Letter from the Chairman of the Board of Executive Directors
Dear Shareholder,
As this report goes to print, we are looking back at one of the most turbulent starts to the year for decades. At times, oil prices fell to below $27 per barrel – the lowest level since 2003. In 2015, oil prices averaged $52 per barrel, almost half the previous year’s figure. This price slump reflects not only an oil surplus but also a slowdown in global economic growth, especially in emerging markets. Our share price has also suffered from these developments. Since the beginning of the year it has fallen significantly to below €60 and is thus substantially lower than the peak of nearly €97 in April 2015.
These figures underline the level of uncertainty about the future performance of the global economy. This raises some legitimate questions: How will demand for chemical products develop? What will be the impact if oil prices remain low for any length of time? How does one steer a company like BASF in such turbulent and challenging times?
A look back at the past year provides some initial answers to these questions. Compared with 2014, our goals for 2015 were to increase sales slightly and match the high level of income from operations (EBIT) before special items. This was based on the assumption that higher earnings from our chemicals activities would compensate for the expected decline in earnings in our Oil & Gas segment due to lower oil prices. We planned with oil prices in the range of $60 to $70 per barrel.
“In our chemicals business, the oil price initially had a positive impact on margins. Soon, however, it was clear that our customers were becoming increasingly cautious.”
The start to 2015 confirmed these goals: Although volume growth weakened in the first quarter, margins developed satisfactorily and oil prices moved in the direction of the expected corridor. However, the first signs of an economic slowdown also became apparent – especially in emerging economies. Important industries such as agriculture and automotive developed more weakly than expected. In contrast, the U.S. economy proved relatively robust. The weakness of the euro supported the competitiveness of our European sites.
In our chemicals business, the oil price initially had a positive impact on margins. Soon, however, it was clear that our customers were becoming increasingly cautious. They held back from ordering – in the expectation of further declines in prices for chemical products. Pressure on margins increased in the course of the year, particularly in the fourth quarter.
In such a situation it helps to build on the strengths of BASF and keep costs and cash under control. We were quick to adapt production to reflect weaker demand, reduced inventories and thus strengthened cash flow. Our STEP excellence program, which had been running since 2012, was completed faster than originally planned and we therefore launched a new program – DrivE – in September. It is expected to contribute €1 billion to earnings annually by the end of 2018.
At the end of the third quarter, we completed the divestiture of our gas trading and storage business to Gazprom. This business contributed approximately €10 billion to sales and €260 million to EBIT before special items in the first three quarters of 2015. In combination with the further fall in oil prices, it became apparent at the end of October that we would probably not reach our annual goals. In 2015, EBIT before special items was 8% lower than in 2014, although we improved earnings in the chemicals business as planned. EBIT fell by 18%, in particular due to price-related impairments to assets in the Oil & Gas segment. As a result, oil prices thwarted our plans in 2015.
As the Board of Executive Directors, we cannot be satisfied with last year’s performance. Nevertheless, the BASF team did a good job. On behalf of the Board of Executive Directors, I thank all employees for their efforts in what was a challenging year.
”We remain committed to our ambitious dividend policy and will again propose to the Annual Shareholders’ Meeting to increase the dividend by €0.10 to €2.90 per share.”
We remain committed to our ambitious dividend policy and will again propose to the Annual Shareholders’ Meeting to increase the dividend by €0.10 to €2.90 per share. As a result, we would pay out almost €2.7 billion to our shareholders. Based on the year-end price of €70.72 for 2015, BASF shares again offer a high dividend yield of around 4.1%.
What do we expect in 2016? We assume that oil prices will remain low and are basing our planning on $40 per barrel. As a consequence and in particular due to the divestiture of our gas trading and storage business, sales will decline significantly. We aim to increase sales volumes in our chemicals and agricultural solutions businesses and above all ensure better utilization of the capacities that came on stream in 2015. This is an ambitious goal because our markets are likely to grow more slowly than in 2015.
“We expect to achieve a slightly lower level of EBIT before special items than in 2015. The oil price will continue to be the biggest risk in 2016.”
We expect to achieve a slightly lower level of EBIT before special items than in 2015. We want to again increase earnings in our chemicals and crop protection businesses, but this will not be sufficient to compensate for the massive decline in earnings in the oil and gas business. The oil price will continue to be the biggest risk in 2016. If it should remain below our expected average of $40 per barrel, then we will be unlikely to offset this by means of higher earnings in the chemicals business.
Strict cost and expenditure discipline will therefore also be top priority in 2016. This applies in particular to cutting back on capital expenditures, which we will reduce significantly following the increase in 2013 to 2015. A special challenge in this area will be in adjusting expenditures for the development of oil and gas fields.
We will continue to actively manage our portfolio. In 2015, we made a number of smaller, technology-driven acquisitions, but we also streamlined our portfolio. We divested parts of our pharmaceutical ingredients business and are preparing the sale of our industrial coatings business. As a result, we will be able to concentrate even more closely on particularly promising areas of activity. In the future, we will continue to review possible acquisitions very critically as to whether they actually create value for our shareholders. Not everything that is en vogue meets this criterion.
“Research and development and thus innovations remain at the heart of our competitiveness. Our goal is to convince our customers by continually offering new products and solutions.”
Research and development and thus innovations remain at the heart of our competitiveness. In 2015, we reached our goal of achieving sales of around €10 billion with new and improved products that have been on the market for less than five years. Following a significant increase in research and development spending in the past years, we plan to maintain expenditure at the previous year’s level in 2016. Our goal is to convince our customers by continually offering new products and solutions. Since customers are increasingly focusing on sustainability, we see business opportunities that we want to seize through our innovations. We will further increase the proportion of sales from products that contribute particularly to sustainability.
Innovation and cooperation with our partners also played a central role in our 150th anniversary year. The wide range of activities, which you will also find in this report, reflect the dynamics of our industry and the contributions that chemistry and BASF – together with its customers – make towards enabling a better life, technical progress and efficient use of resources. This power and dynamism are hallmarks of BASF – both when the company was founded 150 years ago and also today.
Yours,
Kurt Bock