BASF SE (OTCQX:BASFY) Q3 2021 Earnings Conference Call October 27, 2021 4:00 AM ET

Martin Brudermüller – Chairman of the Board of Executive Directors

Hans Engel – Chief Financial Officer

Matthew Yates – Bank of America

Jaideep Pandya – On Field Research

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the Third Quarter 2021 Results. Throughout today’s recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and the results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in Opportunities and Risks of the BASF Report 2020. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements.

On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans Engel, Chief Financial Officer. Please be aware that we have already posted the speech on our website at basf.com/q32021. This brings us to the point where I give the floor to Martin Brudermüller.

Good morning ladies and gentlemen. Thank you for joining us today. I would like to begin with the highlights of the third quarter of 2021. Demand remained solid over the summer, enabling us to continue to grow profitably. Compared with the third quarter of 2020, we increased prices by 36% and volumes by 6%. Increases were realized especially in the Chemicals, Materials and Industrial Solutions segments. EBIT before special items rose by around €1.3 billion compared with the weak third quarter of 2020 to reach €1.9 billion. This is also considerably above the pre-pandemic level of €1.1 billion in Q3 2019.

With strong earnings contributions from the Chemicals and Materials segments, the earnings mix in the third quarter of 2021 was comparable with the second quarter of 2021. Overall, margins in the upstream businesses remained at a high level but softened slightly compared with Q2 2021. Our downstream businesses are still confronted with further rising raw material, energy and freight costs. Price increases in most downstream businesses could only partially offset these higher costs. In addition, higher fixed costs weighed on earnings. The semiconductor shortage severely hampered the global automotive industry in the third quarter. Temporary shutdowns and lower run rates in production have negatively impacted our automotive-related businesses, particularly in the Surface Technologies segment.

At the beginning of the year, LMCA projected global light vehicle production would reach 87.6 million in 2021. In the meantime, LMCA has revised its forecast to 76.7 million units. We do not rule out the production of only 75 million units in 2021. We expect the semiconductor shortage to persist, at least in the first half of 2022. It is interesting to note that the production cuts are predominantly related to vehicles with internal combustion engines and not battery electric vehicles.

Let’s now turn to the macroeconomic data. According to the currently available estimates, global chemical production increased by around 4% in Q3 2021 compared with the prior-year quarter. All regions recorded growth; it was most pronounced in Europe and in Asia excluding China. However, several temporary factors, such as the global semiconductor shortage, hurricanes Ida and Nicholas in the U.S. as well as power cuts in some provinces of China, led to overall lower growth rates compared with Q2 2021. The slowdown was particularly evident at the end of the quarter. With an increase in sales volumes of 6%, BASF Group again grew faster than the global chemical production in Q3 2021.

This slide shows our volume growth by region. Sales volumes are compared with the volumes in the respective prior-year quarters. In Q3 2021, volumes grew considerably in North America and in Europe. The prior-year quarter in these regions was still heavily impacted by pandemic-related restrictions. In Greater China, we recorded a slight volume decline compared with the very strong prior-year quarter, when we had achieved growth of 17%. The volume decline was almost entirely due to lower volumes in our mobile emissions catalysts business in Greater China associated with the decrease in automotive production. In Q3 2020, the introduction of China 6 emission standards for light-duty vehicles had supported volume growth.

Let’s move on to the volume development by segment. In the third quarter of 2021, we increased volumes in all our segments, except for Surface Technologies. The automotive industry, which is currently strongly affected by the semiconductor shortage, is the dominating customer sector for this segment. The volume growth was most pronounced in the Chemicals, Industrial Solutions and Materials segments. Volumes in Nutrition and Care and Agricultural Solutions grew by around €100 million each. Overall, volumes increased by 6% or €872 million in absolute terms compared with the prior-year quarter.

We now look at our sales development compared with the third quarter of 2020. Sales of BASF Group increased by €5.9 billion to €19.7 billion. Considerably higher prices and volumes were the main drivers for this. In total, organic sales growth amounted to 42% compared with the prior-year quarter, which was weak due to the pandemic. Currency effects of plus 1% were mainly related to Asian currencies. Portfolio effects influenced sales by minus 1%; they mainly resulted from the sale of the pigments business.

This slide shows the growth in EBIT before special items by segment. As already mentioned, we achieved considerably higher earnings in the Chemicals, Materials and Industrial Solutions segments. In the downstream businesses, price increases were not yet sufficient to compensate for the higher raw materials, energy and freight costs.

Compared with Q3 2020 EBIT before special items in above improved considerably. This was mainly due to the adjustments of bonus provisions as they were allocated to the divisions.

I will now provide you with further details regarding the unsatisfying earnings development in some of our downstream businesses. In the Surface Technology segment, we were confronted this the unexpectedly low demand from the automotive industry. According to LMCA global light vehicle production declined by 16% compared with the prior year quarter. Despite lower automotive volumes, sales in Surface Technology increased on account of higher prices. These price increases were mainly related to the precious metal trading and mobile emission catalyst businesses.

EBIT before special items declined due to significantly lower earnings in the Coatings division. Higher fixed cost and increasing raw material prices could only partially be passed on in such a deteriorating OEM business environment. The Catalyst division was able to slightly increase EBIT before special items on account of higher margins. These resulted from among other things, a favorable product mix. In the nutrition and care segment sales increased because of higher volumes in both divisions and price increases in the Care Chemicals division. By contrast prices were flat in Nutrition and Health. EBIT before special items declined to significantly higher or increased raw material, energy and freight costs, which could only be partially passed onto customers, as well as higher fixed cost.

Let me also address an underlying challenge in our Nutrition and Health division. Our Vitamin A plant expansion successfully came onstream in late summer. Still, we are struggling with the production challenges for Vitamin A 1000 since the ramp up of the animal nutrition formulation plant is ongoing. No commercial volumes from this formulation plant are available due to time needed to ensure stable operations. Therefore, we expect to be volume restricted for several months to come with a step-wise return into the market.

The Agricultural Solutions segment was severely hit by supply constraints in combination with higher input factor cost two to various shortages. Nevertheless, sales increased compared with the prior year quarter, mainly in the seed and traits business in South America and the fungicide business in Europe and South America.

EBIT before special items decreased on account of considerably higher fixed costs among other things to a higher bonus provision, as well as higher raw material and logistic costs and an unfavorable product mix. The higher costs could only partially be passed on to customers since prices had mostly been negotiated prior to the season.

At this point, I’m going to hand things over to on Hans.

Thank you, Martin. And good morning, ladies and gentlemen. I would like to start with an update on our recently concluded portfolio measures. On August 31 BSF and Shanshan formed the joint venture, BASF Shanshan Battery Materials, with 51% the company’s majority owned by BSF. With the completion of the transaction BSF has reached a significant milestone in executing its strategic roadmap to build up a global battery materials value chain equipped with an industry leading CAM capacity of 160 kilotons by 2022.

On September 1, 2021 BSF completed the purchase of 49.5% of the offshore wind farm Hollandse Kust Zuid from Vattenfall. Construction work on the wind farm started in July, 2021. It is expected to become fully operational in 2023. The electricity from the wind farm will enable BSF to implement innovative, low emission technologies at several of its production sites in Europe, mainly at Verbund site in Antwerp, Belgium. Following the closing, we have started the process to sell around half of our shares to a financial co-investor and we aim to sign agreements in the first month of 2022.

In the following, I will turn to the financial figures of BSF Group compared to the prior year, quarter in more detail. Martin already covered the top line development. So, I will start with EBITDA before special items, which increased by €1.2 billion to reach €2.8 billion. EBITDA amounted to €2.7 billion compared with €1 billion in Q3 2020.

EBIT before special items came in at €1.9 billion compared with €581 billion in the prior quarter. Special items in EBIT amounted to minus €43 million, compared with minus €3.2 billion in the third quarter of 2020. In the prior year quarter special items were primarily related to non-cash effective impairments in all segments due to the economic effects of the pandemic and two restructuring measures. Consequently, EBIT came in at €1.8 billion in Q3 2021, compared with minus €2.6 billion in Q3 2020.

At €86 million net income from shareholdings improved by €133 million in the third quarter of 2021. The improvement is mainly attributable to the earnings contribution of [indiscernible] of €97 million. In the prior year quarter, its contribution was minus €3 million.

Net income amounted to €1.3 billion compared with minus €2.1 billion in the prior quarter. The tax rate was 20%.

Reported earnings per share increased from minus €2.31 in the prior year, quarter to €1.36 in Q3 2021.

Adjusted EPS increased to €1.56 in the third quarter of 2021. In the prior year quarter, it was €0.60.

I will now move on to our cash flow development in Q3. Cash flows from operating activities reached €1.9 billion, a decrease of €204 million compared with Q3 20. The main reason for the decline was the higher networking capital requirement of our strong business in Q3 of this year, while networking capital released almost €800 million in the prior year quarter, which was heavily affected by the pandemic.

Cash flows from investing activities amounted to minus €1.8 billion compared with plus €1.9 billion. In Q3 2020 cash inflows from acquisitions and divestitures amounted to plus €2.7 billion and were primarily attributable to the divestiture of the construction chemicals business. In Q3 2021, we had a cash outflow of minus €627 million, mainly due to the acquisition of 51% in BASF Shanshan Battery Materials.

At minus €819 million, payments made for property, plant and equipment and intangible assets were €83 million above the level of Q3 2020. At minus €56 million, cash flows from financing activities were almost balanced. In the prior-year quarter, the reduction of financial and similar liabilities led to negative cash flows from financing activities.

Free cash flow amounted to €1.1 billion, representing a decrease by €287 million due to lower cash flows from operating activities and higher payments made for property, plant and equipment and intangible assets.

Since we are currently receiving a lot of questions about the impact of recent natural gas price developments, I would like to provide you with further information on this topic. As a result of the strong economic recovery, overall lower gas production rates and comparably low gas storage levels, gas prices in Europe increased significantly, reaching a historical peak in October 2021.

In Europe, we require most gas for our Verbund site in Ludwigshafen. Our second-largest gas consumer is the Verbund site in Antwerp. We use gas to produce electricity and steam in our combined heat and power plants. Furthermore, gas is used as a feedstock to produce, for example, ammonia, acetylene and hydrogen. As you might have read, we recently had to curtail our ammonia production in Antwerp and Ludwigshafen. Due to the recent rise of natural gas prices in Europe, the economics for operating ammonia plants in the region have become very challenging.

To secure our natural gas supply, we have long-term supply contracts with different suppliers in place. The pricing is predominantly based on spot prices. Part of our gas price exposure in Europe is compensated via our shareholding in Wintershall Dea. The remaining exposure is partly hedged through financial instruments. For our European sites, the additional costs due to higher natural gas prices amounted to around €600 million in the first nine months of 2021, with a significant increase expected following the price hike in October. At BASF Group level, this amount is partly mitigated by the above-mentioned measures.

And with that, back to you, Martin.

Before we turn to the outlook, I would like to share another example that illustrates how BASF is using the transparency of product carbon footprints to reduce the carbon footprint of our customers. Energy efficiency and more particularly the insulation of a building play a key role in achieving the CO2 reduction targets connected with the EU Green Deal.

Since 1997, BASF’s insulation panels made of Neopor have been helping our customers avoid CO2 emissions. An analysis performed by BASF showed that the volumes of Neopor sold in 2019 helped our customers avoid 37 million metric tons of CO2 emissions over the entire product lifecycle when used to insulate existing buildings.

To offer our customers products with an even better environmental profile, BASF has started to sell Neopor BMB. Using the biomass balance approach, 100% of the fossil resources needed to produce Neopor can be replaced by renewable raw materials. The use of renewable raw materials reduces the carbon footprint of Neopor BMB by 90% compared with traditionally produced material.

Due to tighter regulatory requirements, demand for our product Neopor BMB is strong. The example shows how we continuously evolve our innovative products contributing to a sustainable development and combining sustainability with economic success.

Ladies and gentlemen, we will conclude with BASF Group’s outlook. Overall, we expect solid demand in the different businesses until year-end and beyond. Automotive will remain challenging with production levels far below consumer demand for cars. The final number of cars produced will continue to depend on the availability of semiconductors. We expect the supply challenges to last at least until the middle of next year.

Margins in the upstream businesses are slowly normalizing from a very high level with improving availability but largely stable demand. Throughout basically all value chains, our suppliers, our customers, and we ourselves continue to be confronted with increasing raw material, energy and transportation costs, supply chain constraints and the related and largely unforeseeable issues with material availability. The situation requires an elevated level of coordination and close customer and supplier contact.

Despite these challenges, we express our confidence for Q4 by increasing our outlook for 2021 in accordance with market expectations. We now expect sales in the range of €76 billion to €78 billion. EBIT before special items is anticipated to reach between €7.5 billion and €8.0 billion. The return on capital employed is expected to be between 13.2% and 14.1%. Accelerator sales are expected to reach between €21.5 billion and €22.5 billion.

We maintain our forecast regarding the expected CO2 emissions. Our adjusted outlook is based on the following assumptions regarding the global economic environment in 2021.

We now assume gross domestic product to grow by 5.3%. Industrial production and chemical production are now both expected to grow by 6.0% instead of 6.5% for the full year. Our assumption for the average exchange rate of the U.S. dollar per euro remains unchanged. With an average annual oil price of US$70 per barrel Brent crude, we increased our expectation for 2021.

And now, we are glad to answer your questions.

Yes. Ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions] We will begin with Christian Faitz from Kepler Cheuvreux. The next one will then be Andrew Stott, followed by Tony Jones. So now it’s Christian Faitz, Kepler Cheuvreux. Please go ahead.

Yes. Thank you, Stefanie. Good morning, Martin and Hans. Two questions please. First what if any sickness are you getting from your key automotive customers in terms of production plans heading into 2022? And then the second question do your own assets face any noteworthy logistics or supply challenges at this point in time? Thank you.

Christian, good morning. I mean the sickness we get from the OEM producers is actually they live from hand to mouth when it comes to semiconductors. There’s every week, they basically decide on the availability of the semiconductors, what the next week’s production is. That is also why short work schemes has partly come up again. We feel that most prominently and directly in the coatings business, because some of the OEMs have actually produced costs where you let components. They are actually on the yard and they to be completed, but you cannot produce a car without painting it. That is why we have a pretty good sensor here.

So what you hear from that it’s connected to two or three incidents, you know that, I mean, it is the overwhelming demand, which is also coming with all the devices you need for teach realization. So semiconductors as such are short I think they all work on capacity expansions, which you also know that takes two, three years. So that is not a long time since that became evident after the recovery. And then there were also two outages, actually the one in Malaysia, which was related to COVID, which are basic chips almost in all the costs really hamper their production.

So overall, I think the good thing is Christian, the demand for cost is very high. Every car that is produced is sold. Actually, they could sell much, many more costs than they actually produce. So we take – we think that takes a little bit until maybe mid of the year, slowly easing step for step. But that is something where you have to be really well connected. This the customer, it’s not overall totally depressive, but I think the hopes that this year we’ll have significantly production increases towards 2020 were not fulfilled. We will be about the level of that and then slowly coming up in 2022.

Christian, this is Hans. Thanks for your question on the supply chain challenges. I mean I could start with the beginning of the year, the freeze of the U.S. Gulf Coast continue with the Suez channel go to the closures COVID-related of Chinese ports on the East Coast congestion at the U.S. Pacific course I could go on and on through the hurricanes Ida and Nicholas in there. So this is a continuous challenge that we are facing and this may be the wrong place, but it’s maybe the right time to say a big thank you to the BASF team how we’ve handled and the team has handled the entire situation.

Are we affected? Yes, we are affected. The – it just give you one idea. The freeze on the U.S. Gulf Coast has led to shut-ins of chlorine plants. And these – the issue is will that continue have an impact on isocyanate production in the U.S. force majeure as a result of that declared and still ongoing we have a number of force majeure situations due to supply chain issues that unfortunately our customers are very much aware of we’re doing what we can, has this led to situations where we had to shut down production, actually not really.

So we were able to cope and manage, but it has clearly an impact on the business. But it’s a situation that to a certain extent when we saw what happened, how quick the demand came back that we – I don’t want to say had expected, but something that to a certain extent we had at least foreseen going back to the year 2020, sorry, 2010, when due to increased demand there, we’ve seen lots of similar issues can prepare for them, can only try to handle them in the best possible way and that’s what we’re trying to do.

Okay. Thank you very much.

Okay. Then the next questions coming from Andrew Stott, UBS, your turn.

Yes. Thanks, Stefanie. Morning, Martin and Hans. Couple of questions. First one was on energy costs. My rather rudimentary back of the envelope gave me a much bigger number than the energy inflation you pointed to in the slides. So my question is to what extent has hedging protected you so far? And is there a broad guidance you could give for 2022 on energy costs, if we just assume spot persist with – which I get may not happen. So that’s the first question, a rough guidance on current sensitivities.

And the second question is more broad brushed around China. I saw at the weekend, the Chinese government or the NDRC most specifically put out some targets for closures across the petrochemicals industry. I just wanted what your first thoughts are on this policy. Thank you.

Thanks, Andrew for the question. Rough guidance on energy cost that’s actually a good one. So what have we provided you with, we have provided you with the $600 million in additional costs that only relate to European gas purchases. So that’s what we’ve given you, you’re right. In total, when we look at the situation, the cost impact is obviously on the energy side, but also if I go broader on the raw materials side much higher than that. If I look at raw materials in total and I only compare Q3 this year with Q3 last year, and this is only the price impact, and there’s about $2 billion price impact in other words, cost impact if you leave raw material volume at the same level that comes here from prices that puts a lot of pressure obviously on the system, but also in all businesses, because clear expectation is that these prices are passed on.

With respect to Q4, they’re giving guidance is extremely difficult. Coming back to natural gas prices in Europe, you’ve seen natural gas prices in Europe during the course of this month spot prices at levels of €140, €150 per megawatt hour. Currently, we’re sitting at a level of €88 per megawatt hour, so significant decline. But this is 6 to 7 times if I think back 6 to 7 times where we were in the beginning of this year. So due to the volatility please understand that I can’t give you specific guidance. It is a very interesting situation that we are in, that we have to cope with. There’s a significant cost pressure coming from raw materials in general, natural gas in particular and with that energy and it’s also clearly reflected in the results, but so far if you look at Q3 earnings as I said, we’re able to cope with it.

Andrew, I’m not totally sure of what exactly you mean, whether this is the energy related topics NDRC communicated, because they communicate continuously comes in…

Yes. Sorry, Martin. Yes, it was specific to some of the de-carbonization plants. So they talked about potentially emphasize, potentially closing smaller facilities across China. And it mainly an ethylene and ammonia, but just wondered if you had any thoughts on that.

Yes, yes. This is what I just said this energy intensity. I mean, overall I would say this is a positive development. I actually would also say the energy shortages are to a certain expect extend also a positive sign from China, because we are complaining now, but that is actually also showing that they take CO2 reduction in energy intensity furious. I mean that they shut down partially their industry knowing that goes on cost of GDP, because let’s say the guidelines and the KPIs for energy consumption and they said also for CO2 emissions have actually been overtaking.

I think this is a very good sign. So they go on the energy intensive industries and chemical industry is one of those. And there are tremendous inefficiencies in the chemical production landscape in China. There’s a lot of coal based chemistry. And am I right that actually as one more step built among many to basically go for structural improvement of the chemical industry, that means clustering them shutting down those who are inefficient.

So that is all overall great for us, Andrew, because that is actually bringing the industry benchmark closer to what BASF is anyway doing. I think we showed you also on our capital markets today, how we actually address CO2. And I have to say when we have the new side in Chancheng, there will be a lot of competitors look pretty ugly when it comes to CO2 emissions. And I’m quite sure it will put pressure on them that they have to do something against this. So I like that it’s a little bit similar like we had 10 years ago with EHS where we were operating on a high level and the industry was on much lower level.

Now in the meantime, EHS is a tough issue in China. So they are forced to produce under the same circumstances. And this is, we have a more a global level playing field. So I very much like that. And I would say, we should acknowledge that that China is not only about building coal fired plants, power plants, but also curtailing CO2 and energy intensity.

And any of your sites affected so far.

No. We had one a little bit problems with the new Shanshan part because they had some reductions in the provinces that were far above their energy consumption. But on the other hand, for example, in Nanjing where we have a very energy efficient setup, we were actually praised because we need much less energy per – let’s say, value added in chemicals over there. So that is exactly when you are benchmark there, they also don’t shut you down, but they shut down the inefficient ones. So that is actually in this environment really a competitive advantage.

Okay. So now we move on to Tony Jones, Redburn in the following we will have Matthew Yates, Bank of America, and then Jaideep Pandya, On Field Research. So now Tony Jones, Redburn. Please go ahead.

Good morning. Thanks, everybody. I’ve got two questions. The first one there’s been some recent headlines rumors that the EU Commission is sort of changing its stance in terms of board attacks for the chemical industry. Could you maybe give your own perspectives on that and whether you see that as a net positive or negative for BASF. And then secondly, I wanted to come back to the reallocation of the bonus. Could you help us understand which divisional metrics now will trigger the bonus? Or is it still at the Group level? The reason why I ask that is, well, it’s good to know from a modeling perspective. But it looks like it was a provision in Ag Solutions, but the EBIT was lower than we expected. So that would be good to know. Thank you.

Tony, on the border adjustment measures, I’m clearly addressing that. I don’t think that this is an appropriate measure. It is very, very complex. It’s bureaucratic and it does not really help to address the problem because you have then to control also all the consumer products, finally that contain certain chemicals with CO2 emissions. And I ask myself how you want to bring that transparency in. And it actually invites actually that you don’t play anymore on the basic products, but you import further well you added products into Europe, which are not covered at all with the border adjustment measures. That’s why we in the chemical industry in the European have decided not to really push for participation in the border adjustment measures. We are now actually only included with ammonia and fertilizers whereas totally unclear how that actually should work.

And just to give you an example, if you don’t import ammonia and fertilizer, but you import melamine, which is a downstream product for ammonia, you actually escape already the border adjustment measures. So I think it is not an appropriate measure. For BASF the effect is low in the moment as it is designed because you know, that our strategies actually do produce in the regions for the regions, that means we don’t have a big product flow for these kind of basic products. We don’t export ammonia into other regions. But certainly we will be affected a little bit with those products where ammonia is directly, let’s say, the cost impact there. But a lot of our ammonia is actually used internally in the paint. So we go further down to a means, we use it for the production of isocyanate, which have huge margin.

So in that respect we will be fine and not so much exposed. But I think this whole instrument will be a bureaucratic. And at the end it will also WB, WTO conformed. And the bonus, Hans?

Yes, Andrew – sorry, Tony, thanks for your question on the bonus. So let me try to put things in perspective. The bonus that we pay, so the variable compensation at BASF is based on the Group’s return on capital employed. So that’s the basis for the bonus payment. And then there is an individual component in the end when it comes to the individual employee, but irrespective of which part of payers if you’re in the basis is that the bonus pot gets filled on the basis of return on capital employed. Last year was a year where due to the very low results that we generated we paid out bonus in the order of magnitude of €400 million, so €400 million for the year 2020.

At target, we are at – let’s say, round about €1 billion. So that is when the return on capital employee is at 10%. This year we have accrued so far €1.3 billion. So if you compare 2020 to 2021 there is an additional round about €1 billion that we have accrued for so far. How do we do this? We do this typically on a prorated basis. This year due to the development of our earnings, we made certain accrues also in other and I hope that with that I’ll be able to also answer a question that is most probably to come what happened in your results for other.

And we were – this accrual that we had in other of round about €200 million for the third quarter we reverse than in other and allocated it to the operating divisions. So from a personnel cost side, significant increase as a result of the provisions for the various compensation, and the sort of art result that we’re seeing in EBIT before special items in other the big swing that we have there compared to Q3 is explained by the fact that we had about €200 million off bonus accruals sitting there, which didn’t evaporate. But we moved it out of other now in order to have the divisions properly provisioned and sort of burden the provisions with this €200 million. Hope that explains the – your bonus question in general on the one hand side, but then also at the same point in time what’s happening in the results of other in Q3.

Yes. Thank you. That’s really helpful. Appreciate that.

And the next question is for Matthew Yates, Bank of America.

Thank you, Stefanie. Good morning, everyone. I’ll just ask one question relief for Martin please. When you took oversee you highlighted a desire to change the commercial culture and accountability of the downstream units. Now it’s very, very difficult for us to assess that over short-term, quarterly numbers, especially given the noise we have at the moment around volatile, raw materials. But given this was a quarter when most of your downstream units reported profit declines. Can you talk a little bit about how these businesses are operating differently to perhaps they were three or five years ago in trying to systematically demonstrate the sort of pricing power you have in these businesses that can drive higher profitability through cycle? Thank you.

Yes, Matthew, this is certainly not an easy question to end enzyme. But let me say the first thing. I think when we decided that we go for more differentiation, but on the other hand also simplification, and then also empowerment by embedding and delegating more to the division. We are very happy with that result. So the divisions have actually got more and own, let’s say character to more adapt to what the market is needed. I’m very happy with this development coming with this. We said the hunting spirit, you know, that BASF was not growing in volume enough for many years. So, I think if you look now already in the difficult time of the pandemic, we have done well with volumes. Now in this very – let’s say dynamic environment, we are even higher with our own dynamics. So you see that with this, we have managed also a different, or to implement a different mindset to really go more for the market fight for volumes fight for market share.

So, and I think that was also helped and underpin by the embedding. What you see now on the other hand is very much the topic, which is not a new one to be as ever. You know, always when we have very aggressive raw material price increases, then the downstream struggle to pass it over as quickly as it is needed. We have, I think talked about out that many, many times. So they have raised prices. You saw also that all the volumes actually accept those with automotive have raised greatly their volumes. So they are in the business, they are with the customers, but they struggle with their time – with this time, the delay in passing over the cost, because you know that we have for good reasons, partially prices that are not related to raw material costs, because we actually price for an effect and for a value added on the customer side.

That means that, however, if your price is pressure up, you cannot go there and say, now I have a different launching in this moment, and now I want to raise my price, because high of energy and raw. So that is why they need more. On the other hand, it’s also very clear, the higher on prices get the more resistance on the customer you have to go for even higher price increases. But that’s why I said at the beginning, the good thing is that the overarching demand actually in all the business, we have talked about that last week, very intensively, they all confirm that there is actually a strong demand. And as long as you have more demand than supply, then even at higher – at high prices, you still have some pricing power to go even further. And that is actually what has to have from over the next months should then the margins normalize. Then on one hand, the pressure is easing. And for those who have linked into these prices, they have actually a margin increase because the price will also not go down as fast as the raw material.

So it is always this problem on the downstream side, if we have this large changes in the steep slope that they – it need time. So yes, we have the one or the other topic. And we made that also very transparent to you with the Vitamin A 1000 powder, which is a house made problem of BASF, very clear. That’s why we have also highlighted the everything else and happy. But beyond that from an operation, also from the feedback we get from the customers using the right instruments, I can actually see that we have rising customer confidence with BASF throughout the businesses. So that shows me that the downstream businesses do a better job, then they have done in the past in satisfying their customers.

But I think we have an also exceptional situation now, raw material prices is one thing energy, now, we have talked about that on top, but what is also awful transportation costs. I mean, if you look on what the container costs from [indiscernible] price increase, but then if you have agreed to the price, you are not even sure you get the container such. So it is a lot on then on the load. We are not happy with the earnings mix, very clear. I express this also openly, but from principle, how they move in doing business, I’m really satisfied.

Thank you, Martin. Appreciate the comments.

Okay. Now Jaideep Pandya, On Field Research. Please go ahead.

Thank you, and first of all, thanks a lot for sharing the transparency on the energy cost and natural gas. My first question is actually related to that. When you do IPO Wintershall Dea and assume eventually want to exit Wintershall Dea, how are you going to be hedged physically for NAFTA and for natural gas, from a long-term point of view. That’s my first question.

The second question is around ag. Could you just share some color on dynamics, which you’re seeing in, for instance, canola, given the broad situation in Canada, but also very high prices. So going into sort of 2022 season, do you see sort of a normal ag season, or do you think that extreme weather in Brazil and North America along with high fertilizer prices and logistics cost is going to have a negative impact on pharma demand? Thanks a lot.

Yes. This is Hans. Trying to take your first question with respect to a physical hedge without the Wintershall Dea business. I don’t see too much of a physical hedge there anymore. This will be a situation where we will have to turn more in the direction of financial hedges to the extent that raw material price developments are not fully reflected in the respective formulas, sales price formulas.

On your ag question. So what is – what’s the situation there, and I’ll focus on the Northern hemisphere and on ending inventories in these sales channels. We have in the ag industry experienced very good demand, strong demand in the Northern hemisphere. And as a result of that, now, let me quickly think about this in Europe. It looks like the seasoned ending inventories are at a – I wouldn’t call this decent to good level. We’re not faced the situation where there is oversupply sitting in the channel, the same as true in general for North America with one exception. And that exception is Canada, where due to the drought situation, the channel inventories are elevated at this point in time.

The soft commodity prices, as you know have moved up significantly compared to the prior year. Or you could even say the average of the last five years, we’ve seen them coming down from the peaks that they had reached in July a bit. But I would call the prices for soft commodities robust. If you think about soy currently, I think it’s 12.50. You have wheat at above seven. You have corn at above five.

So all compared to average of the last three to five years certainly elevated that usually leads to good, strong demand. Now you hint it to what’s to be expected as a result of high natural gas prices and high ammonia prices, which are high fertilizer prices. Yes, that may play a role in the decisions that the farmers will make then for the next season. But looking at what’s currently happening in South America why we’re not happy with the result that ag has generated in Q3. You see us with volume increase of 7% and that clearly reflect the good, strong demand that we’re currently having in South America. And so with that, I think we will go into what I would call an overall good season then in the year 2022 for the ag business.

Great. Thanks a lot for the color.

Okay. Yes. We have five more participants in here, listing to ask questions. So if you could reduce to one would be great. We will now first have Andreas Heine, then Markus Mayer, and then [indiscernible]. So now, Andreas Heine, [Stifel] please go ahead.

I will try for two, but very brief. And in agro, you sat and emphasize this at the pricing increases can be only done once in the season. Now going into 2022, especially for your seed business, would you share just in quality to terms how much you might be able to increase prices and the first question? And the second is on the gas price regime in Europe. I know historic times it was linked to oil with the delay of three to six months. And now you have most of that in spot. Would it be ever possible to go back to, let’s say the smoothing kind of process for you in the gas price contracts, or is that simply impossible and it will always be linked to spot, and if you’re not happy with spot, then you have to buy financial interests. Thanks.

Yes. Thanks. As for your questions, I’ll take the gas price question first. So yes, as we say most contracts in Europe are now based on spot that has developed over the last years. As always, can I exclude that this will move back to more longer term pricing regime? Can exclude that, but the markets compared to where it was, let’s say five years ago has changed quite a bit. And this is what – what it currently is and depending on how you think about it, you have the – you have the immediate impact based on a spot price regime. You need to act immediately versus something that comes with a time lag of three to six months. Frankly, I don’t know what’s better, always somebody who’s willing to take things head on, so if you need to deal with it then you deal with it in the very moment that it actually happens.

Your first question on AG – the price increases, sorry, the price increases, yes, we can put it this way. We missed the boat, now in the second half of this year or in Q3. The task that the team has is very, very clear. And I think there is also considering the overall cost development for the business. But then also what I refer to the soft commodity price environment, there is room for potential and we’ll certainly go after that.

Now, yes, Andrea, that’s fine.

Yes. Okay. Then Markus Mayer, Baader-Helvea. Please go ahead.

Yes. Good morning. The question for my side would be on your cash flow. And you said this negative effect from net one capital outflow was basically the reason for the – to lower free cash. What are expectations for nets and capital outflows in the fourth quarter? And therefore also the later question, do you expect to pay dividend from your free cash this year? Thank you.

Markus, thanks for the question. The Q4 is traditionally a strong cash provider for BASF. We expect Q4 of this year to be a strong cash provider for BASF. And do I expect to pay a dividend of free cash flow for the year 2021? Absolutely.

Okay. Very clear. Thank you.

Okay. Now, Chetan Udeshi, JPMorgan. Please go ahead with your question.

Yes. Hi. Sorry, I also have two by one very quick. I think there were some – there were some common on IPO of Wintershall on Bloomberg, and I just wanted to check what was actually said, because it says IPO of Wintershall wouldn’t be reasonable in the mid. So are you guys changing the sort of stance on what you want to do with the ownership of Wintershall? That was the first question.

And the second question was again, just going back to the allocation of bonus accruals to individual divisions I think it’s probably the right thing to do because then it improves the transparency in terms of how BASF divisions are doing versus the others. I’m just curious, is this something which is going to be a structural change, i.e., are you going to do that in the same manner in the future?

And again, just related question on, I think you addressed previously that you essentially, it’s the BASF’s performance, which is what drives the bonus pot. But I think you said the question is, shouldn’t there be a more nuanced approach to how individual businesses are rewarded, because just looking at the AG performance this year, it seems quite difficult and I’m surprised that there has been at least it seems quite a big chunk of bonus accrual that has gone to that business. So how do you actually reward individual businesses if all of the or majority of the bonus accruals are based on BASF’s own group performance? Thank you.

Yes. Thanks, Chetan and I think compared to what you offered maximum two short questions, we got to minimum three or four. So, but, let me try to address them, as our strategy with respect to Wintershall’s idea changed? No, absolutely not. I think we’ll – we’ve been absolutely consistent in what we said that we want to exit that business over time that we want to IPO the business. You know, the reasons why we called the IPO off for 2021, and I think we were also absolutely consistent in what we said. The next communication about the IPO will be at the point in time where we have decided to go live. On the bonus allocation we are following a consistent approach in the end. The bonus allocations will be made to the respective divisions. They are based on the respective headcount of a division.

Our biggest division from a headcount perspective is our agricultural solutions division. So yes, they are also being burdened there on a relatively basis with the highest bonus provision. The discussion about, what you do and how you run a group whether you fill the repot for everyone the same way or you differentiate is actually one that we had many, many times we came to the conclusion that for the BASF Group, it is the best way to have a bonus that’s being paid on a similar basis for everyone working in the BASF Group, but then to differentiate in the end based on the performance of the respective business and the performance of the respective individual. And I think, that has worked very well for BASF.

So now we have Peter Clark on the line and the final question will be from Rob hales. So now Peter Clark, Societe Generale. Please go ahead.

Yes. Thank you. A quick one on the, what you were saying on the downstream divisions and pricing power. If I’m looking at coatings in specifically, I mean it could have been in loss. I can’t look at the numbers, but if actually the price plus three; it does look like you’re lagging your peers when you adjust the mix. And I’m just wondering the momentum on price going into Q4, given the costs or we being told costs are clearly going up in Q4 as well and how you see the margins rebuild into 2022 and just a quick one for Hans the CapEx. I presume you’re still on for $3.6 billion. I know you spent $1.5 billion in the final quarter before. Just want to clarify that. Thank you.

Peter on the CapEx 3.6 is the guidance as it looks right now we may come in slightly below that but remains to be seen, what the spend actually in Q4 will be.

Moving on to Rob Hales now, Morningstar. Please go ahead with a final question.

Good morning. Thanks for squeezing me in. Just wondering on chemicals and materials, can you give us an idea of where current spreads sit right now versus historical averages and, what’s the extent of industry force measures right now as well?

Rob, that’s not so easy to answer for – of the segment as such, because there’s a logic on each and every on the line. But I mean, with many of the key products we are talking about whether this is MDI, whether this is acrylic acid, whether this is BDO. We have far above let’s say last five years average margin. Now, this is what I said at the very beginning. I don’t want to now quantify that, but it is partially significant over the five years average. And this is also, why this cannot be a new normal to slightly come down. It’ll come down with more availability, but I mean, I want to, I really want to make clear that there is not coming a negative tone now, that we run into a disaster with margins upstream, because we just talk about a slight normalization and we will remain also going forward at least for the next more months, we will see on a very attractive level in the upstream business.

So just don’t get that, in the wrong way. And then as this is also the last question, I really would like to use that again to say, you see us here in positive mode, you saw that the guidance was taking up I mean, two years before we now come to a year’s end that we raised this again, significantly besides of the automotive industry, which is a little bit head to mouth and where no one can say actually all the remaining business have strong demand. And we see this all continuing in 2022. And the only question is now to handle a little bit all the shortages everywhere. But I think based on that, it’s more a production and availability topic and not a demand topic.

And I think we should really finish with that few, which is actually a good one. I would be much more conservative with the other way around. And we will certainly then update everything in February when you – give you the final numbers for 2021. And then also give you an outlook that goes a little bit beyond what I said today, but we should now really say we will get that year over and finished in a very good manner. And we will also start in the next year very well. So that’s maybe my final message.

Ladies and gentlemen, this brings us to the end of our conference call. Let me take this opportunity to draw your attention to a virtual R&D webcast. We will offer on Thursday, December, 9. The webcast is scheduled to begin at 4:00 PM, CET and end around 5:30 P.M. Melanie Maas-Brunne, Member of the Board of Executive Directors and CTO will share how BASF researchers are supporting the transition towards a more sustainable development.

She will highlight innovations for electromobility beyond battery materials. This will nicely compliment our recent investor update on battery materials. Should you have any further questions regarding our Q3 reporting, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today and goodbye for now.