BASF SE
Q4 2021 Earnings Call Transcript

Published: 26 Feb 2022

[Stefanie Wettberg:]

Ladies and gentlemen, on behalf of BASF, I would like to welcome you to our conference call on the Full Year 2021 Results. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. 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 2021. 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/fy2021. Now, I’d like to hand over to Martin Brudermüller.

[Martin Brudermüller:]

Good morning, ladies and gentlemen. It is hard to go back to business as usual the day after Russia attacked Ukraine. Yesterday marks the end of peace in Europe. It is a bitter day for all of us. A short time ago, no one would have thought it possible. We are dismayed by the attack and are very concerned about further developments. And we are all thinking at this moment of the people in Ukraine who have to fear for their lives and their future. Nevertheless, Hans Engel and I would like to welcome you to our Analyst Conference Call for the full year 2021. 2021 was a strong year for BASF. driven by the Chemicals and Materials segments. The Surface Technologies and Industrial Solutions segments also contributed considerably to the strong recovery. Looking at the underlying sales development, we increased sales prices by 25% and volumes by 11%. All segments achieved price and volume growth in 2021. Cash flows from operating activities improved by 34% and amounted to 7.2 billion Euros, as compared to 5.4 billion Euros in 2020. Free cash flow increased by 1.4 billion Euros to 3.7 billion Euros in 2021. BASF’s automotive-related businesses continued to be negatively impacted by the semiconductor shortage. According to current data, global automotive production reached around 76 million units in 2021, and thus increased only slightly compared with the very low level of the previous year. For 2022, IHS Markit expects 84 million units. We assume that the semiconductor shortage will persist, at least in the first half of 2022. We therefore expect just 82 million units to be produced and are less optimistic than IHS for the full year. Throughout 2021, and particularly in the fourth quarter, higher raw materials prices and increased energy and logistics costs burdened the earnings development in all segments. Consequently, we will focus on further substantial price increases in the coming months to pass on the significantly higher costs and improve our margins in the downstream businesses. The established pricing procedures in these businesses lead to a delay in passing on costs. Let’s now turn to the macroeconomic environment. According to the currently available data, global growth in the Chemical industry was 6.1% in 2021. The strongest growth in Chemical production was achieved in China, the world’s largest Chemical market, with a full-year expansion of 7.7%. Here, however, growth slowed at a high level during the course of the year. Electricity cuts had a negative effect on production, particularly in the third and fourth quarters. Growth in Asia excluding China reached 6.2% in 2021. Chemical production growth in the European Union was extraordinarily high at 6%. A contributing factor was the low basis in the previous year. In addition, the European Chemical industry benefited from the fact that availability of global production capacities for basic Chemicals was limited. In the United States, significant petrochemical capacities were temporarily unavailable. After the freeze in the first quarter, production on the US Gulf Coast was also negatively impacted in the summer by hurricanes Ida and Nicholas. In total, Chemical production in North America grew by only 1.7% in 2021. On this slide you can see BASF’s volume growth by region compared with the prior year. With an increase in volumes of 10.6% in 2021, BASF Group’s growth was 4.5 percentage points above global Chemical production. Let’s now look at the volume development in the regions. With 14.4%, our volume growth was most pronounced in Asia excluding Greater China. In North America, sales volumes grew by 10.6% and in Europe by 10.1%. In Greater China, we increased volumes by 8.7% compared with an already very strong prior year. Volume development in the fourth quarter of 2021 was burdened in particular by lower demand for mobile emissions catalysts. This was a result of overall lower automotive production due to the semiconductor shortage. The electricity cuts for energy-intensive industries had only a minor impact on BASF’s operations in China. We now look at our sales and earnings development by segment in 2021. Hans will comment later on the specific development in Q4. At BASF Group level, sales increased by 33% to 78.6 billion Euros due to considerably higher prices and volumes in all segments. Currency effects had a slightly negative effect and were mainly related to the US dollar. BASF Group’s EBIT before special items reached 7.8 billion Euros, an increase of 118% compared with 2020. All segments, with the exception of Nutrition & Care and Agricultural Solutions, increased EBIT before special items in 2021. The rise in earnings was driven in particular by the Chemicals and the Materials segments. For detailed explanations of the 2021 earnings development by segment, please refer to the BASF Report 2021 published this morning. Let’s now look at our financial and non-financial targets. We achieved all our financial targets in 2021, and we have taken important steps to deliver on our mid-term CO2 emission target. As mentioned before, our sales volumes growth was well above global Chemical production. EBITDA before special items increased from 7.4 billion Euros to 11.3 billion Euros and thus by 53%. Our 2021 ROCE of 13.5% was considerably above the cost of capital rate of 9%. For 2021, we will propose a dividend of 3.40 Euros per share to the Annual Shareholders’ Meeting, thus delivering on our progressive dividend policy. We want to reduce our absolute CO2 emissions by 25% by 2030 compared with the baseline 2018. In 2021, our CO2 emissions amounted to 20.2 million metric tons, a decrease from the 20.8 million metric tons emitted in 2020. This is remarkable given the strong growth in volumes. We also set a target of 22 billion Euros in sales with Accelerator products by 2025. These are products that make a substantial sustainability contribution in the value chain. In 2021, in 2020. We thus achieved our Accelerator sales target much earlier than planned. We will therefore adjust this portfolio steering target in the course of 2022. Ladies and gentlemen, creating value for our shareholders is a top priority for us and this is why we aim to increase the dividend per share every year based on a strong free cash flow. At this year’s Annual Shareholders’ Meeting, the Board of Executive Directors and the Supervisory Board will propose to pay a dividend of 3.40 Euros per share, an increase of . In total, we would pay out 3.1 billion Euros based on the number of shares at the end of the year. This amount is more than covered by our free cash flow in 2021. With our dividend proposal, the BASF share offers an attractive dividend yield of 5.5% based on the share price at the end of 2021. Since we have already received several inquiries, I would like to provide a short update about this year’s Annual Shareholders’ Meeting. The Board of Executive Directors and the Supervisory Board have decided to hold a virtual Annual Shareholders’ Meeting on April 29. The pandemic and the expected number of participants will not yet permit a physical meeting in 2022. The invitation with detailed information will be published in mid-March. Now I would like to hand over to Hans.

[Hans Engel:]

Thank you, Martin. Good morning, ladies and gentlemen, also from my side. I would like to start with a brief overview of BASF’s most relevant portfolio measures. In August 2021, BASF and Shanshan formed BASF Shanshan Battery Materials. BASF owns a majority stake of 51% in this company. With the completion of the transaction, we have reached a significant milestone in executing our strategic roadmap to build up a global Battery Materials value chain, equipped with an industry-leading annual CAM capacity of 160 kilotons by 2022. In June 2021, we closed the divestiture of our global pigments business to the fine Chemical company DIC. The purchase price on a cash and debt-free basis amounted to 1.15 billion Euros. In November 2021, BASF and Clayton, Dubilier & Rice sold Solenis to Platinum Equity. With the divestiture of our 49% share in Solenis, we benefited from the value creation that was achieved by combining Solenis and BASF’s paper wet-end and water Chemicals business in 2019. Our share in the purchase price amounted to 1.1 billion Euros. The disposal gain of 589 million Euros is reported as a special item below EBIT, in net income from shareholdings. In June 2021, we announced the postponement of the IPO of Wintershall Dea. Strategically, and in line with the original agreement with LetterOne, we remain fully committed to achieving an IPO of Wintershall Dea. You may have seen that representatives of LetterOne have now questioned this objective contrary to the originally agreed strategy. Given the significant strategic relevance of the IPO for BASF and our stakeholders, we will use all available means to protect our rights and interests, including legal remedies and the right to unilaterally pursue an IPO in 2023. In 2021, Wintershall Dea generated an EBITDAX of 3.8 billion Euros, an increase of 133% compared with 2020. EBITDAX is defined as earnings before interest and taxes, depreciation, amortization and exploration expenses, it is a common indicator for financial performance in the oil and gas industry. Wintershall Dea’s free cash flow improved considerably from 159 million Euros in 2020 to 2.1 billion Euros in 2021. Let me also give you a final update on our Excellence Program. We concluded the program within budget and on time and exceeded the targeted annual EBITDA contribution, reaching 2.1 billion Euros by the end of 2021. The associated costs amounted to around 140 million Euros in 2021. On top of this Excellence Program, we have implemented specific efficiency programs in our service units and operating divisions. For example, the realignment of our Global Business Services unit will result in savings of more than 200 million Euros per year from 2023 onwards. We expect savings of a similar magnitude from efficiency and optimization measures in our Global Digital Services unit from 2023 onwards. Furthermore, the operating divisions are continuing to drive forward their unit-specific efficiency programs. In the following, I will turn to the financial figures of BASF Group in the fourth quarter of 2021 compared with the prior-year quarter in more detail. Overall, the fourth quarter was characterized by higher raw materials prices and logistics costs as well as a steep increase in energy costs, particularly in December. Some of these increases can only be passed on to our customers with a certain time lag. I will start with sales, which increased by 24% to 19.8 billion Euros. Despite the comparison with the strong prior-year quarter, BASF was able to increase volumes in all segments except for Materials in Q4 2021. EBITDA before special items increased by around 100 million Euros to reach 2.2 billion Euros. EBITDA amounted to 2.3 billion Euros, compared with 2.0 billion Euros in Q4 2020. EBIT before special items came in at 1.2 billion Euros compared with 1.1 billion Euros in Q4 2020. Special items in EBIT amounted to plus 1 million Euros compared with minus 181 million Euros in the fourth quarter of 2020. EBIT came in at 1.2 billion Euros in Q4 2021, compared with 932 million Euros in Q4 2020. At 97 million Euros, net income from shareholdings improved slightly in the fourth quarter of 2021. This improvement was mainly driven by the disposal gain from the divestiture of Solenis, while impairments on our shareholding in Wintershall Dea had a negative impact. Net income amounted to 898 million Euros, compared with 1.1 billion Euros in the prior-year quarter. The tax rate was 19.9% compared with 24.7% in Q4 2020. This decrease resulted mainly from the tax-free disposal gain from divesting our share in Solenis. Reported earnings per share declined from 1.15 euro in the prior-year quarter to 98 cents in Q4 2021. Adjusted EPS increased to 1.17 euro in the fourth quarter of 2021; in the prior-year quarter it was 1.10 euro. Cash flows from operating activities increased by 1.2 billion Euros to 3.3 billion Euros in Q4 2021. This increase was mainly driven by a higher cash inflow from changes in net working capital because of lower accounts receivable and higher accounts payable. Free cash flow came in at 1.8 billion Euros, an increase of 84% compared with Q4 2020. And on the next slide, here you see the sales and earnings development by segment in the fourth quarter of 2021. Compared with the prior-year quarter, BASF Group increased sales from 15.9 billion Euros to 19.8 billion Euros. Considerably higher prices and slightly higher volumes as well as positive currency effects were the main drivers for this. Currency effects were primarily related to the US dollar and the renminbi. All segments contributed to the sales increase in the fourth quarter. EBIT before special items increased by 10% to 1.2 billion Euros in Q4 2021. Considerably higher earnings in the Chemicals segment and in Other compensated for lower contributions from the remaining segments. For details on the earnings development by segment, please refer to the Reporting Factsheet we published this morning. I will now give you an update on the impact of the natural gas price development in Europe. Natural gas prices further increased in the final quarter of the year, reaching an all-time high in December. For our European sites, the additional costs due to higher natural gas prices in 2021 amounted to around 1.5 billion Euros. The fourth quarter of 2021 alone accounted for 8000 million Euros of this amount. The earnings of our operating divisions were directly burdened by these cost increases compared with the previous year. Let’s now move on to our cash flow development, where I will comment on the full-year figures. Cash flows from operating activities amounted to 7.2 billion Euros, compared with 5.4 billion Euros in the previous year. The considerable increase was primarily due to the improvement in net income. An offsetting factor was cash tied up in net working capital, which rose by 1.2 billion Euros to 1.6 billion Euros in 2021. This mainly resulted from the significant increases in inventories and trade accounts receivable due to higher business volumes and prices. Cash flows from investing activities totaled minus 2.6 billion Euros in 2021, after minus 1.9 billion Euros in the previous year. Payments received for divestitures and the disposal of the shareholding in Solenis in 2021 were below the figure from the disposal of the construction Chemicals business in the previous year. Cash flows from financing activities amounted to minus 6.5 billion Euros. In addition to the payment of dividends in the amount of 3.3 billion Euros, financial and similar liabilities were reduced by 3.1 billion Euros. Free cash flow amounted to 3.7 billion Euros in 2021, after 2.3 billion Euros in the previous year. Turning to our balance sheet at the end of 2021 compared with year- end 2020. Total assets increased by 7.1 billion Euros to 87.4 billion Euros. Non-current assets amounted to 52.3 billion Euros, an increase of 1.9 billion Euros, mainly due to additions to property, plant and equipment and currency effects. Current assets increased by 5.2 billion Euros to 35.1 billion Euros, primarily due to higher inventories as a result of higher raw materials prices and higher accounts receivable because of the increase in sales. Net debt decreased to 14.4 billion Euros at the end of 2021. Equity amounted to 42.1 billion Euros on December 31, 2021, representing an increase of 7.7 billion Euros compared with the year end of 2020. This was driven by the considerably higher net income and other comprehensive income. The equity ratio was 48.2% compared with 42.8% at the end of 2020. On this slide, we give you some more explanations on our CapEx budget. Between 2022 and 2026, we plan capital expenditures of 25.6 billion Euros. CapEx in the next five years will thus be higher than in the prior planning period from 2021 to 2025 with a budget of 22.9 billion Euros. The main reasons for this are our two major growth projects, the new Verbund site in Zhanjiang and our Battery Materials activities. These two projects are key to drive BASF’s future growth and the reason why the share of capital expenditures in the region Asia Pacific is rising to 45% of the BASF Group’s CapEx between 2022 and 2026. The European share is budgeted to reach 37% and the North American share 15%. Investments in BASF’s existing business remain stable at an average level of 2.6 billion Euros per year. We will ensure a high level of discipline regarding the CapEx required to maintain and profitably grow these businesses. This will enable us to fund the growth projects with an average of also roughly 2.6 billion Euros per year. CapEx for our growth projects will peak in 2024 and decline thereafter. For 2022, we plan total capital expenditures of 4.6 billion Euros compared with 3.4 billion Euros in 2021. Let’s now move on to BASF’s priorities regarding the use of cash. BASF’s corporate strategy is based on organic growth. Our annual budget for R&D activities amounts to around 2.1 billion Euros. We are committed to increasing our dividend per share every year. Our solid balance sheet and strong free cash flow support this progressive dividend policy. We strive to strengthen BASF’s portfolio through smaller, bolt-on acquisitions and further focus the portfolio with continued pruning measures. On January 4, 2022, we resolved on a share buyback program, our first since 2008. We have prepared an additional slide on the program. The program resolved and announced on January 4 amounts to up to 3 billion Euros. We started it on January 11, 2022, and it will be concluded by December 31, 2023 at the latest, subject to a renewed authorization to repurchase own shares by the Annual Shareholders’ Meeting on April 29, 2022. The repurchased shares will be canceled, reducing the share capital accordingly. As of February 23, we have already bought back 6.2 million of shares for a total amount of 415 million Euros. This illustrates that the program is being swiftly executed. And with that, back to you Martin for the outlook.

[Martin Brudermüller:]

Ladies and gentlemen, I am happy to tell you that we have had a very strong start to the year, with January figures above the prior-year month. The macroeconomic environment that is the basis for our full-year outlook also looks positive from today’s point of view. We are confident regarding our business development in 2022. With 3.8%, we expect global economic growth to be somewhat more moderate in 2022 following the very strong recovery in 2021. As order backlogs in industry are high, we expect global industrial production to grow by 3.8% and Chemical production by 3.5%. We anticipate an average oil price of 75 US dollars for a barrel of Brent crude and an exchange rate of 1.15 US dollars per euro. Based on these assumptions, we are forecasting sales of between 74 billion Euros and 77 billion Euros for 2022. The BASF Group’s EBIT before special items is expected to be between 6.6 billion Euros and 7.2 billion Euros. ROCE should be between 11.4% and 12.6%. We expect our CO2 emissions to be between 19.6 million metric tons and 20.6 million metric tons in 2022. No forecast has been made for Accelerator sales, as we have already achieved our target and plan to update our portfolio steering target in the course of 2022. Our forecast ranges take into account uncertainty resulting in particular from the effects of ongoing supply chain disruptions, the further course of the Corona pandemic and the development of energy prices. The impact of the escalation of the Ukraine conflict is not factored in and cannot be reliably predicted at this time. However, the war in Ukraine has the potential to significantly reduce growth of global GDP and industrial production. Ladies and gentlemen, to conclude, I will highlight our focus areas for 2022. We will focus on improving the performance of our downstream businesses. Price increases to restore and expand our margins are the key measure in our downstream businesses to compensate for higher raw materials and energy prices. Furthermore, we will work on maintaining the strong margins in our upstream businesses for as long as possible. To support future profitable growth of BASF, we will continue to execute our two major growth projects, the Zhanjiang Verbund site and our Battery Materials activities. We will remain disciplined regarding investments and costs, and we will put even more emphasis on effective project execution across our organization. Finally, we will vigorously prepare BASF for a low-carbon and circular economy. We will present the latest information on our progress towards net zero CO2 emissions by 2050 at a virtual Investor Update on March 28. And now, we are glad to take your questions.

[Stefanie Wettberg:]

The first question is now from Christian Faitz from Kepler Cheuvreux. Please go ahead, Christian.

[Christian Faitz:]

Thanks, Stefanie. Good morning, everyone. I stick to one question. Can you remind us of your exposure into Russia and Ukraine for the group and also in particular for your agricultural Solutions Division, which I got to believe is relatively higher versus other segments of the group? Thank you.

[Martin Brudermüller:]

Yeah, Christian, it’s roughly 1% of our sales in Russia and 0.2% In Ukraine, which more or less translates into about 800 million sales in Russia and 150 million in Ukraine. Whereas the distribution among the businesses in Russia is more equal, there’s a high share of Agriculture, but also from all the other divisions, it is much more significantly twined towards agricultural solutions business in the Ukraine, which is about two-thirds of it. So that is roughly the situation. So you see the size of the markets are not so big.

[Christian Faitz:]

Okay, thank you. Thank you very much, Martin.

[Stefanie Wettberg:]

The next question is from Andrew Stott, UBS. Your turn Andrew.

[Andrew Stott:]

Thanks, Stefanie. Good morning. My question was really the mid-term return on capital. So you’ve kindly given the split by division. And it just strikes me that -- and I suppose we knew this from last September, but the confirmation is there that you’re spending almost 20% of your group CapEx on Surface Tech and, obviously, Battery Materials, mainly. But the return on capital in ‘21 was 5.6%. I’ve got two questions on this. One, what was the underlying return on capital because I assume there’s all a goodwill in there for Cantor or Shanshan and maybe other things. So I’m trying to get an idea of the incremental return of capital as we go forward. And then two and more importantly, what are the levers for improving that return on capital, given the amount of CapEx you’re committing to that division? Thank you.

[Hans Engel:]

Yeah, good morning, Andrew. This is Hans. So as you rightfully pointed out, Surface Tech has a relatively low return on capital. What is that driven by? That’s driven by primarily the two major acquisitions that we did in that segment, one back in 2006, the Engelhard acquisition, and then in 2015, if I recall correctly, the acquisition of Chemetall, both came with significant amount of goodwill. And as you know, under IFRS rules, you don’t depreciate the goodwill. Now, when we look at the investments that we’re making, this is -- or that we are now forecasting in that area, this is organic growth. This is, in particular, the two Battery Material plants in Europe, with significant capital expenditure in particular in 2022 and then the startup in 2022. And for these kinds of investments, you will see returns, obviously, in the range of what we expect for the BASF Group, i.e., earning a premium on our cost of capital.

[Andrew Stott:]

Thank you.

[Stefanie Wettberg:]

Chemetall, if I may add was ‘16, at 2016, by one year. Sorry Andrew. So everybody has it. The next question will be from Matthew Yates. We will then have Tony Jones, and then Mubasher Chaudhry. So now is Matthew Yates, Bank of America. Please go ahead.

[Matthew Yates:]

Hi, thank you. Good morning, everyone. I’d like to focus a bit on slide 20 annual statement that one of the priorities for this year is to improve the downstream performance. So I have a couple of questions relating to the culture and the organization or the model of the group and in trying to achieve that. The first one is that you recently announced some reshuffling of the divisional responsibilities within the executive team. I think your leader in Ag moved to Materials and vice versa. I know that’s normal course of business for BASF but can you explain or remind us why you think that model is best practice to move around the management team? Because I think your US peers would probably argue that these different businesses have very different skill sets. And then the second question is, obviously the numbers this morning, there was a lot of impact from the booking of bonuses, at least relative to what consensus expected. I just had a general question and that is, if I am working in, say, the Agriculture or the Nutrition Division, how much of my bonus at the end of the year reflects the performance of myself and the division I work in versus the overall BASF group? Thank you.

[Martin Brudermüller:]

So Matthew, first of all on the downstream performance, you can absolutely be sure that there is a lot of pressure on the downstream divisions to increase their margins to pass over the raw materials and the energy cost. Believe me in December, we have ourselves be a little bit disappointed about the final December result, which then impacted also Q4, because you saw also that there was quite a spike in energy costs, I have to say even maybe the last two weeks of that month. So it was not possible to pass over all that cost in the downstream area. And this is also why they came in a little bit lower and result of the group maybe a little bit lower than some of you have obviously expected. But you see also from my commend, and that’s why I have given it that January was so strong, that you can see from that that we are not tired to pass on the cost increases and raise prices and it actually happened fairly well in January and I have to say also far in February. And you know that that the business models are different, downstream and upstream; upstream, you have formula prices and something translates from Friday to next Monday to a higher price. If you are downstream, you have partially monthly, quarterly, half year prices and in the extreme case also full year prices. So you cannot correct that all the time and this is why it just takes longer. And I think with the energy prices, which we have now to expect from the current situation, the pressure of downstream business is not going away and be sure we are sitting in their neck to continue to increase prices. You referred to the change which we have done in the board’s responsibilities between Chemicals and Materials on one end and Nutrition & Care and Ag on the other side. I think first of all, we have to differentiate between the board and also the operating division head and the division heads are far longer in their business, normally five years and longer. That is also what we want to have that they are in the details that they’re responsible for their actions. And this is also to go into continue because they don’t have many any changes here. On the other hand, we have made the change, in this case, between the operational responsibilities here for the segments between Saori and Mike for the reasons that also Mike in the past was himself in the Agricultural business, and although you know that we have also said this that we want to increase the performance in Ag, quite significantly now. And also the major markets are here, the US and South America and Mike is over there and this is why we said he can also draw synergies from that, that he can actually take the direct transmission into these markets by being in the US. With the bonus impact, I think I mentioned that that this is actually a multi-formula where things multiple themselves so the first one is actually the crude ROCE, which defines a certain amount of or a factor, which is multiplied with the target bonus, this is kind of Verbund reflection. And then beyond that is there’s a second factor, which is relating to your personal target agreement, which is nothing else then the value driver tree brought down to each and every one where the lever is. And this is usually also quite ambitious target. So you seen that this is, I think, a rather fair distribution on one hand of the Verbund and the group part and on the other hand, with the same kind of multiplier for the personal performance. I hope that answers your question.

[Matthew Yates:]

Thank you very much, Martin.

[Stefanie Wettberg:]

So, now it’s Tony Jones, Redburn.

[Tony Jones:]

Yes, good morning, everybody. Thanks for taking my questions. I got two. So you are guiding for oil to be $75 over this year. So I was curious, just to sort of link that to guidance, is that what you would expect to need together with much lower gas prices to reach your EBIT targets? And then secondly, on the Excellence Program, thanks for the update, but could you remind us if there any further gains to come in 2022, 2023? And if so, will there -- that be enough to offset things like wage inflation?

[Hans Engel:]

So, Tony, this is Hans. I’ll take your second question first. The Excellence Program came to an end, so to say, in 2021. We have reached the full impact of 2 billion Euros. Is there more to come from that program in the following years? No, there’s not more to come. But as I mentioned, there are further Excellence Programs, there’s one in our Global Business Services division, there’s one in our Global Digital Services division, both targeting 200 million earnings improvement from 2023 on. So rest assured, we don’t sit back and sit on our hands. We keep moving and keep pushing BASF in the right direction. Your second question was on the oil price of 75. That is, what our full year assumption is. I’m fully aware of the fact that today we sit at $100 per barrel Brent, what this will lead to is and that is what Martin alluded to. We need to push, obviously, for further price increases, but we haven’t built in any fluff or anything in our budgets. So, we are fully committed to reach even in an oil price environment of $75 or higher gas prices environment, what we have budgeted for and what we are guiding for.

[Martin Brudermüller:]

Tony also because I talked only about the downstream margin and the prices, there is definitely also a lot going on the cost side. Not only that we get on a corporate level there from the Global Business Services and from digital services some significant savings, also all the divisions are looking into their cost structure and complexity. And I think you have seen in recent months that we have also sold quite some of the sites and also cleaned further up our portfolio in terms of active portfolio management. And this is going through all the portfolio and this will also help us that we contain on the cost side while we are increasing margins.

[Tony Jones:]

Thank you. That’s appreciated.

[Stefanie Wettberg:]

Okay. Now we have from Citi, Mubasher Chaudhry. Please go ahead.

[Mubasher Chaudhry:]

Hi, thank you for taking my question. Just on the balance sheet, please. Can you please comment on your targeted net debt-to-EBITDA, given the increased shareholder returns and the increased CapEx number that we’re talking about and given the potentially weaker performance? Just wanted to hear your thoughts on that business is able to balance the books on an organic basis going forward. And just related to that when we talk about the CapEx forecast, could you provide some comments on the impact of inflation please, what portion of the CapEx has been fixed and kind of what portion could move up as given the costs are rising across the spectrum? Thank you.

[Hans Engel:]

Yeah, Mubasher. This is Hans. Thanks for your question. First on debt and debt development, we’ve used a reduced debt in the year 2021 to level net debt of 14.3 billion. We are fully committed to a single A rating and that is what we will also deliver. On our CapEx forecast, now fixing elements in a five-year CapEx forecast is relatively difficult. But if you look at price developments that are relevant for our CapEx projects, such as, for example, the price of steel, we’ve seen that at very elevated levels during the course of 2021. It has come down I think, by round about 20%, compared to the peak that we had in 2021. You’ll see also other key building material prices coming down, while on the same side you see labor costs increasing in the current environment. So what we’ll do there needs to be very, very carefully monitored. But I think this is any how a task that we all have day in and day out.

[Mubasher Chaudhry:]

Understood. Thank you.

[Stefanie Wettberg:]

Given that there are still nine analysts in the line wanting to ask a question, I would really urge you to ask only one question. We will now have Gunther Zechmann, then Laurent Favre, and then Peter Clark. So now Gunther Zechmann, Bernstein.

[Gunther Zechmann:]

Thank you. Good morning, everyone. My one question then is, I was intrigued by your comments in the remarks to force, possibly an IPO of the Wintershall Dea business in 2023. Can you talk us through how exactly that would work please?

[Hans Engel:]

This is Hans again, Gunther. Let me put it this way. Is this something that we want to do and that we intend to do? No. Is that an option that we have? Yes, it is an option that we have and the technicalities of that are as you would expect it to for a unilateral IPO.

[Stefanie Wettberg:]

Okay, so now we have Laurent Favre, BNP Paribas Exane.

[Laurent Favre:]

Thank you. It’s a question for Martin. Since Q3, you announced a strategic review on the auto catalyst business and the 3 billion buyback program, which refer to a history when you did about 10 billion of buybacks on a multi-year basis. I was wondering if we should assume that the 3 billion program you’ve just started is a one-off or should we see this more as an intention of, well, I guess repeating what you did or what BASF did 15 or 20 years ago? And are you considering some other portfolio reviews that could help fund the buyback but also sharpen the focus, especially in the downstream? Thank you.

[Martin Brudermüller:]

[t:]

So I think that reflects what we want to do. You know basically our plans and, I mean, when it comes to portfolio management, I think we have been fairly active over the recent two or three years. Now we have also some activity which is the carve out of the automotive catalyst business, which is not a decision to sell this business but to put it into the right operational independence and strength for the team to get the maximum out of that business in a totally different environment now for the automotive industry, but I would say beyond that we don’t have now a big thing in front of us. I mean what I said there is quite a lot of work in the smaller parts where we take sites out and reduce structures, but there is nothing which I get mentioned now. We have to say we have a bigger portfolio piece ahead of us because we now fully focus and you know these projects which are the organic growth projects, we fully stand behind of that. And I think both for China but also for the Battery Materials, the expectations in these businesses are good, but that means also I would say even fit very good but we have to also put now some steel and iron into ground to participate in this.

[Laurent Favre:]

Thank you. And quick one for Hans please, it’s about the constraints you have with Wintershall Dea and later one. I was a bit surprised that the dividend of Wintershall Dea would only be flat, given the strength in the market. Are you also constrained in your ability to grow dividend and turn the free cash flow into a dividend for BASF?

[Hans Engel:]

No, as you have seen, Wintershall Dea is paying a common dividend of 600 million. It remains to be seen whether that is the end of the flagpole for the year 2022.

[Laurent Favre:]

Thank you, Hans.

[Stefanie Wettberg:]

So now we move on to Peter Clark, Société Générale. We will then have Jaideep Pandya and then Chetan Udeshi.

[Peter Clark:]

Yes. Good morning. Yeah, good morning. Thank you. I got -- I asked this on Q3 but I got cut off. It was about the pressure on the downstream that you talked about not going away. And specifically on something like coatings, which looks like it’s falling in deeper loss in the fourth quarter. You pushed price 4%, it is clearly not enough, you made that quite clear. There’s a lag effect. Just wondering when you see that business turn back positive and certainly when the pricing catches up with a cost, since it sounds like it might be more a second half effect, I think, in that business. And just a quick follow on from that, the resistance from customers, have you noticed any change in the customer reaction to the price increases, as we’ve gone through the fourth quarter into the first quarter? Thank you. And that’s general, that’s not just coatings. Thank you.

[Martin Brudermüller:]

So Peter, I mean, there’s most probably no other businesses more directly related to automotive than coatings because you can build a car without a seat, but you cannot build a car without coding it, that means the coating business immediately reacts when they reduce the number of cars produced. This was also the topic for the coatings business last year when the numbers actually went down significantly. They certainly had much less and they had also short work schemes and whatever, I mean, you know that in the past. Now, what you have seen is that actually there was an uptick because Q4 was for the automotive industry in volumes pass up better than anticipated, so that also immediately was shown in the coatings business and I would say it strongly depends what’s really the final number of cars produced is here. But let me very clearly say they are extremely pushy and successful in reducing costs. Over many years, they really go down this complexity this number of people and they work on that. But I have also to say that is an area where price increases are not easy. If you have an OEM who produces not so many cars, you don’t have an open door now to say you increase your prices dramatically and certainly they have to go much more their way because raw material price increases are not fully covered yet, just coatings. But they are on it and I would expect them -- when the number of cars really going up and semiconductor shortage eases a little bit, they will have also the power to increase prices even further.

[Peter Clark:]

Thank you. And the general question about pricing resistance, no change in behavior from the customer generally?

[Martin Brudermüller:]

Yeah, I mean, generally . I mean, you can imagine that customers are not amused. We are already on very high price level throughout the portfolio, I have to clearly say this, but it’s definitely also not enough in all the business to cover with the cost. They are aware of that but with each level higher in the prices, the resistances also goes up, but at the very end it is then also a question of power balance because I think they have partially full order books, they need also the materials. You know that some of the materials are short, not only because of supply chain, I mean if you look on the number of ships, the waiting has not dramatically reduced, to get containers and the price and everything is not easy. Raw materials are partly short, so we still have a lot of allocations actually in some of the lines. And I think this balance between their demand and our supply capability that gives you also the power then of pricing. And I would say, it has become more difficult but our people are firm on that and they get our pressure in doing that. And I would say so far, it’s still working.

[Peter Clark:]

Thank you very much.

[Stefanie Wettberg:]

Okay. Now we move on to Jaideep Pandya, On Field Research.

[Jaideep Pandya:]

Thanks. My question is on Ag. So in ‘19, you guys gave guidance on Ag for roughly 23% margin. In the last couple of years, obviously, this business has gone significantly backwards. And when I think about the mix, I mean, your fungicide sales have gone up by about 20%, 2021 versus ‘19. And you obviously have got buyers, vegetable seeds and other seeds business. And then R&D costs are also roughly flat. So I appreciate the whole bonus reshuffling thing. But underlying what is really going on in Ag? And then are you still sticking to the 23% margin guidance, despite the whole bonus reshuffling? That’s my first question. And the second question really is around your nickel and cobalt sourcing, because obviously, you have a relationship with Norilsk Nickel. And in the current geopolitical context, what is the plan B, if really there are hard sanctions around trade agreements between Russia and Europe? Thanks a lot.

[Hans Engel:]

Yeah, Jaideep. This is Hans on your Ag question. If you look at the year 2021, some of the factors that drive the margin below what used to be the target and what continues to be the target is, as you mentioned it, is the higher personnel cost coming via the bonus, we have significant cost increases also in all other categories. And when you compare to these significant cost increases, what we were able to push through as price increase, that was just not significant. It reduces the contribution margin one by roughly 5 percentage points. And when you look at this, this goes all the way through to the EBITDA level and also the EBIT level. There’s also another component in there that you will not see the same way with the US competitors. What is the impact that currency has in the year 2021, there’s about, let me say, somewhere in the order of magnitude of 100 million to 150 million also sitting in currency effect that a US competitor would not show the same way, because the US dollar compared to the Euro on average in 2021 was significantly weaker than in the year 2020. But as Martin has stated before, this is certainly not the kind of performance that we want to deliver with Ag business and I’m pretty sure that we will significantly improve performance in the year 2022.

[Martin Brudermüller:]

Jaideep, a word on the raw material supply, I mean, you’re referring to Norilsk Nickel, which is actually our supplier then in the batteries value chain also in Europe because the plant is actually directly adjacent to their metal refinery over there. And we have a long span of -- we have a long-term market-based supply agreement for these materials, so nickel and cobalt with them. Let me also very clearly say we have a long standing relationship with them when it comes to precious metals, particularly palladium for our automotive catalyst division. So that is a very reliable partner. And I mean, given the power and the pressure the EU Commission puts now on bringing the combustion engine into a decline and actually moving on with the EVs, Norilsk Nickel is one of the very strong, if not the only, significant European nickel and cobalt supplier. I don’t think and we don’t know that yet but I don’t expect that this is part of the sanctions package, let’s see. But for that reason we go with them, and you know also that we have a much more sophisticated raw material supply network built up. First of all is our acquisition in Shanshan, we have access also to nickel and cobalt suppliers over there. You know that we also worked with in another project, therefore, tapping into the Indonesian resources. So if something would there be happening, we have to reshuffle and use the network globally which we have established for the raw materials, but I would expect that this is something we have to observe a little bit. It’s just very, very hard to give more comments in the first day after the conflict now escalated.

[Jaideep Pandya:]

Thanks a lot. And if I may just say it would really be good if you could increase the focus a little bit on Ag in the communication as well. Thanks a lot.

[Martin Brudermüller:]

Good hint, because it doesn’t like on the pressure, they feed in their neck from Hans and myself.

[Stefanie Wettberg:]

Okay, so now we move on to Chetan Udeshi. We will then have a Sebastian Bray, Andreas Heine and Markus Mayer. And now Chetan Udeshi, please.

[Chetan Udeshi:]

Yeah. Hi. Thank you. Just following on previous question and, also, prior to that. I’m just doing my math here and maybe I’m wrong, but hoping I’m correct. Nutrition & Care EBIT in 2021 is about 37% below 2019, Ag EBIT 35. I mean, I haven’t seen any of your peers -- yes that are not always pure peers in the industry but I mean, so far as I’ve seen 2021 numbers for most of your peers, closest peers in these markets have been clearly well about 2021, sorry 2019 levels, even with raw material pressures. Now I understand all the cost dynamics, which are somehow different at BASF because of the immediate pass through of cost, etc, etc. But my question is we hear you when you say, okay, there is a pressure on the teams, and we’ve been hearing that for all of 2021, are you able to commit today that in 2022, at least we should expect the earnings in these divisions to go back to 2019 levels, because 2019 themselves was actually lower than the prior years in both these divisions. So I’m just wanting to see, get some more conviction in terms of how do you think 2022 lay out for these two divisions? And just one follow-up, small one, in your return on capital employed calculation, I’m just curious why do you not include the costs in the other line, which is quite significant? We are talking about 700 million of costs. So, why is that excluded from ROCE calculation because that probably would dilute your ROCE by 100, 250 basis points? Thank you.

[Hans Engel:]

So, Chetan, as you know, ROCE calculations are done in different ways. We do a ROCE calculation on the basis of our operating assets, and our operating results in the target. We then include an error of 1 percentage points, and that covers what we have in the other line. So I need to run the calculation myself, haven’t done that, because we’re using this operating ROCE -- operative ROCE model for more than a decade, need to run that calculation myself, but I would doubt that we will find a significant dilution here.

[Martin Brudermüller:]

And Chetan, I can only say, I mean, as I already alluded to, we have enormous pressure on the downstream business to improve their margins but I have also to say, I mean, if you look for purely the energy costs, and also the chart we have released, I mean, they are running up hills. I mean, it is continuously going the energy prices up and they run and put it on. They could not really pass it over. And I think if you look also in the situation, we have given you some background here also in the Nutrition business, where we had a fundamental problem is our Vitamin A volumes, which are now coming back, so we are there. You see also from information we gave you on the segments with the price increases that was the rather soft one here, whereas all the other segments have dramatically increased price, so they have not yet done fully their job. If you look on the Ag part, I mean, they had a fantastic volume growth, it was actually 8.1% for the full year in Ag, but not so much yet on the prices. They have also to dramatically increase prices over there and we have had to mix. But let me also say we have been significantly hit also by FX because we are the only one who’s reporting here in Euro numbers whereas the others do in US dollars and we had quite a strong headwind both in the Real and also the US dollar, which is no excuse, but which has hit us. And so I can only say, yes, you made some mathematics now, I cannot promise you where it is but I’ll tell you, we will get the maximum out of this business in 2022 and certainly, we have to come back to these kinds of levels, which you just described.

[Chetan Udeshi:]

Thank you.

[Stefanie Wettberg:]

So now it’s Sebastian Bray, Berenberg Bank. Please go ahead.

[Sebastian Bray:]

Hello, good morning and thank you for taking my question. I’d like to focus on the upstream please and in particular, why the Material Segment had such a contrasting development versus the Chemical segment; Materials being substantially below market expectations and Chemicals slightly above? In both cases, higher raw materials and higher bonus provisions are cited. There seems to be in the release a bigger emphasis on higher fixed costs in Materials. But given these are effectively both upstream petrochemicals businesses, what is the reason why Material seems to have had a much harder time in Q4 than the Chemical segment? And would you expect this to continue into 2022? Thank you.

[Martin Brudermüller:]

So, first thing I would like to make you make always a very black and white distinction that both Chemicals and Materials are downstream -- sorry upstream. So, I mean, we have to clearly say that CM monomers division is clearly upstream, but the performance materials division is actually downstream. So we have a full value chain here. So this segment is a little bit different than really the C division, which is fully upstream. So what you can actually see is that the raw material side, so that means the commodities on the isocyanates, basically, and also the materials for the polyamides have done extremely well. Actually also across the year, ammonia, which is one of the material has done extremely well. Where we had more topics was really on the on the downstream part in this case as well, because the performance materials had lower volumes, which came from the automotive industry. We know that this is a significant outlet over there, but also the construction industries across the globe did not do so well. And also because of the models, which we have set, they have not done fully their job on the price increases. So if you look on Materials, be really aware that is the full value chain and not only upstream logic, whereas Chemicals really is upstream business. And this is also why was this what I explained is a little bit different performance here.

[Sebastian Bray:]

Yeah, that’s helpful. Thank you. Is it just fair to say that you chanced to -- BASF chanced in the performance materials business more for the isocyanates monomers and the caprolactam and it got internally squeezed, but that hasn’t shown up in previous quarter. So it’s entirely a lag effect on downstream why Materials is different from Chemicals in terms of development.

[Martin Brudermüller:]

Yes, Sebastian. This is almost what we say. We certainly want to have the full earnings on the whole value chain and the upstream business are simple in the internal transfer price, they just hand over from Friday to Monday the price increase, which they give out to the external customers. And then the higher raw material cost is with the performance materials and they have to hand it over to their customer. So they get squeezed with increasing raw materials and industry prices. So that’s the same logic to these customers as we are with the outside customers and that’s why they need a little bit more time to then send that over. But you know, also then when the raw material prices go down, they also get from Friday to Monday a lower price while their sales prices are going down later, so then they have an expansion of the margin. It is this logic which we explained also several times already, which in this case applies within the Material Segment.

[Sebastian Bray:]

That’s helpful. Thank you for taking my question.

[Stefanie Wettberg:]

Okay. So now Andreas Heine, Stifel and then we will have a final question from Markus Mayer. So now Andreas Heine, please.

[Andreas Heine:]

Yeah, it’s again on the Nutrition & Care business. It was not great in performance over recent years and it cannot be only the vitamin A plant and the pricing. Is there anything else you have to change? As we look on peers, which live obviously on the same planet and have the same issue with energy prices and raw material cost, there the margin actually improved during this year and was not down? So why is it that different, not only in 2021, but also in the year before, cannot be only the vitamin A plant?

[Hans Engel:]

Hi, Andreas. This is Hans. Vitamin A plays in that segment an important role due to volume and the position that it has. We have in addition to that, not only the fact that the vitamin A plant didn’t produce, we have the expansion actually of the vitamin A plan and the cost that comes with it and we have the expansion of the formulation plant and the cost that comes with that and that hits an operating division that is relatively small. And these two effects explained pretty much what happened in the Nutrition & Health business. In the Care Chemicals business, we had, if you think back to the year 2020, very strong results in there, and I think we talked about that also in prior calls. There in particular two areas, which suffered in the year 2021, one -- and both are actually, you want to say, leisure or travel related. One is the UV filter business, which is an important part of our Care Chemicals business and the other is also in Care Chemicals, it is active ingredients for higher-end cosmetics. And a lot of that business simply has to do with people traveling more or less. And in 2021, we saw people for obvious reasons, traveling less. By the way that has picked up in the meantime, so our customers seem to have worked through their inventories of UV filters, so where we had very, very slow business during the course of 2021, it has now picked up again. Hope that helps.

[Andreas Heine:]

Yeah, thanks.

[Stefanie Wettberg:]

So now Markus Mayer, Baader Helvea.

[Markus Mayer:]

Yeah, good morning, Stefanie, Mark and Hans. My question is basically on the free cash flow, can you remind us how much of the free cash flow came from Wintershall Dea. And in the past before this business was then combined with and deconsolidated in the core business unit. You also had oil and gas in the dividend analyzers. Maybe now it would be helpful if you could give this at least a kind of flavor, how much oil and gas and would mean for your cash flow from Wintershall -- coming from Wintershall Dea? Thank you.

[Hans Engel:]

On the free cash side, that is relatively simple, because that is the dividend that we are receiving from Wintershall Dea. On the oil and -- oil price sensitivity, we will have to provide that to you after the call. I don’t have that figure handy at this point in time. Hope that’s okay.

[Markus Mayer:]

Sure. Of course, thank you.

[Stefanie Wettberg:]

We’ll put that in the transcript then. And I hand back to Martin.

[Martin Brudermüller:]

Yeah, thank you very much. Maybe at the end, I would give two or three more sentences. I mean, first of all, I thank you for the variety of questions and not only focusing on Wintershall Dea, which is clearly now something everyone thinks of, but I’m happy that you reflected that BASF is certainly much more than that. And I hope we could really convey we are positive about this year. And yes, there are uncertainty now what Wintershall Dea and the Russian thing and what that all means for us and for the world. But I would say overall, the fundamentals for 2022 are good, there is backlog, in demand of people. There is a sound demand, as we can see, at least for the first half year, as long as we can see. There’s actually no business where this is falling off the cliff for us and anything changing significantly. We also hope then in the second half that Automotive is actually getting better. So the business conditions are good. We told you that Russia and Ukraine is not really big markets for us and I think for many other companies, this is the same. So if there’s something directly connected to sanctions, I think it’s not this direct marketing, which is I think something we have to observe is, then the energy cost that under these circumstances, or rather maybe stay on the higher side. If Europe buys a lot of LNG, most probably the energy prices also stay high in Asia, what is then the impact on consumption, what is this real income and are getting people a little bit more cautious and spending but I would also regard that not so dramatically that that has now potential to derail everything. And I just want to say we expect now a very strong quarter one, orders are fine, orders at hand are fine, order entry is fine. So I just would like to really close here on a positive note. And you know that visibility is always giving us quarter one, quarter two, but then let’s see and I think the further we go into the year, we will then have more sight into the second half and then we will update but I think overall this should be a good year.

[Stefanie Wettberg:]

Ladies and gentlemen, this brings us to the end of our conference call. Let me invite you to join our Virtual Investor Update on Monday, March 28. As Martin Brudermüller mentioned already, we will present further details on BASF journey to net zero 2050. The webcast is scheduled to begin at 2pm Central European Time. Around one month later on April 29, we will report on BASF first quarter results and offer our Virtual Annual Shareholders Meeting. Should you have any further questions regarding our full year reporting, please do not hesitate to contact the IR team. Thank you very much for joining us and goodbye for now.