Our Steering Concept

We have firmly anchored our goal of achieving profitable growth while creating value for society and our shareholders in our strategy. For this reason, both financial and sustainability-related indicators are an integral part of our steering system. With our Differentiated Steering approach, we aim to increase the competitiveness of our business units and thus the profitability of the BASF Group.

Steering concept of the BASF Group

At the beginning of 2024, we introduced a Differentiated Steering concept, which is reported at the segment level. The goal is to empower our business units through this approach. We also want to create a clearer distinction between short- and medium-term steering. Key criteria in the selection of industry-specific financial steering indicators are the respective strategic direction of the business, the role of the business in BASF’s portfolio and the contribution of the business to achieving corporate targets. In addition, we are benchmarking our performance even more closely against that of our competitors.

As part of this, we have established two new most important financial key performance indicators for the BASF Group’s steering. Short-term influencing factors, such as the development of earnings or current operating assets, are controlled directly via two indicators:

• Income from operations before depreciation, amortization and special items
  (EBITDA before special items)
• Free cash flow

Return on capital employed (ROCE) is significantly influenced by strategic decisions such as acquisitions, divestitures and investments. It remains a medium-term key financial target for the BASF Group. This is reflected in our ROCE target of around 10% in 2028. It emphasizes the importance of managing our return on capital employed over time.

Scope 1 and 2 CO₂ emissions remain the most important sustainability-related key performance indicator at Group level. We see sustainability as a decisive factor for our long-term business success.

As part of the “Winning Ways” strategy and the clear distinction between core and standalone businesses enshrined therein, the steering concept for the segments was adjusted in the second half of 2024. Accordingly, all segments are now measured by their absolute contribution to EBITDA before special items. This is an earnings indicator that describes the operational performance independent of age-related depreciation and amortization of assets and any impairment or reversal of impairment. The key figure is therefore particularly suitable for indicating the profitability of a business and for comparisons with businesses in similar sectors.

To manage cash flow at segment level, we use a specific key figure, segment cash flow, which includes the elements of free cash flow that can be managed by the operating divisions. This key performance indicator also applies to all segments.

Value-based management throughout the company

The target agreement process is an important part of our value-based management. Since 2024, variable compensation for senior executives has been based on targets derived from the key performance indicators for the steering of the respective business unit and the BASF Group. We plan to introduce this differentiated bonus system for all other employees over the course of 2025. This underscores the further increased autonomy of the divisions as part of the “Winning Ways” strategy and their accountability for business success.

Key figures in reporting

In line with the new steering concept, in financial reporting we analyze, comment on and forecast the most important key performance indicators EBITDA before special items and free cash flow for the BASF Group, and EBITDA before special items and segment cash flow for the segments.

Capital expenditures that have a direct impact on ROCE serve as an additional key performance indicator for the BASF Group. Capital expenditures are used to manage capital employed in the BASF Group. These comprise additions to property, plant and equipment excluding additions from acquisitions, IT investments and restoration obligations as well as right-of-use assets arising from leases.

We will continue to forecast cash flows from operating activities and payments made for property, plant and equipment and intangible assets as key factors for free cash flow.

In addition, we continue to analyze and comment on sales at Group and segment level, but we do not forecast them.

Calculation of EBITDA before special items

EBITDA is the result from income from operations reported in the Consolidated Financial Statements plus depreciation, amortization, impairments and reversals of impairments on property, plant and equipment and intangible assets. This is adjusted for special items that may arise from the integration of acquired businesses, from restructuring measures, from gains or losses resulting from divestitures and sales of shareholdings as well as from other expenses and income that arise outside of ordinary business activities.

Calculation of free cash flow and segment cash flow

Segment cash flow measures the cash inflow and outflow of a segment and thus its contribution to the BASF Group’s free cash flow. It includes only those amounts that can be steered by the segment and is calculated from EBITDA, changes in inventories and trade accounts receivable, and other extraordinary adjustments (such as those related to acquisitions and divestitures), less payments for intangible assets and property, plant and equipment. The BASF Group’s free cash flow also includes components of cash flow from operating activities that are not allocated to the segments as well as adjustments of other noncash effects.

Free cash flow is the cash flows from operating activities less payments made for property, plant and equipment and intangible assets.

Calculation of CO₂ emissions

We calculate the BASF Group’s absolute CO₂ emissions on the basis of greenhouse gas emissions, which are the sum of direct emissions from production processes and the generation of steam and electricity (Scope 1), as well as indirect emissions from the purchase of energy (Scope 2). Direct emissions from the generation of energy for third parties are not considered here. Relevant emissions include other greenhouse gases according to the Greenhouse Gas Protocol, which are converted into CO₂ equivalents.

Calculation of ROCE and cost of capital

ROCE is calculated as the EBIT of the segments as a percentage of the average cost of capital basis.

To calculate the EBIT of the segments, we take the BASF Group’s EBIT and deduct the EBIT of activities recognized under Other, which are not allocated to the divisions.

The cost of capital basis is calculated using the month-end figures and consists of the operating assets of the segments. Operating assets comprise the current and noncurrent asset items of the segments. They include property, plant and equipment as well as intangible fixed assets, integral investments accounted for using the equity method, inventories, trade accounts receivable, other receivables and miscellaneous assets and, if applicable, the assets of disposal groups, insofar as they are allocated to the segments. The cost of capital basis also includes customer and supplier financing.

We have integrated the cost of capital percentage into our ROCE target as a comparative figure. This is determined using the weighted cost of capital from equity and borrowing costs (weighted average cost of capital). To calculate a pretax figure similar to EBIT, the cost of capital is adjusted using the expected tax rate for the BASF Group for the business year. In addition, the projected net expense of Other is already provided for by an adjustment to the cost of capital percentage. The cost of equity is ascertained using the capital asset pricing model. Borrowing costs are determined based on the financing costs of the BASF Group. The cost of capital percentage for 2025 is 10% (2024: 10%).