purchasing price allocation following the transaction with Bayer.

Turning to the sales volumes development in more detail. Compared to the first half of 2018, sales volumes of BASF Group decreased by 4%.

Half of the negative impact on volumes resulted from the planned cracker turnarounds in Antwerp and Port Arthur. The other half of the volume decline was driven by lower demand from the automotive industry and the redevelopment of the agricultural sector in North America.

Excluding those effects, our volumes remained flat. From a regional perspective, sales volumes by location of customers decreased globally, except for the region South America, Africa and Middle East.

The volume decline was mostly pronounced in North America, driven by the cracker turnaround and the weak demand in the agricultural sector. In Europe, the decline was particularly driven by lower volumes in Chemicals, Materials and Surface Technologies.

In Asia Pacific, all segments recorded lower volumes, except for Nutrition & Care. In the region South America, Africa, Middle East, volumes increased by 2%.

As part of our strategy implementation, we roll out specific global customer initiatives to foster volume growth. Besides lower volumes, key drivers for the earnings decline were lower margins in isocyanates and cracker products.

Therefore, I would like to show you the margin development in cracker products and isocyanates in the following two slides. We start with the cracker economics in major regions based on market data.

Feedstock prices are shown in blue, ethylene prices in red. Given the low ethane feedstock costs in the United States, there has been a significant capacity buildup in the region, pushing prices and margins to a 30-year low.

Further capacities coming on stream coincide with a slowing domestic consumption. This increases the pressure to export, a challenge in view of the ongoing trade conflicts.

Falling margins for global derivatives, such as ethylene glycol in Asia and Europe are a result. This development is not likely to revert any time soon.

This slide now illustrates the sharp price corrections in TDI, shown in red, and MDI, shown in blue, after hitting record levels at the beginning of 2018. We highlighted at that time already that such margin levels could not be sustained.

Waning demand across several downstream sectors, especially transportation and industrial, contributed to the negative market sentiment. A temporary upwards price momentum in Asia at the end of April was short-lived and faded after the trade conflicts escalated in May and June.

Let me now look at the factors that we as a company can influence. With our strategy, we defined six action areas where we are actively moving forward within BASF.

First, people. We are transforming our organization to be more agile and customer-focused.

Many changes were already implemented at the beginning of this year. In June, we announced further important organizational changes.

Second, portfolio. We are executing the announced transactions to sharpen our portfolio, with the Wintershall Dea merger and the planned IPO as well as our plans for Construction Chemicals being the most prominent ones.

Third, digitalization. Using digital technologies and data, we are creating additional value ranging from higher efficiency in our plants to accelerated innovation processes and innovative business models.

Fourth, operations. To remain competitive, we continuously improve our operations.

Technological leadership and operational excellence are the focus topics in this area. Fifth, sustainability.

Sustainability is a cornerstone of our strategy and a driver for growth and an element of our risk management. We drive our long-term competitiveness via carbon management and circular economy.

And sixth, innovation. Effective and efficient R&D is a prerequisite for innovation and an important growth engine for BASF.

We strive to innovate with impact for our customers by connecting R and D even more closely. The measures we defined in these six areas I just described were the right ones in November, and they are even more so today.

In the currently challenging environment, we are implementing them with high speed and determination. In the following, I will illustrate this.

We are in the midst of reshaping our organization. We are streamlining our administration, sharpening the roles of services and regions and simplifying processes and procedures.

First, we have embedded significant parts of our functional services in our operating divisions. As of today, 15,000 colleagues have already moved closer to our customers.

The embedding will be completed by October. Second, we have defined a lean corporate center to support the Board of Executive Directors in steering the BASF Group.

Less than 1,000 employees, and this is less than 1% of BASF’s workforce, will be working in these corporate units. The remaining service activities with initially approximately 22 – 29,000 employees will be assigned to four cross-functional service units: Global Engineering Services, Global Digital Services, Global Business Services and Global Procurement.

Customer-focused operating divisions and technology platforms, the new service units and more market-focused regional organizations as well as the lean corporate center are the cornerstones of BASF’s new organization. The organizational measures I just described are part of our excellence program.

We expect savings of around €300 million annually from leaner structures and simplified processes associated with this new organization. A considerable contribution is also anticipated from operational excellence measures in production, logistics and planning.

Digitalization and automation will contribute as well. Overall, we expect an EBITDA contribution of €2 billion annually from the end of 2021 onwards.

In the course of the strategy implementation, we plan a reduction of around 6,000 positions worldwide by the end of 2021, and thereof roughly half in Germany. This decrease in positions will result from organizational simplification and from efficiency gains in administration and services as well as in operating divisions.

In addition, central structures are being streamlined in the context of the announced portfolio changes. At BASF SE in Ludwigshafen, more than 1,100 employees signed termination agreements by the end of June 2019.

The related costs have been included as special charges in the first half of 2019, mostly in Q2. This shows you that we are executing at a high speed and with determination.

With our active portfolio management, we are moving forward towards higher value and more focus, this is an ongoing task. Currently, we are executing the announced portfolio measures.

On January 31, 2019, BASF and Solenis completed the transfer of BASF’s paper and water chemicals business to Solenis. The merger of Wintershall and DEA became effective May 1, and the IPO is planned for the second half of 2020, subject to market conditions.

The structured processes and related carve-outs regarding our Construction Chemicals business and our Pigment business are fully on track. We expect substantial cash inflows from these transactions in 2020.

At this point, I would like to hand things over to Hans.

Yes. Thank you, Martin.

Good morning, ladies and gentlemen. Let me turn to BASF Group’s financial figures for Q2 2019 compared to the prior year quarter in more detail.

Sales in the second quarter of 2019 decreased by 4% to €15.2 billion. Prices were down by 2%, mainly driven by isocyanates and cracker products.

Sales volumes of BASF Group declined by 6%. All segments recorded lower volumes, expect for Nutrition & Care.

The volume decline was most pronounced in the Chemicals segment, because of the planned cracker turnarounds and in the Agricultural Solutions segment due to the severe weather conditions in North America. Portfolio effects accounted for plus 2% and were related to the acquisition of Agricultural Solutions businesses from Bayer.

Currency effects amounted to plus 2%. EBITDA before special items decreased by 27% to €2 billion.

EBITDA amounted to €1.6 billion, compared to €2.6 billion in Q2 2018. EBIT before special items came in at €1 billion, 47% lower than in Q2 2018.

Special items in EBIT amounted to minus €497 million, compared to minus €66 million in Q2 2018. The increase in special charges is mainly due to onetime costs for the excellence program and the impairment of a natural gas-based investment on the U.S.

Gulf Coast, which BASF is no longer pursuing. In addition, the integration of the acquired businesses and assets from Bayer led to special charges in the Agricultural Solutions segment.

EBIT decreased from €1.9 billion in Q2 2018 to €548 million in Q2 2019. The tax rate was 18%, compared to 20.6% in the second quarter of 2018.

This was mainly a result of lower earnings, especially in countries with higher tax rates. Income after taxes from our discontinued Oil & Gas operations increased from €162 million in Q2 2018 to €6.2 billion in Q2 2019.

This is due to the book gain from the deconsolidation of Wintershall with the closing of the merger of Wintershall and DEA. Net income amounted to €6.5 billion compared to €1.5 billion in Q2 2018.

Reported earnings per share increased from €1.61 to €7.03 in Q2 2019. Adjusted EPS amounted to €0.82.

This compares to €1.77 in the prior year quarter. The cash flows from operating activities came in at €1.9 billion, compared to €2.2 billion in the second quarter of 2018.

The free cash flow decreased by 31% to €965 million. During today’s conference call, we want to offer you an extensive Q&A.

Therefore, let me only briefly touch on the segments. The detailed slides on the segments can be found in the backup of our presentation.

I already explained the main drivers for the sales development compared to the prior year quarter. Therefore, I will focus on the earnings development.

As in the first half of 2019, earnings in Q2 2019 significantly suffered from the lower margins and volumes in the Materials and Chemicals segments. In total, both segments accounted for 83% of the overall earnings decline in Q2 2019.

Earnings in the Agricultural Solutions segment considerably decreased as well, mainly due to the seasonally negative earnings of the acquired businesses and lower volumes in our crop protection business, especially in North America. EBIT before special items also declined in Other because of a swing in the currency result and in the provision for our long-term incentive program.

Significantly higher earnings in Industrial Solutions and slightly higher earnings in Surface Technologies and in Nutrition & Care could only partially offset the decline. It is noteworthy, though, that our three downstream chemical segments delivered higher results in a difficult environment versus the prior year quarter.

Let’s now turn to our cash flow in the first half of 2019. Cash flows from operating activities amounted to €2.3 billion, €1.1 billion below the figure for the first half of 2018.

This was primarily due to the lower net income after the reclassification of the book gain from the deconsolidation of Wintershall to cash flows from investing activities. Cash flows from investing activities amounted to plus €452 million in the first half of 2019, compared to minus €1.7 billion in the first 6 months of 2018.

This reflects the cash received in connection with the Wintershall Dea merger. Payments made for intangible assets and property, plant and equipment increased by €273 million.

Financing activities led to a cash outflow of €3.2 billion in the first half of 2019, compared to a cash outflow of €518 million in the first half of 2018. Dividends of €2.9 billion were paid to shareholders of BASF SE in the first half, €92 million more than in the prior year period.

Changes in financial and similar liabilities amounted to minus €215 million in the first 6 months of this year. The repayment of financial liabilities exceeded the additions to financial liabilities.

Free cash flow declined from €2 billion in first half of 2018 to €597 million, mainly as a result of lower cash flows from operating activities. Turning to our balance sheet on June 30, 2019, compared to the year-end 2018.

Total assets rose by €2.2 billion to €88.8 billion. Roughly half of this increase comes from the implementation of the new IFRS 16 standard on leases.

In addition, higher accounts receivables related to the acquired Agricultural Solutions businesses from Bayer contributed to the increase. Noncurrent assets increased by €16 billion.

The main driver for this increase was the recognition of our participating interests in Wintershall Dea and Solenis at fair value. We are now reporting our shares in Wintershall Dea and in Solenis as investments accounted for using the equity method.

Current assets declined largely due to the derecognition of assets of the disposal groups. Net debt increased by €675 million to €18.9 billion.

Our equity ratio was 46% at the end of June 2019. And with that, back to you, Martin, for the outlook.

Ladies and gentlemen. Global economic risks increased during recent months driven by geopolitical developments.

The ongoing trade conflicts between the United States and its trading partners are not likely to be settled quickly. The G20 Summit has shown that the trade conflict is just one of many aspects regarding the future relationship between the United States and China.

This conflict is causing a noticeable slowdown in the overall economic growth, particularly in China. We feared this might happen but followed the general opinion of a reasonable settlement within 2019.

We now expect a settlement of the trade conflicts during 2020 at the earliest. As a consequence and due to the slowdown in global economic growth and industrial production, we adjusted our macroeconomic assumptions for the full year.

We have reduced our 2019 growth expectation significantly for global industrial production and for global chemical production, both from 2.7% to around 1.5%. The automotive industry, an important customer industry for BASF, is no longer expected to grow in 2019.

Growth in the second half compared to the prior year period is projected to stay negative. We thus expect a global volume decline of minus 4.5% in the full year.

Customers in all industries are now very cautious with projections in these times. Our visibility on demand development is currently very low.

The previously assumed acceleration in the second half will not happen. For the time being, we expect low margins in our isocyanates and cracker products business to persist.

Let me also mention that we have a planned turnaround at our smaller steam cracker in Ludwigshafen. This will negatively affect our volumes and earnings in Q3 2019.

As a result of this challenging macroeconomic environment, we are – we adjusted BASF Group’s outlook for the full year 2019 on July 8. BASF anticipates a slight decline in sales.

For EBIT before special items, we expect a considerable decline for up to 30%. Return on capital employed, ROCE, for the full year 2019 is anticipated to decline considerably compared with the previous year.

Let me nonetheless reiterate that we stand by our dividend policy of increasing our dividend per share each year. Ladies and gentlemen, to conclude.

The macroeconomic environment has become challenging. Uncertainty is high now and predictability low.

Our second quarter results clearly reflect this. At the beginning of July, we had to adjust our ambitious outlook, which seemed, however, achievable in the global economic environment assumed at the beginning of that year.

We explained the reasons in more detail today. The consequence cannot be to stop being ambitious in the future.

The BASF team remains fully committed to an ambitious profitable growth path. Despite the current challenges, we will not lose sight of our strategic growth initiatives.

We will rigorously and decisively implement our well-defined measures around customer focus, efficiency and effectiveness with the aim to be the preferred partner of our customers. And now, Hans and I am glad to take your questions.

[Operator Instructions] The first question is from Thomas Wrigglesworth, Citi.

Two questions. First question is on exit rates.

Obviously, your guidance of down 30% of EBIT year-over-year maximum looks conservative. Could you just go through the Chemicals businesses in terms of the exit rates from 2Q?

Obviously, the market is a little worried about demand falling off in the U.S. and in Europe, specifically in June.

Color there. And then, secondly, it looks like you’ve accelerated the restructuring in the second quarter with those higher special items.

Can you talk about the – how that’s brought forwards or potentially changed the time line of benefits going forwards, both in the second half of 2019 and into 2020 from the restructuring?

Thomas, I’ll take the second one. I mean we had, from beginning when we communicated the strategy in November, a very ambitious time plan, how to establish – how to basically bring in the new measures from the strategy.

This is a very, very fast pace, a lot of things at the same time. We never had this before in BASF Group so far.

So there is nothing which we can also make more fast or put on top on the list. But what we really do is that we focus the whole team to execute this with all decisiveness and with all focus necessary.

So this is also why these 6,000 positions, which we will eliminate until the end of 2021 have been part of this excellence plan, which we communicated in November already. So it is now really on the focus for the team to execute.

And I think this difficult environment which we have now makes it clear for each and every employee in the company that this has now to happen. And in that respect, I think this environment helps us to really stay on track, and we are on track with these measures to execute.

And I think, to the first one, Hans?

Yes. Thomas, this is Hans.

If I got your question correctly, you asked with respect to developments in the Chemicals segment, in particular, what have we experienced there. Significant volume decline of 17%.

Now this is driven predominantly by the 2 cracker turnarounds that we had in Q2, Port Arthur in Texas as well as Antwerp in Belgium. We’re also seeing in Chemicals segment in particular cracker margins under pressure.

It looked for a certain period of time going into Q2 like the situation would improve at least slightly, in particular in Asia and in Europe. North America, obviously, being under pressure from about 4 million tons of new ethylene capacity that came on stream in 2018 and about the same amount that’s coming on stream during the year 2019.

So we do not expect real improvement in North America to come in 2020. It will take quite some time for these additional volumes and capacities to be absorbed in the market, particularly in a situation where there’s hardly any product flowing to China and to Asia at this point in time out of the U.S.

Cracker margins in Europe and in Asia obviously better than what we’re experiencing in North America but not where we were in Q2 of 2018. And also, here, we do not expect to see improvement now going into Q3.

What’s going to happen then in Q4 remains to be seen.

Sorry. Just as a – I kind of mentioned the downstream businesses as well.

So have you seen any notable changes in June versus the start of 2Q in the downstream businesses?

Business development in the downstream businesses, I want to say pretty much what we’ve experienced throughout Q2 now going also into Q3. In particular, the businesses catering to the transportation industry continued to be under pressure.

And then, as always, we’re now into peak holiday season in Europe. We’ll have to see how we come out of that.

Unclear at this point in time what’s going to happen. The order behavior of our customers gives us even less visibility than what we have under the normal circumstances.

Just to give you an idea, in our current order book about 50% to 60% is front month, and then the remainder is predominantly in month number two. So month one and month two is about 80% of our order book, so that gives you an idea on the kind of visibility that we have.

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

Thank you very much. Very helpful.

I had two questions. The first one was on the agricultural business and, in particular, on the contribution from Bayer seeds.

So when you gave us the original presentation on that particular acquisition, you quoted €2.2 billion of sales, which admittedly was a 2017 number. If I take the – now we have the last 12 months rolling from all the contributions in, and I think it’s just short of 12 months because you only, I think, had a few weeks absent in Q3.

I get to shy of €2 billion. So there’s a €200 million gap between 2017 and 2019 trailing 12 months.

Is that all of the market conditions or are there some one-offs or even some small disposals I missed during that whole transition? And just staying with ag, the 450 basis point decline in margin first half on first half, is there any way of delayering that?

In particular, I’m just wondering if there’s any duplication of costs for a period of time with the integration. Or is that just operational gearing and that is the number?

So that’s question one. Sorry, two parts.

Question two is more straightforward. CapEx, you obviously have your longer-term guidance.

Given market conditions, given the revisions to growth you’re putting forward now and particularly obviously what you’re seeing upstream, are you starting to think about CapEx again or is there limited flexibility there?

Sorry. Pressed the wrong button.

Andrew, this is Hans. So your first question on ag, please keep in mind at what point in time we acquired in 2018, it was in the beginning and then the second part of the business in the middle of August.

So far with the developments that we’ve seen in the seed business, we are fully on track. It’s fully in line with what we had expected.

You look at the first half results in our ag business, they give you, in this extremely different environment, an increase in EBIT before special items of, if I recall the number correctly, €160 million. So significant improvement there and, again, against a backdrop of a very difficult environment, in particular in North America.

But again, seeds business, fully in line with what we had expected. And it’s quite an interesting business that we also have – still have to get used to.

You have very high sales for the Northern Hemisphere in Q1 and you’ve seen the results that the business generated there. We’re gearing up currently for the business in the Southern Hemisphere, which will be predominantly with respect to seeds, end of Q3 and then early Q4 business.

But again, absolutely in line with what we had expected. And we also, despite the inclement weather conditions, in particular, in North America, expect to see the growth in that business that we wanted to see.

On earnings, we have a heavy impact from the inclement weather situation in North America. That is in addition then even, I guess the word might be, exacerbated by two factors.

Number one is destocking that’s going on in the channel, and number three is limited exports from the U.S. to Asia, and there, in particular, to China as a result of the trade conflicts.

And if I look at that in combination, we’re looking at an EBIT impact which is in the high double-digit-million figure to a very low triple-digit-million figure. Hope that helps.

Andrew, Martin here on the CapEx part. I mean yes, we gave you the guidance here of the €21.3 billion for the next five-year period.

You know that our investment planning is a long-term planning. We have to take the right decisions about the right technology, right location, and then we have to leverage these decisions for a long time.

And you also know that these kind of investment projects are multiyear spendings. So the major part of the spending this year is already projects under construction which we have launched last year or the year before, so there is not – on the major part, not so much you can do.

You also know that we have stepped up our operational excellence spendings. This is really to increase our reliability and also have smart debottlenecking and give us some water under the ship to grow also in the coming years, and this is maybe allowing also to postpone the one or the other bigger plant in the more midterm planning.

And there is some smaller stuff which you can take off the plan, and this is also what the operating divisions do. But don’t expect a big miracle from bringing CapEx down this year.

However, if you look then into the next year and the year after, there’s more and more of freedom in that respect that you launch the new projects, and the obligo is basically going down. So we will look now into the macroeconomic environment.

And should this persist longer, then this clearly leads to postponements of investment projects, and this eases the CapEx project. And last thing I want to mention here, and I think we have reiterated this also as part of our strategy, that we will much – we are looking much more again on which kind of businesses have to grow and which businesses have rather to bring in cash.

And this is we also look very, very detailed into CapEx allocation in the next years and to really allocate it on those businesses which then have also, from a market point of view, a good growth prospective and also from the competitive and the technology position of BASF. So this is more or less a little bit what we can do long term and midterm.

The next question is from Christian Faitz, Kepler Cheuvreux. And then the following analysts are on my list: Tony Jones, Andreas Heine, Sebastian Bray.

But now first, Christian Faitz, please.

Yes. Two questions, if I may.

First of all, automotive coatings apparently saw a significant decline in activity in Q2, which seems to be contrasting to the trend in the overall catalyst business. Am I right in assuming that automotive catalysts also saw a significant volume decline?

And then second question – or actually a question for comment. Any comments on your preparedness for any potentially upcoming drought situation regarding the Rhine River would be greatly appreciated.

Yes, Christian, this is Hans. Your question on auto catalysts, what do we see there, we saw what is to be expected in this environment in the transportation business.

We saw a decline which is in line with the overall decline in production. And to give you a bit more detail there: light vehicles, weak, as to be expected; high – HDDs or high-duty diesel, still going strong, even a bit stronger than what we had expected going into Q2.

Question about the Rhine water situation there, let me quickly elaborate on this. I’m really proud of what the team in Ludwigshafen has done over the last 12 months to prepare ourselves to be more resistant than this.

So the first thing we have done is we work with some external parties but also have our own prediction model, which allows us now for a much longer period going forward to predict how much water they will have in the Rhine and what does this mean then on the logistics so we have more time to prepare, to bring critical raw materials, and this already helps. The second part, you know that we had limitation in logistics but also in the offtake of water from the River Rhine, which has to – basically to do is to carry of warmth and the temperature of the water.

And what we have learned here, and this is really something we explain to you in a little bit more detail is another great example of digitalization because we have now, with sensors, a much better picture of where the streams come from, what temperature level they have. And with this, we can still them much better, have more leeway to cool them down before we give them back to the river, and with this also have a much higher resistance.

We have also built one further cooling facility, which gives us simply more capacity. And then there is one other part, which is the logistic.

We have certainly analyzed this in a very detailed way. We are now sure that if the same situation like 2018 came for the most critical products, we would not have that situation anymore.

We are flexible-izing offtake facilities for ships, and we also changed our transportation concept in a way that we have basically leased all the ships in Germany existing, which have a much lower – or can drive and transport at still much lower water levels. And this also gives us a much longer period of transporting goods on the Rhine than we would have had last year.

So with this, we are more prepared, much more prepared than in the past. And looking at the current situation, there will be a slight lower – slightly lower level of water for the next weeks predicted but far away from being critical, and we will observe this in a very detailed way.

But it’s really remarkable what the team has achieved in only 12 months to significantly improve our resistance.

The next question is now from Tony Jones, Redburn.

I have two, also. Firstly, question for Martin.

When I compare Slides three and 16, so the new versus old assumptions, is the conclusion here that the new guidance for EBIT is highly unlikely to be breached given that you are now factoring in so many negatives and admit that visibility is very limited? Or are there some other things on your mind still that – which are not factored in?

And then secondly, a question for Hans. Could you let us know if there were any costs booked above the line lowering EBIT before special items and whether that sort of thing could reoccur or happen in the second half?

Tony, let me really talk about this because, yes, you asked us all in February, are we overambitious with our forecast? Is it we have been more conservative in the past?

But let me really say that Hans and myself and the whole team of BASF have done the best work we could do to really get a realistic assumption. You know that I have talked to many of you in the – on the roadshow that I said the China/U.S.

conflict might take longer. We actually have not followed my own recommendation but have more followed the general one, who basically said they cannot be so stupid to postpone this for such a long time because it hurts them all.

And this is why the general perception was really that there will be a resolution this year. I think this is the major mark of really the problems we have today because it is so negatively impacting on basically almost everything, from the confidence of consumers to buy a car to having a positive psychological element in the overall perception.

So with this going in a different direction, we really had now to adjust, and you see it has been a significant adjustment. I mean basically, for industrial production and chemical production, almost half our forecast.

This is the best guess we have today. We talked to our customers.

But let me also clearly say, a lot of our customers have high uncertainty on where it really goes. You also know that, on the other hand, it is a question of a regional split.

If you look on where the gravity of the growth comes from, it’s from China. It’s 40% of the market.

And still, the highest growth assumption is in China. Certainly, with six-point something for the GDP, it’s still above 4% for chemical market.

I regard this as a very high assumption. I would even imagine that this is a little bit lower, at least also what we can see now.

And then you should also not underestimate that we have a regional effect. I mean BASF is still 40% roughly in Europe, which is our home market and which is very, very slow.

So also, with this regional pattern we have against the regional pattern from the market perspective is very difficult. So if we take this 1:1, we really think this minus 30% now is the realistic view we have in going forward, and it is the best guidance we can give at the time.

And I really have to say, if you talk to customers, it’s incredibly foggy. They don’t give you any prediction over the next months where they could be.

And as Hans said, with the ordering pattern we see now, which was cautious, more cautious since 2008, actually. It never came back to the old pattern, but it is even more conservative now.

So I think if you take this old and new guidance, we still – we again have this, now, picture as a realistic one. And just maybe last thing.

If you look on the overall PMI, so the manufacturing indices, they are basically going down since 12 months in all the regions. We are now in negative territory for Europe.

We are basically close to zero for also the U.S. even, which is still in a rather positive mode.

So there is nothing coming positive from there. And also from the industrial order indices, they’re also going down since several months now.

So this is what we think is the realistic picture as of today. And for the second question about the costs, Hans?

Yes. Tony, your question on one-offs in EBIT before special items, if you want, so, one we have specified for you, and this is the roughly €150 million impact that comes from the two cracker turnarounds, something that we do not expect to occur again, obviously, in the second half of the year.

But keep in mind please that the smaller cracker in Ludwigshafen will undergo also the usual five-year turnaround in late Q3 and then going into Q4. Other than that, there are onesies and twosies here and there.

There’s a bit of integration cost that doesn’t qualify as special item in Agricultural Solutions. But frankly, nothing to speak of and nothing having a major impact there.

That was different in Q2 of 2018. You will recall that we had significant insurance payments, in particular, related back then to the outage of the citral plant.

I guess that hopefully answers your question.

The next question is from Andreas Heine, MainFirst.

Yes. I’d like to come back to these cracker shutdowns.

I understood the €150 million are more the costs of the closure rather than the lost earnings you would have had if the cracker were running. Could you specify this?

And then looking on agro, for this I have one question to clarify this. So the negative impact from the weather conditions you said are around €100 million.

If I do the math then still earnings would be down year-on-year, specifically in the second quarter. Does that mean that what we should assume as seasonality of the Bayer agribusiness that, basically on EBIT level, only one is profitable and the others are not?

And then more general question on the trends. Martin, what do you think – 2019 is, of course, a very tough year from the macro perspective with all what you have laid out.

But from your experience being in the various regions, what can be different in 2020 looking on that the trends are, in general, going down and probably not everything can be explained with the trade conflict between China and U.S.?

Andreas, I’ll start. This is Hans.

With your question on the cracker, the €150 million that we specified is a combination of cost and lost margin. So on agro, I mean this is the first year that we have the Bayer seeds business.

Q1, strong. No question about it.

You saw the significant contribution coming there. Q2, negative earnings contribution as expected.

Q3 will also be negative contribution, and then Q4 depends on what we will actually experience in the Southern Hemisphere. It will, for sure, not be as strong as Q1, but it’s too early to call that one really out.

Yes, Andreas, I mean I spoke to several people also about this U.S./China topic. And people from China, they basically tell me the Americans stepped over every red line in terms of the negotiations, so it is really in difficult waters, I have to say.

This is also a little bit now with personal things against, obviously, people dealing with them – with each other. So that really looks like it is not solvable very quickly because China is now somehow – wants to demonstrate who has the longer breath actually to keep or withstand this pressure.

And they – I think they prepare for this. And I think also the Huawei topic which came up, that hits them also, not only in a very sensitive industry but it is also the Chinese pride that is basically hurt here.

So I think China is preparing for more independence in technology, and with this, preparing itself also for longer period where maybe it stays as it is today. I regard this as the major obstacle.

And I think the sign that would be flowing into global economy, if this would be resolved and let’s say the trade restrictions would go down, I think this would be the most important element. But on the other hand, I mean if you look on geopolitical thing, now that the conflict is that Iran has also a significant potential to bring uncertainty to the markets, including just assume there would be happening a de-escalation – an escalation from a military point of view, what that would do in the oil price.

I think there are really so many uncertainties, and people wait for kind of a positive element to switch the mode. I think one could really be the EU.

Let’s see how the new European Commission has positioned itself. If they would send out, I think, signal with a more clearer plan what they want to do and that Europe want to strengthen itself, I think this could be a major point.

But to all the industries, I talk basically to the customers, they are exactly waiting for this. And one – not to forget, which was also part of our assumption, Brexit, not so sure whether this picture looks better now after the recent days and the new Prime Minister.

So if that would really come as a rough one, it would really be difficult. So I don’t have any miracle here.

It is really, I think, the major part of the elements we have mentioned, and China and U.S. is the key.

The next question is from Sebastian Bray, Berenberg. And then on the list, we have Laurent Favre, Charlie Webb and Oliver Schwarz.

So now Sebastian Bray.

I would have two, please. The first on just a piece of detail; the second, more philosophical.

Could you please give an update on the production outage I understand you had in nutrition products and if this is likely to be a headwind in H2? Could you also talk about which products in particular have been affected and when the issue is likely to be resolved?

The second question, as I said, is more philosophical. It sounds as if your expectations for mid-and, dare I say it, even long-term Chinese demand growth have come down over the last 12 months.

Would you – would the Guangdong plant as it stands still make returns similar to the level it was approved on if you were to put in current macroeconomic conditions or only a modest recovery?

Sebastian, I take the philosophical one because Hans is the man for the numbers. So what we do is we believe long term in China.

I mean we told you in 2013, this is 50% of the market. We certainly analyzed this.

The Guangdong province, 110 million people. They import 20 billion of – 20 million of chemicals every year.

It’s not about replacing this, but this is also an additional potential. But it is – we’re building also in growth.

Our major customer industries are investing over there. So as I said earlier, if you take a decision like this, you have to have a long-term picture.

And honestly spoken, if China would have a problem long term, then I don’t want to really talk what problem we have here in Europe, where actually 40% of our business is. So I think having lived there 10 years, that was always a bumpy road.

And I think the long-term fundamentals are still there, and this is also why this is part of our CapEx project forward. And we clearly see this as an opportunity.

And this is – even maybe taking a little bit longer, it’s still only a blip on the way forward.

Sebastian, on your question on vitamin E, we experienced, in fact, a technical issue in the vitamin A production process. This is at the very end of the production process and only affects two vitamin A animal feed derivatives.

So the vitamin A synthesis in itself is not affected by it. We can supply all our contractual customers at this point in time as a result of that.

We also do not expect this to have a meaningful impact then in the second half of the year and expect to be fully back online, I want to say, most probably sometime late October, early November.

The next question is from Laurent Favre, Exane BNP Paribas.

My question is on ag, but this time it’s on the legacy business. So it sounds from the commentary that really the weakness in the first half or in Q2 was really in North America and in Europe, and I was wondering if you could tell us a bit more about the splits on volumes and pricing for those two regions.

And obviously, we have to wait a few days before we can get a clearer picture from the peer group, but it sounds, looking at Q1, that your organic performance was below the peer group, and your H1 performance is certainly below your – one of your two largest competitors that reported last week. So I’m just wondering, are you seeing anything on the ground that makes you think that you are losing share?

Or is there anything else that we should be aware of, bearing in mind that, in theory, you were going to have one of the best pipelines in terms of new crop protection products for the next two years?

This is Hans. I’m not sure that we’re actually looking at the same type of publications when it comes to peer group, but I may get to that a little later.

So what have we actually seen in our business? We’ve seen, in North America, weakness basically across the board.

Very interesting developments there. In the U.S., we had the arctic chill followed by the floodings.

And in Canada, we had the arctic chill followed by a drought at least in the western part of Canada. That had a significant impact on our legacy business, and they are pretty much across the board on herbicides as well as on fungicides.

Business in Europe, actually in the first half of 2019, we have an impact there in the fungicides business in Western Europe, and that is related to the rather dry conditions that we have here. So Western Europe, a bit weaker than what we had expected, but almost fully compensated by stronger business in Eastern Europe.

So overall, I’d say Europe, doing okay. Asia, very nice business development in China and in India, partially compensated by the drought conditions in Australia and in Indonesia.

But the more important parts of the business are China and India. In both areas, we see growth.

So if I put this in a nutshell, the brief answer is North America, weakness across the board, which is weather-related. Europe, Western Europe, with an impact from fungicide but almost fully compensated by stronger business in Eastern Europe.

And then Asia Pacific, overall, doing well with the expected sales and earnings growth that we wanted to see there. Now with respect to peer comparison, I have seen one announcement lately.

If I compare to that, I thought we’re doing okay. If you have a different opinion there, maybe we take this and discuss it off-line.

Thank you.

The next question is from Charlie Webb from Morgan Stanley.

Just a couple from me. Staying on ag, Bayer have alluded to receiving service costs for the business, I see, that you have acquired.

Could you help us understand what those service costs are expected to be for this year and whether they will continue into next year, whether you expect them to roll off and also how they’re being reported? Is it below?

Or is it pre-or post-exceptional? And then secondly, just as it relates to the volume discussion and the kind of run rate into next – into the second half, how much of – do you think the destocking, which inevitably has been in the volume numbers, you see in the first half, do you think the destocking is done?

Do you think there is more destocking to go? And in particular, I guess, focusing on automotive, given where kind of run rate demand is, could you – do you expect further destocking for chemicals and chemical products in the second half?

Okay, Charlie. I’ll start with your first question.

As you can imagine in a transaction like we had with Bayer, in particular, in the first year, there’s a number of things that still need to be sorted out. Among them, there’s also a service agreement that we have with Bayer for a limited period of time.

Bayer provides services. Bayer also acts as distributor for certain products also for a limited period of time.

But these type of arrangements that we have, they are very typical, and they come to an end relatively soon. Like other service providers we had to use in the transition period, you may recall that we explained that all business services were provided by a third-party during what we call the structural integration phase.

That structural integration phase came to an end on July 1. Since then, we have all businesses that we acquired on our ERP system.

It follows now our business processes. So also there, we don’t need the services of a third-party anymore.

Charlie, a little bit on volumes. I mean we said after these special effects which we have had, we have been basically flat.

Is this what we want in the IT business? No, it is clearly still below the market because the market at the very end grew a little bit, and it has to change.

So we have not managed totally to turn that around to convert ourselves into a company that grows above market. So very clearly, also, in the second half, that has to be our focus.

I think there is no big stocks anymore at the customer side. I think they are very much in the wait-and-see mode.

We have now to really look that we capture also what we can capture in this difficult environment. And you know we are always the first ones who go down, and we are the first ones who come up if it really picks up a little bit.

This is simply chemistry. This has to do with the destocking.

And so we have also been a little bit limited in our firing power with volumes, which came from the two crackers that were down, and that should improve. And now we have to have a focus to – even in a slowing environment, to at least bring our volume level up on what is in the market.

But the target is really also to beat it. So that’s a bit the situation, and I think let’s see what the customers also see in terms of going forward, and then we will be the first one benefiting from it.

Okay. Given the time, we would like to limit the list now to the three remaining analysts, Oliver Schwarz, Chetan Udeshi and Peter Clark.

There is one fixed income analyst, Stephanie at JPMorgan, on the line. We will call you later on.

Otherwise, it takes a bit too long today. Now Oliver Schwarz, Warburg Research, please.

I’ll try to be brief. First one, a quick one.

Inventory in Agricultural Solutions, especially in North America, any thoughts about the inventory levels there after the sluggish demand of the first half? And are there inventory buybacks likely in the second half of this year?

And the second question is, Mr. Brudermüller, you gave an outlook or, let’s say, a guidance regarding EBITDA as a midyear – midterm target, where you stated that you want to have BASF growing its EBITDA before special items of 3% to 5% every consecutive year for the next 5 years.

Now judging from the EBITDA before special items' development in the first half year of 2019 and your guidance that seems to be a bit hard to achieve already in 2019. Does this guidance still stand?

Oliver, I’ll start with your question on inventory levels in North America. What have we seen with our distributors?

We’ve seen quite some destocking at the distributor level. So our expectation, even though it’s a bit too early to come to final conclusion here, is that the distribution channel should be at the end of the season below the historic averages.

But as I say, we do not yet have final data there. Buying back product is something that is typical for seeds, but it should not have an impact on the second half of the year because, to the extent required, we have provisions on the book there, so that’s already covered in the P&L in the first half of the year.

And to the seeds only, this does not apply to crop protection.

To make this very clear, I mean all the targets – the financial targets which we have are basically connected with each other. We said 2019 is a kind of a transition year.

And now lowering the outlook, that is certainly difficult this year. But you should clearly take us that we, in the coming years, have this as a target, and don’t roll in now our targets which we have put out.

This is also true for the dividend. This is why we said you should not much worry about the dividend.

Yes, there can be years, this was also in the past once in a while, that you have to basically higher dividend payment in the cash flow. That’s definitely not the target.

But in a single year, this is not a problem. So I think, over the longer term, very clearly, we stick to this 3% to 5% EBITDA increase per year.

The long-term plan and the projections is clearly supporting that. What happens now in the macroeconomic view, how long that takes is another part which we cannot see, but you should simply take BASF management committed to its financial targets.

So now it’s Chetan Udeshi, JPMorgan.

I was just wondering if – just – if I were to take 30% decline in EBIT – there are a lot of moving parts, some contribution from Bayer, the Oil & Gas accounting. Can you give us some sense of what is the organic development in earnings in 2020?

And the related question to that is, mostly likely, the organic earnings are down more than 30%. I would be interested in hearing the number.

I mean this is on top of 16% decline last year. Does it make – within the company – does it really raise the question on the benefit of this Verbund structure and the model itself?

Because it seems like BASF has probably seen one of the worst declines in the sector in the last two years.

Chetan, this is Hans, let me give it a try. As Martin has explained, our up to minus 30% guidance for EBIT for the full year 2019 is based on what we’re currently seeing.

Is this a reason to start to question the Verbund concept of BASF? Definitely not.

If you look at the composition of the decline that we have in the first half of the year, we’ve given you the reasons there. In the first half of the year, almost the full decline is explained by what’s happening in petrochemicals and what’s happening in the polyurethane value chain, that’s where the decline is.

Our ag business, as already mentioned, delivers €160 million more in EBIT. If you look at our three chemical downstream segments, you have Industrial Solutions up compared to the first half of 2018.

You have the Surface Technologies up compared to the first half of 2018. And then you have Nutrition & Care, which is slightly down.

The only reason for it being slightly down are the insurance payments that we received in the first half of 2018. If you take that out and compare underlying performance, the Nutrition & Care is also up and that in the extremely difficult environment that we’ve experienced in the first half of 2018.

And you can obviously debate, shouldn’t – in an integrated setup, shouldn’t downstream compensate fully what’s going on in upstream? That is impossible, considering the significant swing that we’ve seen in the short period of time both, in particular, in cracker products but then also in MDI and in TDI.

So while Martin said we stand fully behind the financial commitments that we’ve communicated and, in particular, our dividend policy, I can tell you that we fully stand behind the Verbund concept.

The final question is now from Peter Clark, Societe Generale.

It’s just on price management downstream. I’m just wondering how comfortable you are certainly relative to your peers on what you’ve been pushing so far.

And If I take an example, auto OEM, would you be up on price in all regions of the world? And then tied with that, the margin argument.

Obviously, the Surface Technology margin is up or moving in the right direction. Just wondering if that would be the same for Coatings and potentially even OEM Coatings?

Or is that too early for that?

So I think we don’t have the time anymore to go in each of the businesses because it’s at the very end what you, I think, have to do. But as Hans said, I think the downstream segments remarkably well performed actually in this different – difficult environment.

And in a lot of these businesses, actually, the margins are pretty good. So what is lacking is really the volume part.

And we have somehow caught up a little bit in these areas. And as you know, the pricing mechanisms are not that this is formula pricing and adjusting to each up and down.

This is normally more value based. So I would say, from the margin point of view, we are not so badly positioned in this business.

In most of them, at least, you know that you have also some more commoditized parts in these portfolios but for the specialized part, definitely. So what really has to come in is the volume part.

And this is, on one hand, from the macroeconomic part, but I clearly also said the BASF team has to become a little bit more aggressive also about the volume piece. This is an important part now also for the performance of the second half.

So – but we are confident now having the two big crackers back. And let me really use this last question in order to say – to tell you that the BASF management team is fully aware of the situation we are in.

It’s a serious situation, and it is a difficult environment, but we very closely talked on what is the priorities now to really put the measures into place and to accelerate and to be at the utmost speed so that we come to our new BASF, which is much more forceful and much more customer-oriented, which gives us, then, the opportunity to come on the growth track. And I think this growth part is the critical part for our portfolio going forward.

If we manage that in the second half and then also in 2020, even in the better – or in a lower, slower environment, then I think we are also able to deliver on our financial targets.

Ladies and gentlemen, this brings us to the end of our quarterly conference call for analysts and investors. Let me take this opportunity to draw your attention to our Capital Markets Day on September 27 in Ghent, Belgium.

The event will be focused on Agricultural Solutions. Martin Brudermüller, Saori Dubourg; the division heads, [indiscernible] and Peter Eckes as well as further colleagues from our business and R&D will join.

We hope to welcome you in Ghent. If you have not sent the completed registration form back to us yet, please do so at your earliest convenience as rooms in the dedicated hotels can only be blocked until the end of July, and that’s beginning of next week.

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