transcript q&a session - basf€¦ · transcript basf strategy: we create chemistry__29...

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BASF Strategy: We create chemistry

November 29, 2011

London

Transcript Q&A session

BASF Strategy:We create chemistry

LondonNovember 29, 2011

Transcript BASF Strategy: We create chemistry__29 November 2011

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Christian Faitz (Macquarie): A question for Martin Brudermueller. Very interesting presentation on your innovations and on this holistic approach to build a modern car, reduce weight in the car. In my observation, the BASF portfolio is missing two key products to build more lightweight car bodies, one of which is polycarbonates and the other one would be probably carbon fibres. How do you plan to approach let’s say car companies who want to work together with companies who have polycarbonates and carbon fibres? Would that be, for example, at some point if available, an attractive acquisition for you, again, if available? Martin Brudermueller: Well actually I mean there is more than one chemical solution for lightweight composites and it’s actually BASF who basically works in most of those different systems. It’s indeed that the main OEMs basically sit on one chemical method. I think you cannot dance on every marriage, this is clear. But we are engaged in I think broader portfolios than most of our competitors. It is also possible that with newer methods you can also partly change one or the other OEM by bringing new systems in and compare this with those of others. We are quite successful with this and I think it is particularly the broad automotive competence which makes all the OEMs to listen to us. I think this is really an unique market approach and access which we have in all those industries. I think it is not imaginable for many companies doing such a concept car with Daimler as we did. There were so many ideas that were really triggered by BASF and not thought by the OEM. I think with this we have the opportunity - with our systems - to really work on more. A lot of those lightweight materials have solutions of BASF. This is for example also epoxy resin. We don’t produce only epoxy, but we have hardeners for epoxy and so we can also drive those systems forward. So I think we have a unique opportunity there to make those OEMs listen to us and then partly also to join in to developments with our systems and our chemical solutions.


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Norbert Barth (WestLB): Mr Bock, one of your key assumptions for all your growth and EBITDA target is clearly that the world should grow in the next 10 years. You also mentioned in the past already that BASF is heavily depending on the worldwide industrial production. So I see on your assumption that you expect for the next 10 years to say that 3.8%, which is 50% more than in the last 10 years. I’m a little bit surprised to see this figure because what is heavily discussed currently on economic basis is really if we’re not going into a century or a decade of lower growth rates, especially if you see all the debt situation not only in Europe, clearly around the world and especially with also the opinion that growth rate in the last 10 years was heavily benefitted by this credit expansion. So do you have some background a little bit more about these general assumptions what I think is a key driver for BASF?

Kurt Bock: Yes, I think you are right; it is probably one of the most critical assumptions what is the future growth of the world economy. It certainly would have been easier to make that presentation let’s say six or nine months ago and not today in the midst of all this uncertainty.

Can we rule out that the world economy will cool down considerably? No, we cannot rule it out. Do we foresee it right now? Actually not for the next 10 years. There might be a dip. We see some uncertainties, as I said before, but the underlying trends – world population, growth of emerging markets, people want to have a better living standard – still are in place and they drive essentially the growth.

When you look at the chemical industry, the major market for chemicals 10 years from now will be Asia. It will be Asia. So we might have some problems here in Europe and in the United States right away, but our assumption is that Asia will continue to grow and I also believe that Europe, at the end of the day, will get its act together.

Can we rule out let’s say a slowdown completely 100%? Clearly not, but that would only happen if we make major policy mistakes within the next foreseeable future and let’s see whether that is the case. But the underlying big megatrends I think are in place.

The GDP growth which we highlight here, the 3%, is very much in line with what most experts, analysts foresee for the future. There are some variations to the theme certainly, but we do not feel out of sync with those forecasters at all. Again, there is some risk, but that is the picture we see right now.


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Andrew Stott (Bank of America-Merrill Lynch): Thanks. Bank of America-Merrill Lynch. I’m intrigued by how you see leverage changing. If you look at the last 10 years you’ve done 12% EBITDA growth on 8% sales growth. Looking forward, you’ve changed that relationship so the numbers are different but the multiplier is also different, so 6 and 7.5. So basically see half the leverage to your revenue growth. I just wondered what’s behind that. What’s in your thinking?

Kurt Bock: Frankly, first of all, I think it’s much easier to forecast sales development. Our model was essentially market grows by 4% and we want to outperform the market by 2%, as we have done in the past.

Then secondly, you have tried to calculate what does it mean in terms of returns and EBITDA. What we indicate here is that we want to improve further on. What is important, we did not provide you with a relative number. We shy away from an EBITDA return on sales number, as you obviously noticed and there is a very simple reason for that. That number is very well appreciated by all of you. I know that, but it’s very prone to misunderstanding simply because we will probably continue to have some kind of price inflation, so the denominator of that equation continues to change.

Even if you maintain an excellent profitability in absolute terms and sales go up because oil price sky rockets, you all of a sudden end up with a different number.

Another point, if we increase our trading business, precious metals, raw material trades which we do, very low margin EBITDA wise but very good return on capital as you can imagine. It dilutes our EBITDA return on sales numbers and for that reason we come up with an absolute number. If you do the math for 2015 it’s something 18%. If you do the math for 2020 it’s something like 20%. What we tried to convey here is the underlying theme. We will continue to work very hard to improve our profitability over time.

Andrew Benson (Citi bank): Thanks very much. Can you just give us more detail on your usages of cash? You talk about share buy-backs. You’ve been committed to a progressive dividend. You’ve now reintroduced the probability of share buy-backs and acquisitions. Can you just talk about that the priorities you’re going to place on the intensity of focus on acquisitions, the criteria of when you will restart share buy-backs and how that balance between dividends and share buy-backs is likely to develop?


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Kurt Bock: Just to make sure I understood your question correctly, the question is can you give a more specific date or number when you really get into a share buy-back mood. The first thing we will do is we will try to get an approval from our AGM in May so we are able to do share buy-backs again because we stopped it in 2008. From our point of view, it’s a viable tool. It continues to be a viable tool to drive shareholder value. It has to be synchronised with our financial needs in terms of capex and M&A and therefore, it’s a little bit difficult right now to give you a specific point in time or number.

Based on what we see right now, we will be quite cash rich in 2012, so there is a potential. But if something walks by in terms of an acquisition opportunity which was almost too good to be true, will we have a serious look at that? Most probably, but again, that is very speculative right now.

Again, what we tried to convey here is the commitment from our side whenever our financial situation allows that we will start again to buy back stock. I think it has served us well during the years 2000 to 2008 and we see here an additional opportunity to drive shareholder value.

Tim Jones (Deutsche Bank): It’s a simple question really. €4billion of EBITDA by 2015 is the gross number you’re looking for. Can you just break it down a bit more between where that will actually come from? Firstly, where it will come from between growth, operational excellence and M&A? And secondly and perhaps a little bit more importantly, I’m hoping a big chunk of that is growth as opposed to just M&A. Maybe you can talk amongst the divisions. Excluding Oil and Gas, but amongst the divisions – Chemicals, Plastics – just proportionally where do you see the differences of growth? Is everything is going to grow at 5% a year or do you think there will be significant differences of growth over that period of time? Thank you. That’s probably my follow up on the back of the first one really.

Hans-Ulrich Engel: Tim, let me start maybe with the easiest part of it because for one part we’ve clearly defined where it is coming from and that’s the €1billion that’s coming from the STEP program and there is remaining 3. We’ve shown you a lot of initiatives. We’ve shown you them in different parts of the portfolio moving further towards functionalized materials and solutions. We’ve also shown you that we are expecting significant growth in each region that we are operating in.

But breaking it down at this point in time and giving you what you are looking for which is how much is it exactly in each one of the segments, frankly, I cannot do that.


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Kurt Bock: We gave you some indication here Tim. One is, for instance, innovation. We said by 2015 we want to have sales of €10billion from innovations which are not older than 10 years and they should yield an EBITDA of €2.5billion. That is one indication. Obviously, part of that growth by innovation will be cannibalising other businesses. That is always the case, but that is a gross number we can provide.

The other question is can you be more specific about the respective segments? I understand this. We could have come up here with let’s say one piece of paper basically indicating growth rates and targets, return targets or EBITDA targets for the six segments and we decided not to do that. We decided that after having a discussion with quite a number of investors and analysts, what do you expect us to do in terms of even more transparency and disclosure and actually we’ve got two schools of thought.

One is give me as much as you can; everything. I mean why don’t you just publish the 76 Strategic Business Units in terms of sales and profits and the other one is really give me an idea what is the underlying growth you see and what kind of profitability you want to achieve and what kind of commitment you want to make for the next couple of years. As you have seen, we are in favour of that second school of thought. We are providing you with, from our point of view, a challenging target but -based on those assumptions and circumstances- achievable numbers which could give you some comfort based on our history. That is the reason why we talked about the last 10 years. This is not just shoot from the hip. This is really based on 10 years of very hard work and what I would describe as very consistent delivery of results and delivery on promises and therefore, we come up now with this number for 2015 and then more out there 2020.

We know we have a couple of things to do. I mean we have strong profitability in Chemicals. That is our Verbund. That profitability in terms of return on sales is less than it looks like because a major piece of that business is transferred to other BASF businesses at market price. That is very, very important, at market price. As soon as the market price for any of those chemicals changes, it’s passed on to our downstream businesses.

For these downstream guys, they all have to cope with rising feedstock costs and it takes time. In automotive coatings it simply takes time to talk with the OEM customers about raising prices. At the end of the day you might get there and we are quite good at that, but it means that in times of good chemical demand, rising chemical prices, all of a sudden you see the squeeze of our downstream profits and that is kind of disturbing to many of our investors and analysts and there is a very easy way of avoiding that by simply transferring at cost and not at market price. Some companies do that. Smaller ones and bigger ones which really changes the profitability picture of your segments quite dramatically.


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What is important from our point of view and that is why we showed you this one slide, this graph about market performance and market attractiveness, what is really important? How is each and every single business competing and that is what we care about. But we don’t want to really provide you with data about 76 business units, so we have to merge them into divisions. They run the businesses and then we report six business segments.

Thomas Gilbert (UBS): Thanks for taking my question on one of your four claims and I have a follow up on Andrew Stott’s question if I may but I can queue up. On your claim One Company, are there any changes in the way the governance works at BASF, or the reporting lines, or the incentivisation? Does it have, in day-to-day business practical consequences that you feel that hasn’t been in place to run the company as it should be run going forward? Should I ask the follow up on Andrew Stott right now or wait?

Again, you said we shouldn’t talk about margins yet when you do the numbers on 2015 it’s an 18% margin and on 2020 it’s roughly 20% and I would say that’s logic because the plant biotechnology royalties probably kick in from Monsanto yet when you look at your innovation slide, your margins on the 10 over €2.5billion and then €30billion sales over 7, the margin falls. Can you reconcile what is so profitable near term in the new products that is more profitable than the plant biotechnology business later in the decade?

Kurt Bock: I would ask Hans to answer the second one because it’s a really difficult one and I take the easy one about One Company. Yes, it has practical consequences. It’s not just a tag line. It’s not just kind of a branding. We thought for a split second about do we have to change our business setup. Could we, for instance, create an automotive division which comprises then all of our automotive activities? Actually, we will not do that because what we do today is we have what is called an Automotive Steering Committee which is very, very close to all of our efforts towards the major OEMs, making sure that we speak with one voice, know what each other is doing in all the businesses and really co-ordinate vis-à-vis specific customers and markets. That approach will be applied, or is already applied, in other industries as well.

It means, you’re absolutely right here we have to incentivise people accordingly. The first question which comes up and you know this from your own business where you operate banking, when you ask two people from different businesses to work together for the benefit of one customer or one market, the first question is what’s in it for me? Why should I collaborate with you if I do not see the immediate bottom line benefit for my business? We face that question already today.


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I think we are able to cope with that situation. We try to incentivise people by setting respective targets and really incorporating this into our organisation. We have, for instance, industry target groups in Asia and North America who specifically do what I just described. People from different businesses come together to really work on certain projects, technologies.

Martin talked about this Smartforvision which is kind of a neat example because so many of our different businesses came together to make this a success for Daimler.

Yes, so it has very practical consequences, but we will not change the segment reporting, or the governance structure, meaning, creating now new divisions.

Hans-Ulrich Engel: Not only did I get the more difficult question, I actually had slight difficulties due to the acoustics in the room to fully understand it. I got so far that you were asking with respect to margin development on a relative basis between 2010 and 2020, correct? You came to the conclusion that the relative margin is at roughly 20% in the year 2020 and you questioned then with respect to the year 2015 and there I apologise, I just didn’t get that part.

Thomas Gilbert (UBS): I will keep it simple. From 2010 to 2015 your margin stays roughly flat and then goes up 200 basis points at Group level. When you calculate the margin on the slide, that looks at the contribution from new products the margin in 2015 is higher than in 2020 and I would have thought that the plant biotechnology bit, the collaboration with Monsanto, that that drives that, that is back end loaded and drives the margin. That is just simple, and that means something must be very profitable near term in the new products other than the plant biotechnology and what is that?

Hans-Ulrich Engel: I think the first thing that you need to look at is over that time period 2010 to 2015 we have a number of assumptions in there such as, for example, the operational excellence programme that we’ve considered to be fully reflected in our earnings by the year 2015. Other than that, if I think about it, I don’t see that we really have major differences. The second part of the decade we have the innovations kicking in more strongly than in the first half of the decade because that’s the underlying work and you see also how the part there from the innovations is increasing with up to €10billion then. So not 100% sure that I can agree there with your interpretation.


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Kurt Bock: Thomas, there is a slide in your handout about the innovation pipeline and the sales and EBITDA from our innovations younger than 10 years and by the way, we will skip this NPV calculation which we have done for a few years. But frankly, from our point of view, NPVs, that is a decision tool, looking at specific projects and since there is no standard really in the industry how you calculate those NPVs, I think those numbers, at the end of the day, are probably more confusing than really providing additional transparency.

We talk now about additional sales and EBITDA and if you go over that slide, I think it is number 61; you can gain the impression that the first five years until 2015 provide a higher return on sales than the last five years. First five years €2.5 billion EBITDA from €10 billion sales and then the additional €20 billion sales. An additional €4.5 billion EBITDA makes the calculation correct.

Okay, this is not an exact science to make this very clear. It could well be that this is also 7.5, or maybe it’s just 6.5 at the end of the day. Again, what we try to describe here is an aspiration level built on our internal models, what we see what is in our pipeline and what we bring to the market and that is certainly much easier for the next five years than for the years 2015 to 2020.

Fabian Smeets (ING Financials): When looking at slide 24 and your continued search for suitable acquisition candidates I was wondering, we as analysts, could we assume that you will be mainly acquiring in the fastest growing areas like electronics, consumer goods and transportation? And then relating to that, when doing acquisitions, would you consider going hostile?

Kurt Bock: It’s not hostile, but it could be unfriendly from time-to-time and we did this with the Engelhard acquisition as you might recall in 2006 when Engelhard management was not too excited about the offer we made. It’s not our preferred option quite clearly because we think friendly is much easier because it makes integration at the end of the day also much, much easier.

And what areas do we want, or in which areas do we want to acquire? Yes, you are probably right in describing areas which are more downstream with serve industries which have higher growth. Industry attractiveness is for us a very, very important driver for acquisitions.

I will give you one example which is the Cognis acquisition which perfectly fits that recipe and growing industry, nutrition, health, personal care etc which is a very nice fit with our existing businesses based on slightly different feedstock.


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You know that they do not only work based on oil but also very much on palm oil which is kind of a diversification for us as well. Yes, but I cannot become more specific right now.

Martin made just one comment. He just informed we talked about the new technology, growth fields which we want to enter and what we see there is that we have to become more open to also acquire certain capabilities.

So sometimes less about acquiring certain businesses in terms of existing sales revenues already, but acquiring certain capabilities and Martin gave one example. We talked about water technology where we bought a rather small German based company inge watertechnology. I think they have 80 people, but they have a very, very promising technology and we try now to synergise that with our existing water chemicals business. You will see more of that type of acquisitions which are actually quite small. They are probably below your radar screen, but they make quite a difference to many of our promising growth fields.

Paul Walsh (Morgan Stanley): I just want to bring the focus back to the nearer term for a short period if I can. You’ve talked about the change in the portfolio, how that has given you more resilience through the cycle. Can you talk a little bit about how that might play out over the next 12 to 24 months within the context of the medium-term targets? Clearly, I don’t want to draw you on any kind of forecast, but I guess the point is what kind of environment would you have to see in order for your growth trajectory to be disrupted significantly from what you’ve laid out today, particularly with regards to the individual capex programmes you’ve got coming to fruition over the next 24 months really against the backdrop of what is a tough macro environment?

Kurt Bock: Starting with the capex program, actually most of the money we are going to spend in 2012 is already committed clearly and that won’t change. Our investment plans are not really driven by a short-term earnings considerations, but by medium and long-term market expectations and profitability targets and that will be the case in the future as well.

In terms of volatility, I can only draw your attention to our past performance. During the last decade we had two dips; a smaller one and a larger one in terms of chemical production. The smaller one was 2001 when chemical production demand globally decreased by 2.9% if I remember correctly. At that point in time our earnings dropped by 30%. The larger dip was in 2008/2009 when chemical demand dropped by almost 10% which I would describe as a dramatic change and our earnings dropped by 20% plus.


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That is an improvement by a factor of four in terms of elasticity with regard to overall chemical demand and earnings. I think this demonstrates that we have worked extremely hard to reduce our breakeven point.

Hans talked about our fixed cost development. Fixed costs have come down from something like 40% of total sales to something like 23% of total sales. That is I think a dramatic change, also highlighting the portfolio change. But it clearly means if there is a downturn (I’m speculating now), we will be more resilient than we were 10 years ago and I think we have demonstrated in 2008 and 2009 that if something happened we will act swiftly and make the right choices to safeguard our profitability and our cash flow. But again, that’s pure speculation from today’s point of view.

Margin Roediger (Cheuvreux): On acquisitions you mentioned the hurdle rate for return on investment of 8% after tax. In which year after acquisition you would like to achieve that goal and how can you measure it when you do acquisitions like Engelhard or Ciba when you split it up into many pieces and split it over the whole portfolio?

Hans-Ulrich Engel: Now with respect to that question, what we’re using the hurdle rate which is 8% after tax and what we do is we discount the cash flows coming in over an extended period of time. So you can’t measure on that basis and say well it has achieved in year three, four or five. You look at a longer period of time.

With respect to the acquisitions, you were pointing at something, or hinting at something there that is in fact a difficulty which simply has to do with the fact how we integrate acquisitions. We don’t have these businesses as standalone businesses. We integrate them into BASF’s portfolio in order to generate the synergies that we would like to generate and as a result of that, if you look at something like Ciba, that is completely amalgamated in our existing business structures and as a result of that, it is extremely difficult to look at the performance of a specific acquisition in our portfolio. Slightly different in the case of Engelhard where we kept the major part of the Engelhard business in one stand-alone operating division which is the operating division catalysts. So the best proxy, by the way, what I said with respect to Ciba is also true with respect to Cognis.


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Cognis gets completely absorbed in our existing business structures and once we’re doing our systems integration, so we bring the acquired businesses onto our existing ERP systems, we are no longer really in a position to report on the specific performance of this acquisition that we absorbed in our portfolio. So the best proxy there is actually to look at the performance of the segments that we are integrating the acquisitions in. If you look in the example of Cognis and Ciba, at the performance that we have in the Performance Products business you clearly see how these acquisitions are contributing.

But the question that you are asking is a very valid one and the answer that we have with respect to it is we can’t tell you exactly due to the way that we are integrating the businesses what the specific performance of the businesses that we acquired is if you want to know that basically in euros and in cents. So what we can offer is as we did it, for example, for the Catalyst business, we had an Investor Day. I hope that we were able to convince you with respect to the Engelhard acquisition to show how that is contributing to BASF’s portfolio. But as I said, with respect to Ciba and Cognis as examples, we only can use the Performance Products’ segment as a proxy.

Kurt Bock: By the way, we don’t do that to confuse you. That’s just the way we run our business. What we do internally is quite clearly that we from time-to-time have a look back and try to understand did we meet our expectation. That is again not a science. This is kind of a manual what we did, put together sales and earnings of respective businesses which were, let’s say, kind of the former Ciba and that gives us an indication whether our expectations have been met. But more importantly, again, we look at our strategic business units. We benchmark them against competition very, very sincerely and then try to understand whether there is an additional need to improve.

As I said, we always have some businesses where we have to do our homework, quite clearly. This might also from time-to-time include one of those which we acquired because when you acquire a Ciba business and it has also a paper chemical business in there, you know that you have a restructuring task at hand, which is exactly what we do in paper chemicals right now.


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Ronald Koehler (MainFirst Bank): The question is on Capex. You had formerly your Capex budget of EUR12.6b and I just want to understand if that is equal with the new one of EUR15b and is that a five year target which means it’s EUR3b per year versus EUR2.5b average before.

Actually, my real question is what made you change your mind to increase this Capex budget in these obviously let’s say uncertain times? So what was really the driver, or what did you think you missed before with your lower Capex budget?

And a follow up question on targets. Obviously you have given historical targets. I just want to let’s say get a reassurance on point number one 2011 target. I guess you just can confirm it despite the turbulences. And perhaps more interesting, historically you have spoken about an 18% EBITDA margin target in 2012. You said you skip the margin target, but nevertheless, so far the target was always reiterated and I just wanted to hear if you are able to reiterate it today?

Kurt Bock: Martin will answer the question about Capex and I will come back to your short-term question.

Martin Brudermueller: Yes Capex, you’re right. I mean we increased this number. You cannot expect that every year you have the same number because a lot of the big projects that kick in are partly overlapping. So could you have one year where you have certainly higher expenses because you are at the peak of the expenses for the Nanjing project that overlaps with the project which we have, for example, with Petronas in Kuantan.

Overall, we had also the same, certainly as everyone in the industry, postponed projects in 2008 and 2009 due to the crisis and we have a quite good load with the plants now and that means on average for normal larger Capex projects you need three, four years, sometimes even five years in order, from the starting point, negotiating, detailed engineering, building and then later on, commissioning. So in that respect, I think you have to have a clearer picture into the future and you cannot only always switch on and off. If you believe in the numbers which we have shown you, and that’s what we do in our long-term forecasts, then we need those capacities simply to grow.

For that reason, I think you have to expect, like in the past where we had the peak performance when we built Nanjing, when we have built Kuantan, that we will also proceed like this in the future. But overall, we simply are a much bigger company. We need bigger spending in order to fuel and keep the growth rate.


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Kurt Bock: And talking about 2012/2011, I mean we had our press call just four weeks ago, so there is nothing new really to report about 2011. What we said then still holds true.

And 2012, I mean you know the procedure. We will talk about that in February when we then have our press conference, what we see and I sincerely hope that by then we have a little bit more transparency. Right now it’s pretty foggy I would say given all the uncertainties you mentioned.

Nice try.

Jenny Barker (Nomura): My question is on nutrition. It obviously featured right at the beginning in terms of that lovely word megatrend. You’ve pointed out that your existing operations are highly profitable. Do you think you have an optimised nutrition portfolio today, or do you think in order to maximise the potential from that business you need to expand into a wider range of products? You obviously mentioned enzymes in one of the slides. Can you just talk about what your ambitions are in that particular block please?

Kurt Bock: That’s true, it’s a megatrend. It’s kind of a buzzword, but it still holds true that this is a big opportunity for a company like BASF and we see acquisition of Cognis we expanded our business for that segment quite considerably.

Yes, we have some gaps in our portfolio. We are working on that. Enzymes is one example and we highlighted it. Yes, it could be that one or the other acquisition could be helpful in that respect, but I can only assure you we will be very, very cautious and very disciplined. I talked about capability-driven acquisitions and that might also hold true in that segment.

Finally, we are investing heavily also internally to grow that business. One recent example is we are in the midst of building a plant for menthol which is kind of a flavour, very important, very complex chemistry. It’s an artificial product. Right now, most of the product is grown by farmers. Essentially customers are waiting for a competitive artificial chemistry based product. That’s another good growth opportunity for BASF, so it’s a growth area.

Follow up?


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Jenny Barker (Nomura): Just so I understand, you said that the capability-driven acquisition might hold in this segment. Does that mean where you’re looking to add technologies that you don’t already have, is that what you’re saying?

Kurt Bock: We already have technology. But you have to complement or add to your portfolio of technologies and that is what we’re also looking at in some cases. It’s simply a question of make or buy very often. It’s a question of speed. Can you accelerate development by acquiring certain technologies and you don’t have to reinvent the wheel or you don’t have to invent everything in-house and that is, I think, an important mindset.

Tony Jones (Redburn): Many of the growth themes that you’ve talked about sound like they will need a lot of service, product customisation and you talked also about getting close to customers with your bigger R&D footprint. One thing that I would like to know is how does that reconcile with the cost optimisation because normally those two factors in businesses conflict? How can you reassure us that you can buck that trend and have set out to do what you achieve?

Kurt Bock: The question was venturing into more service oriented business type model does it conflict with our cost containment measures. Frankly, I don’t think so. You have to be cost competitive in every respective of your business which we try to do.

What I would like to highlight here, there are certain things BASF can do. We are very much aware of what we cannot do. I think we also know our limitations. Let’s talk about water chemicals. I do not foresee that BASF would venture into the water servicing kind of business model where we essentially operate base water facilities and support them. That is not really our cup of tea. Our strength is good technology, customised very often where we can really earn a premium, but we are not really strong at venturing out in business models which are let’s say very unrelated to making something tangible to producing hard stuff.


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Neil Tyler (JP Morgan): A question about the STEP programme and with reference to the slide 39, is the intention of that programme to move those businesses that are in the top left square across to the right? Is that driven by perhaps a sort of recalibration of the opportunities that exist in some of those businesses, some of those having faced pretty tough conditions for a number of years? And specifically within that, can you let us know whether there are any capital efficiency measures within the programme that perhaps might impact the capital intensity of the business or even allow you to extract more working capital? Thank you.

Hans-Ulrich Engel: I got acoustically the first part of your question so I’ll answer that. The second part I will have to ask for repeating that Neil. I’m sorry for it. Somehow this doesn’t quite work the way it is supposed to be.

On the first part of your question, my understanding was you were asking with respect to the fixed costs or the STEP programme and the impact that it will have on existing businesses and whether we want to move businesses which are on the left on the slide further to the right, so towards being more profitable. Is that the correct understanding?

Neil Tyler (JP Morgan): I mean it’s really just asking you whereabouts are you focusing the measures you’re taking. Is it on those underperforming businesses or is it across the portfolio?

Hans-Ulrich Engel: Okay, so everyone asking a question from now on please do us the favour and get the microphone as close to the mouth as possible because otherwise we’re just not able to hear the question.

The answer to that is a programme, operational excellence programmes, are part of the blocking and tackling that you do. You do this constantly. You do it in each and every business. When you look at the programmes that we put in place since 2002/2003, you saw us focusing these programmes let me say in classical areas, but we ventured with operational excellence programmes even into growing regions such as Asia Pacific. We looked at our sites, at our site setup in Asia Pacific and we came to the conclusion that there was improvement potential there. So that formed part of the existing NEXT program, and expect us to do exactly the same moving forward. We will look at the entire portfolio constantly and we will see how we can improve efficiency and productivity. That is just part of, as I call it, the blocking and tackling. This is part of running entrepreneurially your businesses.


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Kurt Bock: And Neil, just one addition here quickly. We haven’t yet identified, defined, precisely what amount of investments we need to implement STEP. I think you are aware of the expenditures which we had with our NEXT programme which was roughly €0.5billion, something like €600million in Capex measures, so I can’t rule out that the same order of magnitude might be necessary as well. That exercise still goes on, but there will be some investment needs quite clearly yes, absolutely, which are highly profitable obviously.

Neil Tyler (JP Morgan): Just to follow up, in terms of the impact of STEP on the capital efficiency of the business, is there going to be any meaningful change in the capital efficiency of the BASF portfolio? That’s really what I’m trying to get at.

Kurt Bock: That is probably too hard to tell right now. I mean we are constantly trying to trim, as Hans said, to trim our businesses and make them more capital efficient and some of those projects clearly have the direction of further optimising our production network which means getting more out of our existing installations or making them slightly more productive.

Martin Brudermueller: But if I may add, I mean in the NEXT project there was also quite a lot of smart ideas to debottleneck plants. So if you take this small amount of money you get less specific capital per ton of produced material, you make the plants more capital intensive. So I think there are a lot of measures. There is partly a logistic measure where you can reduce working capital.

So I think if you take all these ingredients, yes, there is, in very many of those, a contribution also to do it smarter with less resources. In that sense, also with less capital.


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Jeremy Redenius (Sanford Bernstein): Thanks for taking the question. Your target implies over half your sales growth will come from emerging markets in the next decade. That’s an accelerating rate versus the last decade. What is the BASF of today doing in a better, faster, more efficient way to help accelerate that growth? I’m especially interested in hearing that in the context of you’ve said not national champions are moving downstream.

You’ve got an increasingly difficult investment environment in China you’ve described before and it looks like the last couple of investments you’ve made in Asia have been in what you’ve defined classical chemicals like MDI, like C4 derivatives etc. So maybe you can help me kind of reconcile that opportunity and those challenges.

Martin Brudermueller: Well I think we have been growing quite nicely and fast over the recent years in Asia and one reason is really what I showed you with the market approach. I mean the first step when we went to Asia was very much with Western customers which are customers from the US and from Europe that also globalised. So we accompanied them basically into Asia and what happened over the recent years, that the customer portfolio was very much enriched with local companies and now those local companies step up their performance by bringing own brands, by having more and more R&D. This is exactly why I showed you why we have also to have the R&D structures in Asia in order to respond.

The portfolio is also different. They are much more sophisticated products today and not only commodities. That is also why the portfolio changes quite a bit. Yes, we still have the classical chemicals in the Verbund. But if you, for example, look on the recent development of Nanjing what we have done and also what is planned in the new site in Malaysia, then this is all products that are more now forward in the value chains and that have more kind of a specialty character. I think with this offering we certainly can differentiate also and you are right, there is more and more chemical companies also for example in China that you have to regard as viable competitors with all the respect. There are sometimes national champions that get all the support from the government, be it fast approval, unlimited access to capital. But on the other hand, yes, these are new competitors and we do not shy away from competitors. We simply have to accept this. But that’s exactly why we have our levers in order to go forward into new business areas more innovation because that keeps us always a few steps ahead and that’s why I’m not really worried and I can really tell you this market approach which I have explained you to more leverage on the expertise of the different divisions, particularly in Asia, that pays out very, very well. And a lot of the companies appreciate, for example, just last example, OEM.


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We have this classical model what we do here with Daimler, but you heard we had last year a concept car with Hyundai, the i-flow. That was a similar concept as we have done with Smartforvision. And more and more of those companies also appreciate that we have this wide portfolio. We step into strategic development agreements with those customers, so I think there is all those ingredients which really allow us to grow faster also in the future in Asia with a more differentiated offer.

Julia Varesko (Berenberg Bank): I have a follow up question on slide 39. So for the businesses in the top left corner, it’s a follow up question to what Neil was asking about. Presumably some of these businesses can move from left to right with internal measures, be it growth through innovation, the market position or cost improvements and maybe some of them are more likely to rely on some sort of portfolio additions maybe through acquisitions. Could you just give some examples maybe where these dots can move from top left to top right only through acquisitions?

And also as a follow up on the same slide, for the businesses which are high performance but low market attractiveness, do they need to move into the low performance area to become potential targets for disposals?

Kurt Bock: To the second part of your question we certainly don’t want to have good performing businesses moving to the low performing part of that chart even if the markets are not overly attractive and very often here it comes down to the size of the market, the size of a market for BASF. This also is an important characteristic factor because certain small markets really don’t make a huge difference to our top and bottom line. But still, if they perform well, if they fit very nicely, have also some synergies with other businesses, be it production wise, technology wise or market wise, then they have still a good home with BASF.

It’s a little bit difficult for me to give you specific examples for those bubbles how they move from left to right and right to left. The purpose of that slide essentially was to underline that portfolio management, pruning of our portfolio, is an ongoing task. We will always have businesses which are not completely at the level we really need them at, and we will always have businesses which are very successful and all of a sudden something happens on the market or we mishandle them. It happens from time-to-time. Then all of a sudden they move left and we have to react very quickly. Also you understand that we don’t want to give you specific examples. As I said, it’s an ongoing task which keeps us really busy.


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Richard Logan (Goldman Sachs): You’ve talked about growing your emerging markets exposure significantly. I just wondered if you could talk about the return on capital employed by region and what your expectations are, where we are today region by region and where we will be in 2020. Should we expect to see a significant uplift in the return on capital employed for the emerging markets and how that will compare with the developed markets?

Kurt Bock: Correct me if I got it wrong, the question was about the profitability for prospect of emerging markets essentially?

Richard Logan (Goldman Sachs): Yes, just the return on capital employed emerging markets versus developed markets and how that is going to move over the decade. Thanks.

Kurt Bock: There is one slide in our handout which is number 10 where we highlight sales and EBITDA categorised by developed markets and emerging markets and what you can see here is that the share of profits of emerging markets has improved quite nicely and actually represents the same share as percentage of sales, so 34%, which clearly underlines that those markets are attractive and are profitable and they have not a systematically lower rate of return profitability, asset profitability, than what we see in developed markets.

The big difference certainly is that in developed markets you have a more mature stock of capital. That is for sure, especially in Europe. While in the emerging markets, obviously, book value is much closer to replacement, well you put it that way. That makes it a certain difference. But in terms of returns on sales, these are very attractive markets and we don’t foresee that those markets could become less attractive in the future simply because growing markets by definition are more attractive to capture value. If there is less fight for market share, everybody is able to make more money and that is still the case in the emerging markets.

Tim Jones (Deutsche Bank): In slide 75 where you give your 2015 target for EPS, just two straightforward questions I hope. Firstly, can I just clarify Dr Bock, did you say the 7.5 doesn’t include implied buybacks as in the presentation? I just wanted to clarify if that number doesn’t include the assumption of buybacks.


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And secondly, also just to clarify, 7.5 is what you would call reported EPS because I think it’s based off 4.96 and is not what you call adjusted EPS, which is obviously higher than that.

Kurt Bock: Twice yes. Actually, I mean we thought about should we use adjusted EPS or reported EPS. As we all know, over time, that should average out obviously unless you have a systematic deviation. So since we have the reported number starting in 2002 here, we have the reported number starting in 2010 and we didn’t really want to go into the exercise to adjust EPS back in 2002, we stuck here. We put forward the reported numbers.

Tony Jones (Redburn): I just wanted to ask about the role of petrochemical cracking and feedstock over the coming period. Will this place a much lower emphasis in the BASF business not just because that your other markets are growing, but just that you’re not investing in Capex to do that and you’re more interested in maybe accessing feedstock on the open market and then going downstream especially because I noticed that you’re still targeting quite good robust growth in Europe but I’m not aware that you’re increasing that petrochemical footprint?

Martin Brudermueller: Well petrochemical is a little bit more than only the cracker. This is also our plasticisers and many other products.

I mean looking forward, BASF does not need the full fledged raw material output out of cracker because we are not C2 driven. The main part of the value chain is C3 and C4, so we would also go for selective access to C3 and C4 and not to employ capital in the cracker.

That is also very much what the projects are in looking forward. If you, for example, take the project which we go for with Petronas in Malaysia which will be a huge petrochemical complex which will be on the adjacent side of Singapore, this will imply a large seam cracker. This will also imply a large refinery. In both, we don’t participate. We get access to C3 and C4 selectively and then go into a joint venture downstream in petrochemicals first generation downstream of cracker.

We have also, in the R&D portfolio, process development to selectively access those streams. Like, for example, dehydrogenation technology. Not only propane dehydrogenation but also butane dehydrogenation and this gives us a much better opportunity with our technology portfolio to directly assess the streams which we need and we then also employ only the capital


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in those steps where we really need them. For that reason, we do not foresee now to build further crackers and I think we don’t need that particularly also in the emerging markets in order to do that, to grow.

Norbert Barth (West LB): Mr Bock, perhaps a further question on buyback of shares. Honestly, in my view, I have a little bit of doubt if that really creates shareholder value. If you look in the past, I think there is a problem that you will not have this direct link to creating shareholder value and especially when in Germany there was the introduction of the capital gain now. Why do you not prefer to pay instead of buying back shares perhaps a higher dividend then without? That is the first question.

Just a follow up regarding the expected TDI decision in Europe to build it. It looks to be that this is a little bit postponed. Is there a reason for that? Is that because of the current Europe crisis or even the expected slowdown, or when can we expect a decision on that?

Kurt Bock: Second question about proposed TDI investment in Europe, that decision will be made early 2012. It’s not postponed in that sense. We simply have to do some homework to come up with the best solution because we still have to decide which location is the best one, Antwerp or Ludwigshafen and frankly, that capacity then will come on stream in 2014/2015, so it will go through the current downturn in the TDI market which we have seen for a couple of quarters.

Buybacks, I fully agree, a buyback in itself doesn’t make the company more valuable. I fully agree with that assessment. The capital structure doesn’t really change the value of a company, but in terms of share price, I think it has surfaced quite well and I would assume that a higher EPS also translate into a higher share price at the end of the day because simply there are less number of shares out there, or less share owners who own the company. Maybe that’s a too simple way of thinking. We are aware that people also want us to pay handsome dividends and we try to do that as Hans explained to you.

We are certainly very conscious about our capital structure and what the cost of capital is and what we have tried over the last 10 years to make our capital structure much more efficient which I think we have achieved by and large and this will also be our goal then for the next couple of years.


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Ronald Koehler (Main First Bank): A quick question on tax rate. You said 2001 to 2010 you had some tax holidays that might be running out. Do you have planned the same tax rate like today in your long-term forecast or any changes we should be aware of?

Follow up question on Capex. Do you have plans in your let’s say 10 year plans for a new Verbund site on a global level? Anything Eastern Europe or something you can share with us.

Kurt Bock: Hans will talk about the tax rate and then I will wrap this up talking about your Capex question.

Hans-Ulrich Engel: Tax rate first. With respect to the tax rate, we’ve assumed a tax rate in the low 30s through the strategy of horizon and in the end, with respect to tax rates, you’re absolutely right, there is a number of different impacts that you have on your tax rate. You have tax holidays here today which may expire. You may get tax holidays through investments in the future. So the way we’ve approached it is we looked at a let’s say normalised tax rate and that gets us to the low 30s.

Ronald Koehler (Main First Bank): Does that include the non-compensable?

Hans-Ulrich Engel: That would include the non-compensable. Yes, that’s included in there. If you look at Q3 as an example, you’ve seen our extraordinarily low tax rate there of 21% and the difference is pretty much the other tax yes.

Kurt Bock: Talking about a Verbund site, I mean it follows up on what Martin said earlier on, we have a very clear strategy what our petrochemical businesses are all about and how to move downstream and most of those projects which we’ve used there are really used captively. In order to build a new Verbund site, it would take very extraordinary circumstances in terms of feedstock availability, pricing, economics which frankly we don’t see right now. I think we are pretty well situated with what we have.

[End]

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