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Edited Transcript of BAS.DE earnings conference call or presentation 25-Jul-19 7:00am GMT

Half Year 2019 BASF SE Earnings Press Conference

Ludwigshafen Jul 26, 2019 (Thomson StreetEvents) -- Edited Transcript of BASF SE earnings conference call or presentation Thursday, July 25, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anke Schmidt

BASF SE - SVP of Communications & Government Relations

* Hans-Ulrich Engel

BASF SE - CFO & Vice Chairman of Board of Executive Directors

* Martin Brudermüller

BASF SE - Chairman of Management Board, CEO & CTO

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Conference Call Participants

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* Ludwig Burger; Reuters; Reporter

* Oliver Sachgau; Bloomberg; Reporter

* Sabine Rennefanz; Berliner Zeitung; Reporter

* Siegfried Hofmann; Handelsblatt; Reporter

* Tatjana Junker; Mannheimer Morgen; Reporter

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning, and welcome to the telephone conference of BASF SE. (Operator Instructions) The conference will be broadcasted and recorded for reasons of documentation and will be live on basf.com/pressconference. (Operator Instructions)

I will now give the floor to Ms. Schmidt, Head of Corporate Communications and Government Relations.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [2]

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Yes. A warm welcome to all of you, ladies and gentlemen. We are very pleased that you are joining our teleconference this morning. After the publication of our preliminary figures on the 8th of July, today, we are going to present to you the financial figures of BASF Group for the first half year and second quarter 2019. You will find more detailed information also in our midterm financial report.

You will be speaking today to Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans-Ulrich Engel, CFO of BASF.

Before we start, I would like to give you a few pieces of information. The conference language is German with a simultaneous interpretation into English. (Operator Instructions)

And now I will give the floor to Martin Brudermüller.

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [3]

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Good morning, ladies and gentlemen. Hans Engel and I would like to extend a warm welcome to our conference call on the second quarter.

We already published the key figures in an ad hoc release on July 8. As you know, our 2019 outlook presented in February of this year was based on a number of assumptions, macroeconomic and geopolitical ones. Unfortunately, many of these did not materialize. Today, we will give you a comprehensive overview of our business development in the second quarter. We will also tell you about the measures we have introduced to stay on track in this challenging environment.

First of all, let me emphasize that we currently are operating in a business environment with high uncertainty, low visibility and poor predictability. Consider our macroeconomic assumptions from the beginning of the year, and let's take a look at these figures today.

Looking back, growth in our customer industry in the first half of the year was significantly below our expectations. Growth in industrial production slowed considerably around the world. This was very evident in automobile production. The overall forecast for 2019 was plus 0.8%, but production in the first half declined worldwide by 6%. In China, the decline was even 13%.

Compared to the prior year period, chemical production declined by 0.5% in our home market of Europe. The downturn in Germany was particularly pronounced at 3.5%. North America has struggled with exceptionally unfavorable weather conditions in recent months. At the beginning of the year, we could not have predicted the prolonged heavy precipitation in the major agricultural-growing regions. Flooding and extreme conditions literally led to bad weather for our Agricultural Solutions business.

The trade conflicts, particularly between the United States and China, are also a serious concern. We had followed the common view that a solution would be found by the middle of the year, but now it seems the situation will not ease for some time.

Turning to BASF, we had to lower some of our assumptions regarding the upstream businesses. For instance, isocyanate margins, they declined even more than we had originally assumed. Steam cracker margins in the first half of 2019 were also weaker than we had expected. One main reason for this, the overcapacities in North America which also had spillover effect on other regions. And finally, the scheduled turnarounds of our crackers in Antwerp and Port Arthur put a heavy burden on our earnings. We had, however, taken this into account in our planning.

Ladies and gentlemen, well, how did our performance in the first half of 2019 compare to the prior year period? Sales of EUR 31.3 billion in the first half of 2019 nearly met the prior year level. Uncertainty in the market led to cautious ordering behavior among our customers in key industries. Sales volumes decreased by 4% compared to the first half of 2018. All segments reported lower volumes except for Nutrition & Care.

Prices decreased by 2% owing to declines in the Materials, Chemicals, Nutrition & Care segments and Other. 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 the businesses from Bayer. The transfer of our paper and water chemicals business to Solenis at the end of January reduced this positive portfolio effect.

Currency effects amounted to plus 2%. These were mainly related to the appreciation of the U.S. dollar against the euro. EBIT before special items came in at EUR 2.8 billion, lower than in the first half of 2018. This decrease was primarily due to the considerable lower contributions of the Materials and Chemicals segments.

We had already stated in February that a strong decline was expected in the first half, especially due to lower margins and volumes for isocyanates and cracker products. However, we had not expected such a sharp drop. The planned cracker turnarounds in the Petrochemicals division also had a negative effect on our earnings. The Materials and Chemicals segments, therefore, account for nearly the entire earnings decline in the first 6 months of 2019.

EBIT before special items was considerably higher in the Agricultural Solutions and Industrial Solutions segments and slightly higher in the Surface Technologies segment. However, this could only partially offset the decline in the other segments.

What were the driving forces behind the decrease in sales volumes? Half of the negative impact on volumes resulted from the previously mentioned cracker turnarounds in Antwerp and Port Arthur. Moreover, there was weak demand from the automotive industry and the negative development of the agricultural sector in North America. These 2 developments accounted for the other half of the volume's decline. Excluding those effects, our volumes remained nearly stable.

Let's look at the regions. Sales volumes decreased globally, except for the region South America, Africa, Middle East. The volume decline was most pronounced in North America. This was due to the cracker turnaround and the weak demand in the agricultural sector. In Europe, the main factors were lower volumes in the Chemicals, Materials and Surface Technologies segments.

In Asia Pacific, all segments recorded lower volumes except for Nutrition & Care. By contrast, volumes increased by 2% in the region South Africa -- South America, Africa, Middle East. As part of our strategy implementation, we have pushed forward with the rollout of a number of initiatives worldwide to further improve customer retention and foster volume growth.

Ladies and gentlemen, besides lower volumes, a key reason for the earnings decline was lower margins in isocyanates and cracker products. I would therefore like to take a closer look at these factors. Let's start with cracker economics in major regions. Feedstock prices are shown in blue, ethylene prices in red. The low ethane feedstock costs in the United States have led to a significant capacity buildup in the region. This has pushed prices and margins to a 30-year low. Further capacities are coming on stream while domestic consumption is slowing. This increases the pressure to export, a challenge in view of the ongoing trade conflicts. This also leads to increasing margin pressure on global derivatives, such as ethylene glycol, in Asia and Europe. We do not expect this development to revert at any time soon.

Now let's look at the isocyanate margins. After hitting record highs at the beginning of 2018, the prices of TDI, shown in red, and MDI, shown in blue, experienced a sharp correction. We had highlighted early on that such record margins could not be sustained. In addition, demand is waning across several downstream sectors such as transportation. This also contributes to the negative market sentiment. The temporary upward price momentum in Asia at the end of April was short-lived. It faded quickly after the trade conflicts escalated in May and June.

Ladies and gentlemen, let's now look at the factors that we as a company can influence and that we are systematically tackling. With our strategy, we defined 6 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 2019. In June, we announced further important organizational changes.

Second, portfolio. We are executing the announced transactions to sharpen our portfolio. The most important ones are the merger of Wintershall and DEA along with the planned IPO as well as our plans for the Construction Chemicals business.

Third, digitalization. Using data and digital technologies, we are creating additional value. We are making our plants more efficient. We are accelerating innovation processes, and we are launching innovative business models.

Fourth, operations. To remain competitive, we are improving our production processes. We are continuously improving our plant availability. Technological leadership and operational excellence are the focus topics in this area.

Fifth, sustainability. It is a cornerstone of our strategy, a growth driver and an element in our risk management. We enhanced our long-term competitiveness via carbon management and the circular economy.

And sixth, innovation. Effective and efficient research and development is a prerequisite for innovation. It is also another 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 6 action areas were the right ones in November, and they are even more so today. Our environment is challenging. We are therefore implementing these measures with great speed and determination.

I will now share a few examples. We are in the midst of reshaping the BASF organization. We are streamlining our administration. We are sharpening the responsibilities and roles of service units and regions, and we are simplifying procedures and processes.

In recent months, we have embedded significant parts of the functional services in the operating divisions. As of today, 15,000 colleagues are now working closer to our customers. More will make this move by October.

In addition, we have defined a lean corporate center. It supports the Board of Executive Directors in steering the BASF Group. Fewer than 1,000 employees will be working there. This represents less than 1% of our workforce.

The remaining service activities will be assigned to 4 cross-functional service units: Global Engineering Services, Global Digital Services, Global Business Services and Global Procurement. They will initially comprise approximately 29,000 employees.

These are the cornerstones of BASF's new organization: customer-focused operating divisions, technology platforms and new service units as well as the more market-focused regional organizations and the corporate center.

The organizational measures required for this are part of our excellence program. Leaner structures and simplified processes should lead to savings of around EUR 300 million annually. A considerable contribution is anticipated from operational excellence measures in production, logistics and planning. Digitalization and automation will also make a significant contribution. Overall, we expect an EBITDA contribution of EUR 2 billion annually from the end of 2021 onward.

As previously announced, we plan a reduction of around 6,000 positions worldwide by the end of 2021. This will result from organizational simplification and efficiency gains in administration, services and the operating divisions. In addition, central structures are being streamlined in the context of the announced portfolio changes in the Construction Chemicals and Pigments businesses.

I can already provide you with one number today. At BASF SE in Ludwigshafen, more than 1,100 employees accepted an offer and signed termination agreements in the first half of the year. The relevant costs have been included as special items in the first half of 2019, mostly in the second quarter.

At this point, I'd like to hand things over to Hans Engel who will discuss the second quarter figures.

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Hans-Ulrich Engel, BASF SE - CFO & Vice Chairman of Board of Executive Directors [4]

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Thank you, Martin, and good morning, ladies and gentlemen. Let us now have a look in more detail at BASF Group's financial figures for the second quarter of 2019 compared to the prior year quarter.

Sales in the second quarter of 2019 decreased by 4% to EUR 15.2 billion. Prices were down by 2%, mainly driven by the isocyanates and cracker products businesses. Sales volumes declined by 6%. All segments recorded lower volumes except for Nutrition & Care. The decline was most pronounced in the Chemicals and Agricultural Solutions segments. In Chemicals, it was because of the previously mentioned planned cracker turnaround. And in Agricultural Solutions, it was the unfavorable weather conditions in North America. Portfolio effects accounted for plus 2% and were related to the acquisition of the businesses from Bayer. Currency effects amounted to plus 2%.

EBITDA before special items decreased by 27% to EUR 2 billion. EBITDA amounted to EUR 1.6 billion compared with EUR 2.6 billion in the second quarter of 2018. EBIT before special items came in at EUR 1 billion, 47% lower than in the prior year period.

Special items in EBIT amounted to minus EUR 497 million compared to minus EUR 66 million in the second quarter of 2018. The increase in special items is due in part to onetime costs for the excellence program. Moreover, there was an 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 items in the Agricultural Solutions segment. EBIT decreased from EUR 1.9 million -- EUR 1.9 billion in the prior year period to EUR 548 million in the second quarter of 2019.

The tax rate was 18% compared with 20.6% in the second quarter of 2018. Income after taxes from our discontinued Oil & Gas operations increased from EUR 162 million in the prior year period to EUR 6.2 billion in the second quarter of 2019. This was due to the book gain from the deconsolidation of Wintershall following the closing of the merger of Wintershall and DEA.

Net income amounted to EUR 6.5 billion compared with EUR 1.5 billion in the second quarter of 2018. Reported earnings per share increased from EUR 1.61 to EUR 7.03 in the second quarter of 2019. Adjusted EPS amounted to EUR 0.82. This compares with EUR 1.77 in the prior year quarter.

The cash flow from operating activities came in at EUR 1.9 billion compared with EUR 2.2 billion in the second quarter of 2018. The free cash flow decreased by 31% to EUR 965 million.

Ladies and gentlemen, in order to have more time for your questions, today, I will only briefly touch on the segments. You can find further details in our half year financial report 2019, which was published today. I already explained the main drivers for the sales development in the second quarter of 2019 compared to the prior year period, therefore, I will focus on the earnings development.

As in the entire first half of 2019, earnings in the second quarter of 2019 suffered significantly from the lower margins and volumes in the Materials and Chemicals segments. In total, the 2 segments accounted for 83% of the overall earnings decline in the second quarter of 2019. Earnings in the Agricultural Solutions segment considerably decreased as well. This was mainly due to the seasonally negative earnings of the acquired businesses and lower volumes in our crop protection business.

EBIT before special items also declined in Other because of currency effects and valuation effects for our long-term incentive program. Significantly higher earnings in Industrial Solutions and slightly higher earnings in the Surface Technologies and Nutrition & Care segments could only partially offset the decline. I would like to point out that in this difficult environment, our 3 downstream chemical segments reported higher earnings than in the prior year quarter.

Now the cash flow. In the first half of 2019, cash flows from operating activities amounted to EUR 2.3 billion, EUR 1.1 billion below the figure of 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 EUR 452 million in the first half of 2019 compared with minus EUR 1.7 billion in the prior year period. This increase was largely attributable to the net payments received primarily in connection with the merger of the Oil & Gas business of Wintershall and DEA. Payments made for intangible assets and property, plant and equipment increased by EUR 273 million compared with the first half of 2018.

Cash flows from financing activities amounted to minus EUR 3.2 billion in the first half of 2019 compared with minus EUR 518 million in the prior year period. The decrease was primarily driven by changes in financial and similar liabilities. Free cash flow declined from EUR 2 billion in the first half of 2018 to EUR 597 million, mainly as a result of lower cash flows from operating activities.

And I will now give the floor back to Martin Brudermüller for the outlook.

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [5]

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Thank you, Hans. Ladies and gentlemen, the global economic risks have increased significantly during recent months. This has been driven by geopolitical developments and the ongoing trade conflict between the United States and its trading partners. These conflicts will not be resolved in the near future. The G20 meeting showed once again that the trade conflict is just one aspect of the story. There are many other issues, including fundamental ones relating to the 2 superpowers' dealings with each other. All this is causing a noticeable slowdown in macroeconomic growth around the world, particularly in China. We had feared this might happen, but we followed the general assessment that the conflict would be resolved by the middle of 2019 at the latest. We currently do not expect a solution now until sometime in 2020 at the earliest.

We therefore have significantly adjusted our macroeconomic assumptions for the 2019 outlook downwards. We significantly lowered our 2019 growth expectations for global industrial production and for global chemical production from 2.7% to around 1.5% in both cases.

The automotive industry, an important customer industry for BASF, will not recover this year. We now expect a global decline of 4.5% in 2019. Customers in all industries are currently very cautious with projections and ordering. Our visibility on demand development is also very low. Overall, we expect continued low growth in industrial and chemical production in the second half of 2019. The upturn we had expected is not occurring.

From today's point of view, we expect low margins in our isocyanates and cracker products businesses to persist. In the third quarter, we have to shut down our smaller steam cracker in Ludwigshafen for a planned turnaround. This will negatively impact our volumes and earnings.

With the view to the challenging macroeconomic environment, on July 8, we adjusted BASF Group's outlook for 2019. BASF now anticipates a slight decline in sales. For EBIT before special items, we expect a considerable decline of up to 30%. Return on capital employed for the full year 2019 is anticipated to decline considerably compared with the previous year. Let me nonetheless reiterate that we stand by our progressive dividend policy. We want to increase our dividend per share each year.

Ladies and gentlemen, the macroeconomic environment has become very challenging, uncertainty is high and predictability is low. Our second quarter results clearly reflect this. We had to lower our outlook. It was ambitious but seemed achievable under the prevailing conditions at the beginning of the year. Today, we have given you a detailed explanation of the reasons for this. Our response to this cannot be to forgo ambition in the future simply to avoid corrections. BASF's management team remains committed to BASF's ambitious development.

Despite these challenges, we will implement our strategic growth initiatives rapidly, thoroughly and rigorously. We will also rigorously and decisively implement our measures around customer focus for a strong, efficient and productive BASF that continues to grow profitably in the future and it is the preferred partner of our customers.

And now Hans Engel and I will be glad to take your questions. Thank you.

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Questions and Answers

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [1]

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(Operator Instructions) And the first question comes from Ludwig Burger from Reuters.

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Ludwig Burger; Reuters; Reporter, [2]

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I have 3 questions, if it's possible. The downsizing that was announced on June was, as your press release said, was not economically driven. But is it possible that you now need additional restructuring measures? Or are you trying to find out whether it is necessary with a view to the forecast?

Second point, you just mentioned that the forecast measure or your approach, as you have with the forecast, is now being discussed, and there is a certain discrepancy between the general expectations of the data but also in terms of earlier, many people were talking about their -- they couldn't understand your optimism with regard to the automotive industry development.

And thirdly, Construction Chemicals and Pigments, could you give us an outlook there?

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [3]

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Yes. Well, Mr. Burger, in November, we discussed or presented a strategy to you where we thought very closely what we could do in order to prepare for the future for BASF, and part of that is the excellence program. And the excellence program has several components, and one of the components that we now presented to you is the reduction of 6,000 jobs and that streamlining of organization. And with this streamlining -- or in the wake of this streamlining was already planned when we communicated the strategy to you. So it has nothing to do with the current market environment.

So can we do more than we're doing just now? Well, I don't believe so because we have to change speed in many dimensions at BASF, and I don't think that we can pick up on that. So let's see that the measures that we are taking now are done very consistently and as fast as possible, and we've done so already in the first 6 months of this year. We are good in our plan.

Mr. Burger, the forecast and the discrepancies you mentioned, yes, you said we are on the optimistic side just now. But I think you know BASF well enough to see that we always make a forecast on the basis of what we think is realistically possible and feasible, and we did so in February. I was in a closer dialogue with you before. We had a slightly deeper view on the trade conflict and the solution possible between the United States and China. We were doubting whether an alleviation was possible. But then, we also look at other forecasts, and we are discussing with other people, and then we decided to follow the general view that reason would prevail and that there would be a clear signal in the direction of the tone, but that hasn't happened.

And therefore, our forecast for industrial production and chemical production had to be adjusted. We did that in February with just the same care and made a realistic picture of our point of view. We always said that the first 2 quarters would be difficult and that in the next 2 quarters we would then speed up, that we were expecting the invigoration of the economic development. We also said that there were loads with the turnaround of the crackers and the restructuring. But I can only tell you that internally, we are exactly in our plan, but we cannot work miracles by giving us an invigoration of the economic development which is not happening. This is why we're adjusting. But we don't do the following, and I just said so before. We want to remain ambitious, and we had a better view on things -- or thought it would be more positive, but I think we were right and that was our realistic view on things at that time.

You were also asking for the current situation in Pigments and Construction Chemicals. I can only tell you at this point that the time plan that we communicated to you, namely this year to, well, proceed that we are fully in our plans. Everything is according to plan. Both projects are being prepared or being discussed. And I can only tell you that what we told you so far on our time ambitions, this still holds true.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [4]

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Now Siegfried Hofmann, Handelsblatt, please.

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Siegfried Hofmann; Handelsblatt; Reporter, [5]

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I have 2 or 3 questions. First of all, your volume development, Mr. Brudermüller. 50% of the decline in volume is attributable to planned turnaround, but there is a considerable volume decline still remaining. The question is, did BASF lose further market share? Covestro, I think, reported that they had volume increase in the second quarter. Maybe you can comment on that.

And in general, your forecast and the basic conditions. The global economy is not faring that poorly. IWF, I think, announced 3% growth globally. And maybe a shift in the economic growth is foreseeable away from chemically based production and growth effects.

And another question, on the ag business. The decline in the first semester, is this lost for the total year? Or are there still expectations? And looking at the decline in North America, did this also strongly affect Bayer's business or the original BASF business?

And my next question refers to Wintershall. You had profit because of the oil assessment. Now what was the position of Wintershall in your balance sheet before this?

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Hans-Ulrich Engel, BASF SE - CFO & Vice Chairman of Board of Executive Directors [6]

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Mr. Hofmann, you addressed Mr. Brudermüller. This is Mr. Engel. Let me start. Let me start with your volume-related question. Decline of volumes by 6%, as you stated, 50% of this was caused by the 2 major turnarounds of the crackers in Port Arthur and Antwerp. The remaining 50% are attributable to the automotive business and the ag solutions business. So the rest of the portfolio is stable in a considerably difficult environment.

You mentioned Covestro. For the polyurethanes, yesterday, they announced slight growth. We also see slight growth in our polyurethane business. So we think that there is a very similar market development here.

Now the situation in North America. Let me start by telling you how ag solutions has developed as a whole for BASF. Earnings increased by EUR 160 million in the first semester basically due to Q1. In Q2, we had a slight decline in earnings, the reasons being that the Bayer business, basically the seed business on the Northern Hemisphere obviously is a business in Q1. In Q2, basically, you do not have seed business any longer. This changes again in Q3 and Q4 in the preparation of the season in South America.

What we experienced in the legacy business in North America, not only we, but what I can tell from the figures that have been published, I think some are hit even worse than we are. So we must assume that this is lost for this season.

After a very strong beginning in the Southern Hemisphere, we see enormous volume increase, high demand. I would call this preseason in the Southern Hemisphere, but we will not be able to compensate. Now looking at the Southern Hemisphere business, starting very well in Brazil and in Argentina, although, of course, it is too early at the moment to really comment on the situation in the Southern Hemisphere.

You also had a question relating to the Oil & Gas business. If you see that we have about EUR 6 billion profit because of the -- because we deleted this item from our balance sheet, you see that the -- this is a balance item which is not continued, the Oil & Gas business, which is accounted for separately, minus the net assets we have. So a new evaluation based on fair value principles is required, purchase price allocation that we have to do based on the activities. So every field, every activity has to be reevaluated at fair value, and this results in a book gain of EUR 6 billion. So new figures based on fair value, minus the net values as a result of the item of non-continued business resulting in the respective book gain.

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [7]

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Mr. Hofmann, let me comment on -- you said that the world map is not that bleak. Well, we have a different view here. Looking at the chemical market and industrial production, we see a reduction by half looking forward. If you look at the indexes for manufacturing globally, for many months, we have seen that they are going down. For Europe, Western and Eastern Europe, they are negative. And globally, we see a negative figure. Even in North America where the economy is not that bad, it is declining. You see when you look at industrial orders that they have been declining for several months now. And we have to take into consideration that BASF, with our global position, the business -- important business in Europe, which is 5% negative, in Germany 3% negative for chemical products, is extremely important for us.

And the driver for the positive outlook is China. 40% of the chemical market are to be found in China today. And the growth assumption now still is above 4% after the first 2 quarters, but I think we have to doubt these figures now. And the forecast, so it's very much focused on China here. And looking at our business share in China, you know that 20% of our business is automotive worldwide, but 40% automotive in China. So these are factors which hit us.

You asked about the performance volume-wise. Let me tell you very clearly that we are not satisfied. I told you stable volume development if you look at it in an isolated way, but we still see a weakening, and we have not been able to achieve a turnaround with our strategy to grow faster with our customers than the chemical market. And this will be the challenge for the second semester in a weakening environment, but we want to grow as well as the market or even faster. And this is what is ahead of us for the months to come.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [8]

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Thank you, Mr. Hofmann. Sorry? Okay. The next question, Sabine Rennefanz, Berliner Zeitung.

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Sabine Rennefanz; Berliner Zeitung; Reporter, [9]

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I have 2 questions. First of all, the overcapacities with cracker products in North America, you said that in the predictable time, this will not turn around. And I would be interested, can BASF react to that? Can you sort of recede your own capacities? Or is that not possible?

And then on the weather, the second question. In the past year, you had enormous problems with the lower Rhine water levels. And now the dry period has started again. So do you already feel any impairments there already? And then you introduced a few measures to be better prepared for such situations, and how far have these proceeded, could you tell us?

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [10]

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Ms. [Wadewitz], on the overcapacities in the United States, due to the shale gas boom and, of course, the accompanying gas ethane which is produced here, this is a very favorable raw material. And most of the crackers in the United States are ethane-based, and some of them were taken into operation. And this year, there are more than 4 million tons available which can be put on the market in the next month. And all this, of course, in a market environment where growth is not adjusting to that, and the polyethylene and polyglycol normally go to China. And with the trade conflict going on just now, this is not possible. So it is quite clear that there will be a pressure on the ethylene volume. There's no forecast existing that the margin pressure or on the price front, anything will change.

But you know that BASF is in a joint venture with Total in Port Arthur. We don't have an ethane-based cracker, but a mixed-feed cracker, mainly naphtha, but also, according to the market situation, other lighter feedstocks. And eventually, that puts us in an advantageous situation. We not only have ethylene but also propylene and C4. These are the main products that BASF needs. And this is why I would say that other companies that have pure ethane crackers and only depend on ethylene, they have a harder time to go through than we are.

So what can we do? Well, we can't do anything else. Really, we just have to observe and see to it that the cracker works properly, that we get the maximum volume off the products and then our following products -- or follow-up products can be produced on the market.

You also talked about the Rhine water level. A lot has happened after the first year. Our team in BASF Ludwigshafen has done an excellent job in only a few months. One important element is certainly to have a better predictability of how the Rhine level or water level will develop. And we work together with the German Institute of Water Sciences, but we also have a BASF-based model with which for a number of weeks in the future we can simulate the situation. And that is a very important factor because if you then can adjust logistics and have a few weeks more to prepare for the lower water level, then you can buy more products to be better prepared. So we have a better view on this level. And if I look forward now, I can say, yes, the water levels are going down but not to a critical level yet, and that will not happen for the next few weeks.

So what have we done? Apart from the climate model and the predictability, we also worked all around the cooling water systems. We have additional re-cooling capacities built up. And when we have more time, I will give you more details on how cooling water flows can be directed. So we learned a lot about the temperature control to have operations changed, so we have a larger capacity for the cooling. And then we also have more water available now by that. And now in logistics, we also adjusted a few things. We know very much and exactly which volumes are critical. And for the critical raw materials, today, we can say that the situation of last year will not be repeated.

And then another last point. In Germany, there are a few ships or barges that we can drive in very low water levels compared to the standard ships. So all the capacities that exist now are booked by BASF, which means that we can last longer if the water level and kelp will go down even lower than as predicted now. So we are much better prepared than we were last year. And we do expect, from today's point of view, that over the next few weeks, there will be -- there won't be a critical situation that have an influence on our production.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [11]

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Well, thank you very much, Ms. [Wadewitz]. So I'd now ask Oliver Sachgau from Bloomberg.

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Oliver Sachgau; Bloomberg; Reporter, [12]

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I have 2 questions. The first question, you want -- we want to know whether you can adjust the methods to stimulate the economic development. And is the development in the chemical market now starts to go into the multiples and deals for [Savik]? We have seen that there, this had a certain influence. Do you also see that in your area?

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [13]

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Can you please repeat the second question for me?

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Oliver Sachgau; Bloomberg; Reporter, [14]

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Yes, of course. The second question was whether you have an influence now in the chemical market to influence your buying strategy and change the deals because there is a different economic development in the chemical industry.

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Hans-Ulrich Engel, BASF SE - CFO & Vice Chairman of Board of Executive Directors [15]

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Well, it's me, Mr. Engel. I will answer both your questions. First question, Mr. Brudermüller already told you where, in the 2 bigger divestiture processes, where we're standing there. That's Construction Chemicals and Pigments. For Construction Chemicals, just now, we are in the due diligence phase. We have vested interests in accepting what -- the negative bits that we saw actually lets us be very positive with our view on the fourth quarter where there will be the contract closing. And we don't think that in the situation that we have today that it will have an effect on the purchasing price situation. There are ups and downs in a business, and everybody knows that. We have a long-term view on it and then we will, of course, also react in our negotiations.

You also asked for government measures in order to stimulate the economic situation. Well, we do see that in individual countries, particularly in China. There, we can see a lowering of the value-added tax, for example. And here, it becomes very clear that the state is influencing the situation. But what China has done already is not the full pool of methods that we have seen at the beginning of 2016. So there is still an attitude of waiting there and just seeing how the trade conflict is going to develop.

Then we also see signals coming from the Central Bank. So let's see what the ECB will decide today. And it is quite obvious that there is a general interest in supporting the economic situation where necessary. Thank you very much, Mr. Sachgau.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [16]

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Next question, [Yuno Estaki], [The Hindsight].

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Unidentified Participant, [17]

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Again, my question from Ludwigshafen to Ludwigshafen, Mr. Brudermüller. Can you tell us the figure of the foreseeable downsizing at BASF SE and the Ludwigshafen side? And what will be the development of the years to come?

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [18]

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Mr. [Estaki], you already had an intense dialogue in the recent weeks and months. There is not much I can add. First of all, the 6,000 positions we will reduce, around 50% will affect Germany, and thus, a major share will then affect Ludwigshafen. The figure for the end of the year, let me repeat what I mentioned before. We will be below the headcount of the end of last year, but a lot of effects have to be considered here. We have some consolidation issues. And trinamiX, our subsidiary, which turned into an A company, will be added to the scope of consolidation. And we will have retirements and people leaving the company because they voluntarily signed termination agreements.

And it is a considerable figure of new colleagues that were hired for production and digitalization. And you shouldn't forget that we maintain our commitment when it comes to training. So in August, the trainees have to be added to the total headcount. So I cannot give you an exact figure, but the headcount will be below the level of the end of the previous year.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [19]

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Now (inaudible), SWR.

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Unidentified Participant, [20]

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Well, my 2 questions were asked by other colleagues, and I wasn't able to log off. So thank you. No further questions.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [21]

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Thank you. Glad to hear this. Now Tatjana Junker, Mannheimer Morgen.

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Tatjana Junker; Mannheimer Morgen; Reporter, [22]

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I have 3 questions. First of all, what possible effects will the development of the business and your expectations have for investments that probably will be postponed or looked at again?

A question on the downsizing in Ludwigshafen. You said 1,100 employees signed a termination agreement in the first half of the year. How much will this cost? And could you tell me about the effects of the discussions with the Works Council on a new site agreement to safeguard jobs?

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [23]

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Well, Ms. Junker, effects of the current situation regarding investments, you know that our investments always have a long-term perspective. We have to decide to build plants, what kind of plant, what kind of technology, which site. And for many decades, we have to live with such a decision. So we will not shy away from investing when the economy is going down because we still think that the chemical industry is a good one and has good market expectations. So our major measures will not be affected.

You also know that investments cover several years. This year, the lion's share is already decided. We cannot simply interrupt ongoing projects. Next year or the year after, maybe we will postpone some projects, depending on how long the economy is going slowly. And you probably remember from the past that we adjusted for some quarters.

We don't want to reduce our efforts for operational excellence, which are very important. We want our plant availability to increase. We want to do smart debottlenecking, that is incremental capacity improvements that we can then place on the market later on. So we think in the long run, and there are some minor measures where we say we don't have to do it today, we can postpone it slightly. But basically, we stick to our investments.

You asked about downsizing, how much it will cost, around EUR 260 million in our provisions. And you asked about the site agreement. Over many years, we've had a constructive and positive cooperation with the Works Council and the trade unions. It has always been an important component of the stability on site, our site agreement, which was the basis for agreeing on the strategy of many years about the planning horizon and the cornerstone for both sides. And I think given the current environment and what we are doing in terms of restructuring BASF, I think we have to renegotiate this. And the reason why we are doing this now earlier rather than waiting until the end of 2020, we want to agree on the basic conditions by mid-2020. And I think this goes to show how important this stability is for us.

But I think it's also crucial to understand that some issues have to be seen from a different point of view, that the Ludwigshafen site is important that it has future investment, that it is and will remain an important research site. I think you know this. And this is important to us even though there are lots of changes happening in and around BASF.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [24]

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The last question goes to [Tamara Lund], SWR.

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Unidentified Participant, [25]

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Well, just for clarification because a lot of things were addressed and the -- about the termination agreement. The 1,100 termination agreements that were signed, were they all signed in Ludwigshafen? And the EUR 260 million you just mentioned, does this refer to the 1,100 termination agreements? Or is this the overall severance program?

And my third question, what is your view on the willingness on part of the workforce to accept a termination agreement? Do you think that the remaining planned reduction in positions can be done via termination agreement? Or do you think that after 2020, you will have -- you will not have to have people losing their jobs for operational reasons?

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Martin Brudermüller, BASF SE - Chairman of Management Board, CEO & CTO [26]

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Yes. Ms. [Lund], the EUR 260 million refer to termination agreements in Ludwigshafen. We have a special situation in Germany. In many other countries, it is much easier to go ahead with adjustments like these. Here, we use this type of tool because in the past, dismissals for operational reasons were avoided. This is part of the site agreement as well. So we have the principle of double voluntary behavior. So the company address employees where we envisage changes. But in the second part of this voluntary approach, the employee also had to accept this. In other words, we identified a tool that we used in the past as well. We used it more often in this case in order to have the reduction in positions in a positive atmosphere.

You asked about the willingness of employees also looking into the future. We have a time horizon for the about 3,000 employees in Germany, many of them in Ludwigshafen, 2 more years. And you should bear in mind that in the years to come, the number of retirements will increase. So this is -- this will affect a lot of people. In 2025, I think most of our employees will be older than 50, so we have an age pyramid which allows us in the years to come to do adjustments. And you have some employee turnover as well. So you have retirements, employee turnarounds and the tool of controlling this via termination agreement so that we think that in the years to come, we will meet our goal.

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Hans-Ulrich Engel, BASF SE - CFO & Vice Chairman of Board of Executive Directors [27]

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On the provisioned EUR 260 million, that's a total figure. That refers to our excellence program. But the main part of it in the second quarter relates to provisions made for the already mentioned termination agreement.

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Anke Schmidt, BASF SE - SVP of Communications & Government Relations [28]

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Thank you very much to Ms. [Lund]. So that was it from our side for the third quarter figures and the first half update of our measures in our strategy implementation that we'll present on the 24th of October in a telephone conference.

And now ladies and gentlemen, I would now like to inform you about something apart from the minutes. Today, I would like to inform you that Ms. [Ingrid Caulinoyman] will be said goodbye to with a huge bunch of flowers. You cannot see it, but she will leave after 48 years with BASF and will retire here. Since 1971, she has been working in central communication. And for many, many years, you have known her as the first contact person in terms of organization with all our large press conferences. She coordinated, she invited everybody and she just made sure that everything ran smoothly.

And she helped so many people if and when, for example, the trip to the press conference or the hotel, there were any problems. Thank you very much, Ms. [Caulinoyman], for the many years with us here in BASF communication. We will miss you. Enjoy your retirement, and all the best to you.

And yes, with that, I would like to conclude this telephone conference officially. Thank you very much for your interest in the business figures of BASF and for participating in the telephone press conference. And I would like you to -- hear you again on the 24th of October. So far, all the best for you and enjoy the day. Thank you very much and goodbye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]