BASF SE
Q1 2022 Earnings Call Transcript

Published: 29 Apr 2022

[Stefanie Wettberg:]

Good morning ladies and gentlemen, on behalf of BASF, I would like to welcome you to our conference call on the First Quarter 2022 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 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 and also the slides at basf.com/q12022. Now, I’d like to hand over to Martin Brudermüller.

[Martin Brudermüller:]

Good morning ladies and gentleman. Today I would like to start with a few thoughts and concerns about the war in Ukraine. We are deeply appalled and shocked by Russia's brutal attack on Ukraine. With each day the Ukrainian people are subjected to unspeakably barbaric acts that cannot go unpunished. Our thoughts are is all those suffering as a result of this war. We all hope that the war will be ended very soon. As a company however, we must prepare for a long war with all consequences. It is exceptionally challenging to take the right decisions for a company in such circumstances. We are seeing considerable regional differences, supply chain interruptions, higher raw material and energy prices as well as serious geopolitical tensions. In such disturbing times, it is difficult to simply move on to the agenda. But this is our thought for today's conference call. On April 11, BSF released preliminary figures for the first quarter of 2022. Today Hans Engel and I will provide you with further details regarding our business development in Q1 2022. This slide summarizes the current market environment for industry customers and consumers. The overall macroeconomic environment is characterized by a high degree of uncertainty and volatility caused by the war in Ukraine, the ongoing pandemic as well as supply chain shortages. We are facing strong price increases for all input factors. Drastically higher energy, industrial raw materials and logistic costs are the main reasons for the elevated price levels. Furthermore, production and exports of agricultural products from Ukraine and Russia are already impacted and will be further substantially reduced by the war, which is causing prices to greater for grain and foods to rise globally. Due to the reoccurrence of the Coronavirus in China in the country zero COVID strategy, economic growth in China is softening. In Q1 2022, China recorded year-on-year GDP growth of 4.8% compared with 4% year-on-year growth in Q4 2021. This was stronger than expected by analysts. But that's not yet fully reflect the impact of the current COVID related lockdowns in many Chinese cities. Furthermore, automotive production is limited by shortages in semiconductors and now additionally by the shortage of wire harnesses. For 2022 IHS Markit has that cut its outlook for global automotive production to 81 million units, a reduction of around 3 million units. To sum up, the key challenges and downsides for 2022 are direct and indirect effects originating from the war against the Ukraine. Pandemic related lockdowns in China as well as the persistent shortage is affecting the automotive industry. Let's now turn to BSF business development in Q1 2022. We had a strong start to the year and delivered an EBIT before special items of €2.8 billion an increase of 21% compared with Q1 2021. All segments contributed to the strong earnings growth except for Surface Technologies, were shortages continued to limit demand from the global automotive industry. In the first quarter of 2022, all segments achieved price and volume growth. Again, with the exception of Surface Technologies. The downstream segments nutrition and care and agricultural solutions implemented considering the price increases and improve their earnings compared with the prior year quarter. I would like to add that the positive business development in the first quarter of 2022 also continued in April. Our order book looks solid except for the automotive industry in China. All in all, we are still confident about our performance in 2022, but has to prepare for changes in the economic environment from possibly long war in Ukraine. We are monitoring the current developments very closely. And we already feel negative impacts on the supply and prices of energy and raw materials as well is in the participation of Wintershall Dea. I will dive deeper into these two topics in a moment. The war has led to a traffic price increase for energy and various raw materials in Europe. And a high level of uncertainty regarding future supplies. So far, however, the supply of BASF's key raw materials in such as natural gas or naphtha is not limited. To avoid disruptions, we are coordinating closely with our suppliers, network operations, and government agency as the case may be. Moving on to our participation Wintershall Dea. First and foremost, it is important to note that no sanctions apply either to Wintershall Dea to the minority shareholder LetterOne to Wintershall Dea's operation in Russia and to its midstream business. At the beginning of March Wintershall Dea decided not to pursue any additional gas and oil production projects in Russia and stopped all planning for new projects. Furthermore, Wintershall Dea has recognized impairment charges in the first quarter of 2022 that BASF included in its net income from shareholdings on a proportional basis with around €1.1 billion. These impairments were caused by the war in Ukraine and related political consequences and concerned in addition to the Nord Stream 2 loan assets in Russia and in the gas transportation business. We are speaking to our strategic decision to withdraw from the oil and gas business. However, we are aware that an IPO is difficult in the current market environment. It is not yet possible to indicate what the impact of the war, the war in Ukraine will have on our exit as a whole and on the timeline. I will now provide you with further details regarding the impact of the drastically increased gas prices in Europe. Compared with the first quarter of 2021, the additional costs for BASF European sites amounted to €900 million. Compared with the first quarter of 2020 the increase was €1.1 billion. To mitigate these higher costs, we implemented several measures. On a global scale and particularly in Europe, we have increased and will further increase our face prices to pass on higher natural gas prices. In our European sites, we are technically feasible preparations to substitute natural gas that alternative feedstocks are ongoing. For example, our modern combined heat and power plant in Schwarzheide can be operated with natural gas or other oil-based feedstocks. We are also proactively developing scenarios to optimize our production at European sites in the event that Germany is forced to allocate natural gas. In doing so, we are focusing on processes that are very energy intensive, or that use large amounts of natural gas as a raw material. One product in focus is certainly ammonia, a key building block for various value chains such as fertilizers, plastics and fibers, and resins and glues. We take these developments very seriously and have set up teams to monitor the situation around the clock. Let's now briefly look at the macroeconomic environment before we turn to the volume development of our segments. According to the currently available data, global chemical production increased by 3.7% in Q1 2022 compared with the prior year quarter. With 9.4%, growth was most pronounced in North America. In the prior year quarter, this region recorded a decline due to the freeze of the U.S. Gulf Coast. In Europe, the growth rate was 2%. In China, chemical production increased by 4.7%, despite a strong comparison base. In Asia excluding China, chemical production decreased by 1.9%. Moving on to the volume development by segment. In the first quarter of 2022, sales volumes of BASF Group declined by 0.8%. This was due to the considerable volume decline in the Surface Technologies. Lower precious metal trading volumes accounted for around 70% of the volume decline in the segment, excluding the precious metal trading activities, BASF Group sales volume grew by 3% in the first quarter of 2022. On a segment level, the volume grows in absolute terms was most pronounced in the Agricultural Solutions, Industrial Solutions, Materials and Nutrition & Care segments. And I would like to hand over to Hans for further details.

[Hans Engel:]

Thank you, Martin. Good morning, ladies and gentlemen. Let me start with our sales and earnings development in Q1 2022. At BASF Group level sales increased by 19% to €23.1 billion. Sales prices rose by 15.5%. Currency effects of plus 4.2% also contributed to the positive sales development. As already mentioned, BASF Group's EBIT before special items reached €2.8 billion, an increase of around €500 million compared with Q1 2021. On a segment level, Chemicals contributed most to the increase in earnings. Compared to the first quarter of 2021, EBIT before special items rose considerably, mainly due to higher margins in both divisions. The Intermediate division significantly improved margins in North America and Asia-Pacific. Low margins in Europe as a result of sharply increased gas prices were therefore more than offset, improved income from shareholdings accounted for using the equity method also contributed to the earnings growth. Key drivers for the earnings growth in Petrochemicals division were higher margins in the propylene and butadiene value chains as well as for styrene monomers. Low margins for cracker products due to higher raw materials and energy prices were more than offset. EBIT before special items in the Materials segment are also increased considerably compared to the prior-year quarter. This was mainly driven by significantly higher EBIT before special items in the monomer division which in turn was primarily due to increased margins in the .

[Stefanie Wettberg:]

Ladies and gentlemen, thank you for holding, the conference will begin shortly. Can you hear us again? Yes, we can hear you again. You can continue. Sorry for the -- had a technical issue and I suggest you start with the segment you just began.

[Hans Engel:]

And that was the Industrial Solutions segment. Okay, sorry, ladies and gentlemen. Also in the Industrial Solutions segment EBIT before special items was considerably higher than in the first quarter of 2021. Both divisions, Dispersions & Resins as well as Performance Chemicals increased earnings strongly due to positive price and volume developments. Compared with the prior-year quarter, EBIT before special items in both the business of the Surface Technologies segment declined considerably. The main reason for the decline in earnings in the Catalysts division was a significantly lower contribution from the precious metal trading activities. EBIT before special items in the Coatings division decreased mainly due to higher fixed costs and weaker margins on the back of higher raw material prices. EBIT before special items of the Nutrition & Care segment was considerably above the first quarter of 2021. In the Care Chemicals division, EBIT before special items increased mainly as a result of the positive volume development. The earnings growth in the Nutrition & Health Division was due to increased margins, these more than offset higher fixed costs which mainly resulted from higher depreciation, following the startup of the Vitamin A plant expansion in Ludwigshafen in the second quarter of 2021. Since the end of January 2022, we are again selling regular commercial volumes of Lutavit® A, we will continue to ramp-up our production volumes throughout 2022. EBIT before special items in the Agricultural Solutions segment was slightly compared to the strong first quarter of 2021. This was predominantly a result of the sales increase, higher fixed cost dampened the positive earnings development. In the following, I will turn to the financial figures of BASF Group in the first quarter of 2022 compared to the prior-year quarter in more detail, I will start with EBITDA before special items and EBITDA which both reached €3.7 billion compared with €3.2 billion in Q1 2021. EBIT before special items came in at €2.8 billion compared with €2.3 billion in the prior-year quarter. Special items in EBIT amounted to minus €34 million compared to minus €10 million in the first quarter of 2021. EBIT increased by 20.5% to €2.8 billion in Q1 2022. Net income from shareholdings decreased from plus €68 million in Q1 2021 to minus €797 million in Q1 2022. The decline was driven by impairment charges relating to assets of Wintershall Dea. Net income amounted to €1.2 billion compared to €1.7 billion in the prior-year quarter. The decrease was mainly driven by the impairment charges I just mentioned. The tax rate was 29.6% compared with 19.4% in Q1 2021. The increase in the tax rate was particularly driven by the loss in net income from shareholdings, which is an after-tax position. This led to lower income before income taxes without affecting the income tax. Reported earnings per share declined from €1.87 in the prior-year to €1.34 in Q1 2022. Adjusted EPS rose from €2 to €2.70. Cash flows from operating activities improved compared to the prior-year quarter. Let's look at the details of our cash flow development in Q1 2022 compared to the prior-year quarter. Cash flows from operating activities amounted to minus €290 million, an improvement of €235 million compared to the prior-year quarter. The improvement was mainly driven by the better operational performance and comes despite the high cash tied up in working capital resulting from increased input cost and strong sales growth. The non-cash effective impairments at Wintershall Dea are eliminated in miscellaneous items, together with the regular at equity results. If the impairments had instead been eliminated in net income, net income would have been roughly €600 million higher than in the prior-year quarter. Cash flows from investing activities amounted to minus €579 million in the first quarter of 2022, after minus €435 million in the prior-year quarter. Payments made for property, plant and equipment and intangible assets rose by 32% to minus €603 million. Cash flows from financing activities amounted to €2.7 billion an increase of almost €2 billion mainly due to higher financial and similar liabilities. Free cash flow improved by €88 million to minus €893 million in Q1 2022. Turning to the balance sheet, as we see at the following compared with year-end 2021

[Martin Brudermüller:]

Thank you, Hans. The global macroeconomic outlook is currently subject to very high uncertainty. In particular, it is impossible to predict the further development of the war in Ukraine and its impact on the prices and availability of energy and raw materials. Consequently, we are currently maintaining our macroeconomic assumptions for the 2022 business year. BASF group sales and earnings forecasts for the 2022 business year as published in the BASF Report 2021 is being maintained. Sales between €74 billion and €77 billion. EBIT before special items between €6.6 billion and €7.2 billion. ROCE of between 11.4% to 12.6%. And CO2 emissions of between 19.6 million to 20.6 million metric tons. We are now glad to take your questions.

[A - Stefanie Wettberg:]

Yes, ladies and gentlemen, I would now like to open the call for your questions. . Please limit your questions ideally to only one or maximum two at a time so that everybody has a chance to ask the question, since we need to finish this call on time today because our Annual Shareholders Meeting will begin at 10

[Christian Faitz:]

Yes. Good morning, everybody. Thank you very much for taking my one question. Can you in any way qualify or even better quantify of how much of your operations in China are affected by the lockdowns at present?

[Hans Engel:]

Yes, good morning. Can you hear me, Christian?

[Christian Faitz:]

Yes.

[Hans Engel:]

Okay, good. We have a bit of a problem here with our microphone. So that's that is a -- that's a very good, but difficult to answer question. When going through our businesses, we have businesses in China, which are unaffected. And we have businesses, which are heavily affected. I give you the example of our catalyst -- automotive catalyst business in China, which in the month of April, and this is information from the beginning of this week, has roughly volume wise, sold 60% or delivered, I have to say 60% less bricks than in the prior months. We have other businesses which are unaffected because they are not in a lockdown area, because they have access to the logistics they need to have access to. And also their customers are not affected. But overall, I -- it's difficult to quantify that effect at this point in time, because we don't have the full set of numbers that I would need to qualify it or quantify it. But it's -- it is clear that in the month of April, we will see a measurable effect from the lockdowns in China. And the question how -- how this will continue going into the month of May then?

[Martin Brudermüller:]

Christian, maybe I'll quickly add on this. I mean, I think there is the general deadlocks position that the Chinese government cannot really escape from the zero COVID strategy. They would have to ask for the western vaccines to actually mild the situation that is a little bit of a difficult situation how to get out of that. On the other hand, I've think you know I lived there for 10 years and I'm quite sure they will take the appropriate measures to turn that around when this getting really critical for China. But I think over the next weeks, and maybe one, two, three months, it will be more difficult and we will see that volumes will go down and I think already the pictures with the ships in front of the Shanghai Harbor will also tell us that this is something that goes beyond China, because there will be also in and out of China partly missing that will have impact on a global level. On the other hand, and there is also China I just wanted to tell you not only in our plants, but also with certainly many other companies we have our employees who have actually not been lock down taking their sleep pack and everything they need. And they sleep in the plants in the BASF sites now for four weeks. First of all I mentioned that commitment is nowhere else in the world and you could not imagine in Europe. So they keep all our plants running. So we don't have any single one shutdown in the moment but as unset you have an uncertainty also supply chain and you have to coordinate this with your customers, but that also shows you that there will be countermeasures, but I think it is very, very difficult to calculate or quantify that in this moment in time. Go ahead, sorry.

[Stefanie Wettberg:]

Okay. Now Chetan Udeshi from JPMorgan, please.

[Chetan Udeshi:]

One is, can you remind us how much of BASF production is in Europe in terms of production capacities or volumes? And how much of production today is in Germany just for us to know? And second question. I mean, of course, there are a lot of uncertainties today, but based on what you can see in your current order book earnings environment. Can you give us some sense of are you comfortable with what you see in terms of Q2 consensus or full year numbers which are probably at the low end of your guidance range based on current trends? Thank you.

[Hans Engel:]

Yes, Chetan, this is Hans. Thanks for your two questions. So first of all, production is order of magnitude 40% to 45% in Europe of the global production. And then if I think Germany now there's a rough number that I'm giving you, that is 50% plus of the production in Europe. Order book, the order book is strong, is solid, as Martin has already said in his speech. There are two weakest spots. The one is automotive for the norm reasons. The other one is China. But as we said with respect to China, when you read about China in the lockdowns there and you look at the order books, you don't see reflected the let me say intensity of the lockdowns in order books, but that is something that may change. Other than that, the order book, as I say, robust solid, as always, we have a very good look for the next 30 days, which reflect about 60% of total orders. We then have for 30 to 60 days of one to 60 days, we have round about 30% in the order book. And looking at all of that, as I said, this is solid and robust, will be to just mentioned exceptions. And yes, we had a very strong quarter. No question about it. You can calculate the percentage compared to guidance. But I think what is important to see in the first two questions, your question and the question of Christian already indicate that there's so much uncertainty out there that at this point in time, we simply said, we'll stick to the guidance that we gave in the end of February.

[Stefanie Wettberg:]

So we now move on to Andrew Stott in a minute. We will then have Matthew Yates, Mubasher Chaudhry, and then Jaideep Pandya. So now it's Andrew Stott, UBS. Please go ahead.

[Andrew Stott:]

Yes. Thanks, Stephanie. Morning. So, Martin, you mentioned in your speech, that you're looking at what you can do in the scenario that Germany is forced to allocate natural gas. And you're also looking where, as you said, technically feasible, you can actually substitute natural gas. Can you talk more about that scenario planning? Is it sort of shifting more to Emsworth and other sites? Is it -- are you building inventory at the moment? Yes, just thoughts on what you're actually looking at here is plan B, plan C, et cetera? Thank you.

[Martin Brudermüller:]

Yes, Andrew, maybe I start and then focus a little bit on what exactly that is about. What? Oh, there's an echo noise Andrew.

[Andrew Stott:]

I could hear you clearly Martin. Thanks.

[Martin Brudermüller:]

Okay, good, good. So I focus on , which is about 70% of our gas usage in Europe. We have about 4% of Germany. So we are the industrial user. So you will see the enormous numbers here. And just to give you an indication, about half of that is actually the energy production, that means steam and electricity in the Ludwigshafen plant. And then the next largest product is actually ammonia. And then it's acetylene for BDO, and then you have the large consumers. So the first thing is that we actually continue to accelerate and try to accelerate the energy transformation or transition into the renewables, because that would give us the opportunity to partially reduce the gas fired power plant. So that would be definitely helpful. And then as I said the big lever is actually ammonia, because ammonia is the largest consumer. And that is, on the other hand, a global commodity. You earn quite nice money visit in the moment because it is short. But there is also something where you in the long run could think about buying ammonia and substituting own production. You could even go for green ammonia over the time, which would reduce also your CO2 emissions and then save investment costs. So these are the kind of things we are looking into. The more trivial thing is actually you look on your plants today. And before it's hard to find out, you had some 15% of the fuel, which you can substitute by directly immediately by oil. So you use all these kinds of levers, we have some tasks, so we shift the task to reduce the consumption and we have actually gone to a technical limit, which is about 50% of the gas consumption in Ludwigshafen. If it would go significantly below that, it actually means that you have to shut down the site. I think that is I made this very popular and very transparent, I think for good reasons because first, you as investors have to know about that, because that's a major risk. On the other hand, also the German government has to know it because they are the ones who would allocate the gas in certain scenarios. And they also know then what that means, if BASF would not produce and what it would mean for the value chains. So in Antwerp, the situation is much less gas. But there it is even more pronounced, we have about roughly 50% of the gas consumption since ammonia. So you'll see one of the key considerations short-term and long-term going forward. It will be actually the production of ammonia and how you arrange around that. But you see there are many levers and I can only say we are very happy that we have the windpipe already, we are going for other projects, we have the heat pump project that will all help us to reduce natural gas. And yes, I would have loved that we are one or two years advanced. But I can only echo here what I said also in the media, it is not possible in a large amount to reduce the gas consumption. So that is something that we have to live with this uncertainty for quite a while.

[Andrew Stott:]

Okay, and thank you for that. And are you prepared to build inventory if customers require it, considering all the supply chain issues?

[Martin Brudermüller:]

So you almost certainly look into this. And I think as already in the pandemic crisis, the coordination and communication to your customers is really intensified. So people talk about and know about what they need, where they are concerned. And certainly we tried to adapt our stocks over there. But I think also the customers have raised their stocks because of rising prices, they have been going for securing materials, also over the recent months and weeks. But yes, you can imagine that we are as flexible enough to adapt on that opportunity.

[Andrew Stott:]

Thanks.

[Stefanie Wettberg:]

So we move on to Matthew Yates, Bank of America now.

[Matthew Yates:]

Good morning, everyone. Maybe two questions. The first one, you've left your guidance on change, which is totally understandable, given the uncertainty out there. But specifically, on the oil price assumption, if you were to mechanically move from $75 to $100 a barrel, do you think that would impact your profit guidance or is the tightness in the market sufficient to pass that through? The second question was around agriculture, you had a nice 10% year-on-year increased profits there. But given the backdrop we have of crop prices, I'm not sure if you would have hoped for even more profit growth. Are you seeing any sort of demand destruction on the crop protection side as farmers allocate money towards fertilizers? Or is there any issue here around timing and perhaps we're going to have a strong Q2 to look forward to enact. Thank you.

[Martin Brudermüller:]

So Matthew, I take the first one and Hans maybe take the second one, I mean on the first one that is this magic formula between strong demand and pricing power, I promised you, Hans promised you in the last call that we are heavily going for price increases and I am actually quite proud what the BASF team did. If you see now in the Q1 numbers we have actually everywhere even also in the downstream area where we said we are in the delay by the pricing mechanisms, we have significantly increased the prices. So you ask now if we go into have this higher oil prices, and then what that would mean, I mean it would strongly depend on the demand part, if the demand continues to be strong, and there is maybe shortage and we have a reasonable good demand supply, then actually I think you can also live with these high raw material prices and energy prices, and they don't like it, the customers, they will pay for it. If on the other hand, the demand would really go down, because we would now run into a Recession in Europe, because Ukraine and Russia is 8% of GDP. And the shortages and the supply chain disruptions would really take down GDP globally, significantly, then certainly the pricing power at the absolute level where we are will be going down. I mean, then the resistance of the customers will go up. But in the current moment, I would say, yes, no one likes it. But we are actually quite successfully handing over. And it certainly starts very nicely and clicking the Chemical and Material segments, that's why they also contributed again, in this environment so much. But again, I'm really happy and we promised this to you. We have also made significant inroads on the Downstream segments to increase prices. So as long as the economy is not collapsing, and we don't get into speculation, with strong inflation and then gross going down, then I would say that has a good chance to go on for quite some months. Hans on the second?

[Hans Engel:]

Yes, Matthew, happy to take your question on Ag. I think with respect to price and price increases, there's a 7.7% price increase, we have roughly 10% volume increase. So with respect to demand destruction, due to increased fertilizer prices increased, other input costs that farmers have to digest. I think there is a strong appetite going into the season in the Northern Hemisphere, based on everything that we can see on the pharma side, and this is explained by the development of the soft commodity prices. If you look at soy prices, wheat prices, corn prices, all on an elevated level, actually on higher levels than what we've seen in the years 2012 through 2015. I think this is despite the really strong increases on input costs, that's a good background for a strong Ag Solutions business at BASF. And I think you want to show that Q1 with €60 million improvement on EBIT before special items basis from 800 to 860 comparing to a very strong quarter already in Q1 of last year is good proof for what the business can deliver in the current environment.

[Matthew Yates:]

Thank you guys.

[Stefanie Wettberg:]

Okay, so we move on to Mubasher from Citi now.

[Mubasher Chaudhry:]

Hi, thank you for taking my question. Just one left, please. Could you provide some comments around the gas price assumption that you're making for the rest of the year? Just trying to understand kind of what the impact could be? Thank you.

[Martin Brudermüller:]

Yes, Mubasher, that's a great question. I mean, in the month of March, we've seen and we do the strange thing in Europe, we look at gas prices in Europe per megawatt hours. And I'll build a bridge in the second half, try to build it to dollars per million Btu. We've seen in Europe per megawatt hour gas prices at a level of 85 low and 360 intraday high. So that translates in U.S. dollars per million Btu to something in the order of magnitude of let's say roundabout $100 per million Btu high and $25 per million Btu low. Now giving a reliable gas price forecast for the remainder of the year, in the current situation is almost impossible. We have a base case assumption which I will not disclose here, because a month from now, you may call me a fool because I told you what kind of gas price basic assumption we're using. But I hope that the kind of volatility that I just like to let you understand, how difficult it is to forecast gas prices in the current environment.

[Hans Engel:]

And everything depends on whether we can hand it over. That's the critical thing.

[Mubasher Chaudhry:]

I just wanted to get, you disclosed your oil price consumption, I was just wondering if there was something for the gas prices. That's very helpful. Thank you.

[Stefanie Wettberg:]

So we will now have Jaideep Pandya from On Field Research. And then we have four more participants in the queue that will be done, Peter, Andreas Heine and Markus Mayer and Laurent Favre to conclude. So now with Jaideep Pandya, On Field Research.

[Jaideep Pandya:]

Thank you. Firstly, I would just want to understand, sort of what is your naphtha purchases out of, if you aren't purchasing any naphtha which is Russian origin and how difficult or easy is it to replace that. Are you seeing any problems with regards to sourcing naphtha, or for that matter LPG in Europe? And then sort of in light of that with higher methane prices, higher LNG exports out of Europe? Do you see sort of a tough time for the global sort of cracker landscape? That's my first question. And the second question is just really understanding what is your worst case or plan B scenario for the oil and gas business? I appreciate you can't IPO at right now. But if you can't IPO forever, then what would that mean for BASF? Thanks a lot.

[Hans Engel:]

Jai, thanks for the questions. Naphtha, so when I look at the years, let's take 2021 as a year. In 2021 we didn't source any naphtha directly from Russia, we're sourcing naphtha via traders in Europe. The Russian share in 2021 is in the high 30% range. Now, we can say that, exactly, but this is, if you think about the traders that we are dealing with, and their respective portfolios, where the ships are coming from. So that's the order magnitude just showed off 40% in 2021. We've reduced this in the first quarter and will be more specific, starting from the beginning of March, already by aim, let me put it this way, a measurable amount. And a clear target is to reduce further and to get to zero Russian source naphtha as quickly as possible. And our team and procurement is working on that heavily. We consider that as doable. It's a different situation than the situation that you have with natural gas. In Germany and in Europe, you have a different market. Transportation is different, obviously, by ship mostly and not by pipeline. So that is comparable, actually to the oil situation where it is also easier to become less dependent on Russian supply in Europe. It comes or may come with higher prices for naphtha in Europe. When we look at Q1, and then in particularly the month of March, we see that our cracker business in Europe goes strong. Despite the naphtha prices, which are on an elevated level. I think on average, we were at $900 per ton in the month of March for naphtha. Hope that helps to put things in perspective. On the Wintershall Dea side, as Martin said the strategic decision is clear. We will find ways to implement that. An IPO in the current situation is obviously is extremely difficult not to say impossible. But I can guarantee you that we are working on that and we will find a way to implement a strategic decision that BASF has taken.

[Jaideep Pandya:]

Thanks a lot for the increased disclosure on the natural gas side as well. Thank you.

[Hans Engel:]

Sure.

[Stefanie Wettberg:]

It's now Peter Clark, Société Générale. Please go ahead.

[Peter Clark:]

Yes. Good morning, everyone. I guess this question I think for Martin, you talked about the strong demonstration of pricing downstream. And if I take coatings 3.9% in Q4 to 8.6% very apparent. Now it suggests to me, you're even getting traction on the auto OEM side now quite significantly, but you've still got some catch up. So I'm just wondering where you see the inflection point on the margins in something like coatings, you talked about still pricing power for the next few months. We'll be looking at the second half maybe margins turning on the margin on the coating side?

[Martin Brudermüller:]

I mean, first of all, you mentioned already. And then if you look on the segment numbers here, I think for the price increase, and I think we explained to Surface Technologies in the particular situation over there, all the others in particular downstream really did a good job 21% in nutrition and care, industrial solutions 19%. So in the coatings area, yes, we were able to significantly increase our sales and have been rising prices, due to higher raw material costs. But certainly if you have lower number of cost produced your pricing power is more limited. This is exactly what I said. It goes hand-in-hand. And if I just take the numbers here, actually, from the planning from the IHS, who actually expect this to 81.6 million cars to be produced its roughly a 6% increase. The fact is that year-to-date is minus 5%. So with that you see basically that lower number of cars are produced and is that the pricing power encodings is limited. They increase because everyone knows that they are higher prices by everyone, but you could not really increase to significantly increase your margins over there. And I think in that particular part where you're talking about encodings, it will only come if actually, the limitations in car productions are reduced, because then it's booming again. And then certainly you have also pricing power. I think that is this magic formula, which now in automotive is very clear by the production numbers, but that is going through all the different segments, but you can see actually from the part. And that is also emphasizing the . When it comes to order books and everything, it would have not been so successful in all the other segments if there would actually not be a strong demand. So I hope that answers your question, Peter.

[Peter Clark:]

Yes, I guess so what you're suggesting is the auto OEM pricing is still very sluggish compared to the other two bits of that business?

[Martin Brudermüller:]

Absolutely. This is the area where this is most difficult for the reasons I said.

[Peter Clark:]

Got it. Thank you.

[Stefanie Wettberg:]

So we move on to Andreas Heine, Stifel.

[Andreas Heine:]

Yes, two quick ones please. Thanks for having the opportunity. At first chemicals at least I was most surprised seeing that segment being so strong in Q1. Looking on the margins, what you see in the second quarter. How do they develop sequentially? That's the first question. And the second in agro, I mean there's quite some wording on drop percent per side, but in the first quarter, the seed business is most important. Could you give some insight, what you see in price and volume for your most important seed area. So canola, cotton, and…

[Hans Engel:]

Andreas, this is Hans. On your second question with respect to the ag business, and then particular seed. Very strong start in Q1 with the seed business both on with respect to the top-line, but then also with respect to earnings. So good strong development there. And as I say, better than what we had in Q1 of 2021. One thing comes to mind that I should have said when one of the earlier questions came on, on the ag business. With respect to seed business, obviously primarily Q1 business. The remainder of the ag business. So the good old crop protection business is Q1 and Q2 business. Their timing can always play a role. That's something that I forgot to say, but with respect to your question, on seeds good strong business better than in Q1 of last year. And this is actually the big part of the season in Q1 for ag northern hemisphere.

[Martin Brudermüller:]

Andreas, maybe a quick comment on the margins in the chemical arena. I mean, first of all, if you look on all our records, they actually run in a very high 90s, so very, very strong utilization, which underlines the order book and also the demand on the market. If you take then some single product like for example an acrylic acid, yes margins have been coming down a little bit from the peak. But if you compare that with the five years average margin. We are still at a very, very high level. Same is also true if you look in MDI and TDI, we're actually -- particularly MDI, this is still ranging out to the areas where we have been last year. And so that really shows that it is this underlying demand which is still very strong and which really allows you to hand over all the increases from the raw material side as well as from the energy side, because certainly if you look into several of the products, whether this is ammonia, whether the cyclohexane benzene, told you in I mean you know these products, they've actually increased the pricing significantly, but based on the strong demand, you can really hand over the increase in partially in the one or the other really also to hold the margins. So, the April margin in the chemicals is still very high.

[Andreas Heine:]

Thanks.

[Stefanie Wettberg:]

So now we have Markus Mayer and then the final participant to ask questions, so Markus Meyer, Baader Helvea. Please go ahead.

[Markus Mayer:]

Good morning, Martin, Hans, and Stefanie. Two questions, the circular basically around this kind of change of your supply sources. And you said that already beginning that you now focus more also on renewable sources, my question is, given the new situation of very high oil and gas prices, have you all had a change to timeline for becoming CO2 neutral or switch to renewable sources like fermentation based chemical? And also in business regard, have you also tried to get more renewable suppliers or pushing your own fermentation capabilities more in this direction? And would be my first question. Sorry for this long question. And then the second question is overview and also kind of thoughts in previous conference calls on Clean Hydrogen and that might be a commercial business case for hydrogen in general kind of anticipated for BASF, given this very high energy cost level, we have right now, this business cases, these different cases become no more economically sensible for you.

[Martin Brudermüller:]

So maybe on the first one, Markus, the problem is in general, I mean I think we talked about this several times, there is no way that the whole chemical industry can switch from fossil to bio based raw materials, because that would really stretch or the markets and you immediately have interference with food and feed markets. So that would be very difficult. So as we have said in the Capital Markets Day is our example from Henkel, this is actually a customer by customer piece, where you have customers that are very ambitious in sustainability, and they push you, they do projects like this, and then you try to secure the volumes. I would say in general, for the one or the other solution, fossil bio may be increasing faster than the bio-base. So that giving the one or the other area also a case where you could now step in. And that's actually what some of the customers do, and we take them this mass balance approaches to facilitate that. But then I would see now massive acceleration of that trend, I would not really say so. There's a lot of stuff going on in that single customers, on single product lines, the most prominent and biggest one most nowadays, is hangar pod. But even after we announced the hangar pod, some of the competitors got a little bit nervous and stepped up and said, we want to do similar things. But I would not say that there is now a dramatic change. Green hydrogen, that is also a very difficult situation because overall, that is still very expensive. You might have seen in the news, at least here in Germany, there was a study between done by German government, I think, Australian partners for this green hydrogen. And actually what they said was the full transportation costs to Europe, that would be actually a €6.50 per kilogram of hydrogen. If you compare that in the times before we had the energy prices rising with about something like €1.8 per kilogram in reforming, maybe now you are quite significantly higher, certainly with the gas costs. But you see how big the gap is in between this. So there is no way in the moment or capital you need to install all that and to be invested that this is really a business case where your customers pay for. And this is why I said we are very much going on direct electrification. Hydrogen has a lower rank in us in terms of reducing our CO2. And the big lever is actually the green hydrogen evergreen ammonia. This is what I mentioned earlier, that is the big volumes. That is also of this 1 million tons of hydrogen BASF uses in the group worldwide, most of that is actually used for ammonia. So you could think about these kinds of projects. And I think there are some areas in the world that getting interesting if you have solar at very low cost, and then maybe even gas in the future where you can use our methane pyrolysis. So that is definitely something worth to look into with respect for European operations to look in energy costs, but also the rising CO2 costs. So that's why Markus we are not really super chomping now on this green hydrogen, it is in our considerations, but it's not the prime lever on our way to decarbonize, I think that sort of what we made clear in the Capital Markets Day.

[Markus Mayer:]

Okay, perfect. Thank you so much for this information.

[Stefanie Wettberg:]

Now, I would like to hand over to Laurent Favre, BNP Paribas.

[Laurent Favre:]

Thank you, Stefanie. Good morning all, I'll try another question on Wintershall Dea in some dividend which was to the statutory minimum of €6 million. Martin, you said yourself that Wintershall Dea is not directly or indirectly sanctions, I think there's been changes at the board and LetterOne as well. And financial performance is well, I guess, pretty obvious to all of us. But then so I think Wintershall Dea has said that the dividend could be reinstated, depending on circumstances. And I was wondering if you could shed a bit of light on whether it's related to governance, operations or something else? Thank you.

[Martin Brudermüller:]

Laurent, I'm taking your question. Dividend decision, dividend decision was due actually as always, end of February. You know what kind of a situation we were in at the end of February. And the decision was simply made to postpone the dividend decision to later point in time. I don't know whether you participated in yesterday's call of Wintershall Dea. You've seen and heard then what the cash position of Wintershall Dea is, I would describe that as rock solid. And I hope that will have a bit more certainty with respect to overall developments economically, geopolitically, and then we'll put the shareholders in a position to come to a conclusion on the dividend during my expectation is probably Q3, latest beginning of Q4 of this year.

[Laurent Favre:]

Yes, thanks to all of you guys and maybe just one final word from my side. I mean first of all, I think you saw we really started strong to the year I think, hope you also saw that we keep a cool head in this situation, I think this is what you have to have. And you also know that the BASF team is always at its best performance when in crisis mode. So be assured that we really leverage everything we can within the size, within the regions or within the value chains. That's also the time when you're very close to your customers, we can see that also by the response for our customers, our satisfaction of the customer level. Nevertheless, they have to pay for high prices or very, very high level. So for that reason, I think we are now running a little bit onsite. So we have to see how it develops. But I think there's also a good reason to assume that the next month to come could actually be very strong.

[Stefanie Wettberg:]

Okay, ladies and gentlemen, this brings us to the end of our conference call. As mentioned at the beginning the whole BASF Annual Shareholders Meeting right after this conference for as of 10