Conference Call Transcript Q&A September 28, 2018 BASF and LetterOne sign agreement to merge Wintershall and DEA Dr. Hans-Ulrich Engel, Chief Financial Officer, BASF Mario Mehren, Chief Executive Officer, Wintershall BASF Conference Call, Ludwigshafen September 28, 2018
Questions related to the signed agreement to merge Wintershall and DEA Christian Faitz (Kepler Cheuvreux): Good morning! Two questions, if I may: First of all, can you elucidate a bit the 200 million synergies you are aiming for in year three? The second question would be: Obviously, I am fully aware that the combined entity does not have any direct U.S. exposure. Please excuse my limited legal knowledge, but does the U.S. Department of Justice have any say in the approval of the transaction? Dr. Hans-Ulrich Engel: With respect to the approvals, we will have to go through merger control processes in the EU, in Mexico and in Argentina. We have foreign investment approvals to tick in Germany and in Russia. And then we have to go for the mining authorities in the countries that we are operating in, plus the Bundesnetzagentur. Since there aren t any assets in the U.S., we do not have to go through any type of approval process in the U.S. Mario Mehren: Christian, on synergies: They will basically be fuelled by synergies coming from production, higher combined production that we will have in certain fields. Of course, we will have synergies from procurement bundled, from joint exploration budgets and capex budgets. And last but not least and maybe most importantly, we have a certain overlap in Germany with the two headquarters and in Norway and Germany with the operations where we will eliminate duplications. That will overall then lead to the 200 million euros that we mentioned as a minimum figure for the year 2021 onwards. Andrew Stott (UBS): Good morning everyone! Thank you for the presentation this morning. I want to focus on the cash flow effect of the transaction for BASF Group and then also to the new entity. The first question is: What does BASF look like in 2019 from the point of your working capital ratio ex Oil & Gas? Also from a point of view of the corporate tax rate: Obviously, capex is clear from your previous guidance as you will book Oil & Gas in discontinued. So working capital and tax, please. The second question is around Wintershall DEA: What do you judge to be the capex requirement of the company to get to those production targets of 2021 to 2023? Dr. Hans-Ulrich Engel: Good morning, Andrew! On the tax side, ex Oil & Gas, we would expect a tax rate in the mid-20s, maybe slightly lower than that. On capex for the BASF Group: I think in the 2018 through 2022 capex plan we have about a billion per year capex allocated to our Oil & Gas operations, slightly less than that. That will not be shown anymore from now on, neither for the discontinued business nor from the point in time on where we form the joint venture and then show the at-equity part of the equation. Page 2 of 5
Mario Mehren: Capex is on the way to further growth, Andrew, for Wintershall. As you can imagine, it s very early days in the transaction. So, for Wintershall, we stick to the 3.5 billion euros that were communicated by BASF earlier for the five-year period. For the new entity, as soon as we have the closing, we will come up with a capex guidance what is needed to achieve our goals. Andreas Heine (MainFirst Bank): The first question is on the debt of the new organization, of the new joint venture. Could you highlight a little bit what BASF will put into that? You have this share in equity, 67, so two thirds for BASF, one third of DEA. Is that similar to what each party puts in in net debt or is there a difference? What in total can we expect to be hived off when we see the discontinued line in the balance sheet? Dr. Hans-Ulrich Engel: Your question on the debt of the company: The expectation is that the shareholders will be in there with their respective equity, no question about that. And then the company for which we intend to have an investment grade rating will be financed in the market. That will lead to us probably being able to reduce our overall debt position somewhere in the order of magnitude of, I would think, 2.5 to maybe up to 3 billion euros, always keeping in mind that there is also a position then via our preferred shares that reflect the gas transportation business. So much maybe for the financing of the company. Page 3 of 5
Questions related to the adjusted outlook 2018 for BASF Group Christian Faitz (Kepler Cheuvreux): As we have the benefit of having some management interaction so late in Q3, would you mind giving us some indication how demand trends in your chemical segments have developed in the quarter? Dr. Hans-Ulrich Engel: On your Q3 question: As you rightfully mentioned, Q3 is not yet done. We will report on Q3 on October 26. What do we see at the current point in time? My suggestion would be that after this comment we really concentrate on what we wanted to talk about this morning, which is the merger of Wintershall and DEA. What do we see in Q3 so far? Demand I would describe as maybe a bit slower than what we had expected going into Q3. And we also see certain effects of the continued low water levels on the river Rhine, as you have read, particularly in August, but that also continues in September. As you could read at least in the German newspapers, they have an impact on our operations in Ludwigshafen. But as I said, we will report on Q3 and then in the full detail that you are used to on October 26. Chetan Udeshi (JP Morgan): Maybe not a question on Q3, but just looking at your comment ex Oil & Gas for the full-year guidance where you say slight decline. This is a pretty wide range, 1 to 10 percent. We have already had the first half of the year and probably you know most of the Q3. Can you give us more colour on where we should think the outlook reflect in terms of whether it will be at the higher end or the lower end of the range as such. That would be useful. Dr. Hans-Ulrich Engel: First of all, what we have here is: We simply pulled the Oil & Gas figures out of our guidance. So, at this point in time, this is nothing but a mathematical exercise a very standard thing. I think that is important to understand. Maybe the easiest way to look at this is when you go to our first-half 2018 report where on page 16 we are reporting the figures for the Oil & Gas segment. You go there from sales to EBIT before special items; all of these positions will simply come out of our P&L. What will be reported going forward is the net profit. We will show that in a separate line for discontinued business. That s, I think, the easiest way to look at this. We simply mathematically adjusted the guidance that we are giving now. Within the guidance, yes, we have the 1 to 10 percent. Let me say at this point in time: We stay within what you describe as a rather broad range. I prefer to leave it there and not go any further. As I said already, we will have our Q3 earnings coming out on October 26 and we will provide more information then. Andreas Heine (MainFirst Bank): Sorry for asking again on the guidance: You said it is mathematically calculated. So it is not that you put a higher confidence behind it. If I calculated correctly, in the first half, adjusted for Oil & Gas, you had a decline of 6 percent. The second half shows MDI and TDI prices falling. You mentioned the Ludwigshafen site. And you have the consolidation of the Bayer business which, for seasonal reasons, has a loss in the second half. Maybe you could give one more comment on how confident you are with this guidance. Page 4 of 5
Dr. Hans-Ulrich Engel: If I do the maths, then I come to the conclusion that, if I pull out Oil & Gas for the first half of the year, our EBIT before special items is down by slightly less than 5 percent. We do not yet have the full figures for Q3. Even though this is September 28, it takes us a little bit of time to close our books after the end of the month. At that point in time, we then will have more clarity, but our target is clearly to stay within the guidance that we gave. Page 5 of 5