BASF: Robust in an unprecedented year

F. Strube
Chairman of the Board of Executive Directors,
BASF Aktiengesellschaft, Ludwigshafen

Ladies and gentlemen,
2001 has been unprecedented year: for the global economy, for the chemical industry and for BASF. Unfortunately, the year has not proved unprecedented in the positive way. Following a promising start, we experienced a significant decline in growth in the second quarter. And in the third quarter this developed into a noticeable downturn that most likely will continue in the fourth quarter.
We have adapted to this difficult economic climate and have taken precautions, although we are unable to ignore economic realities.
In the first nine months of this year, our sales from ongoing business amounted to more than EURO 24 billion. This corresponds to an increase of just over 8 percent compared with the same period last year.
From January through September, our income from operations on the basis of ongoing business before special items was about EURO 2 billion, down 15 percent compared with the first three quarters of 2000.

Confidence in our own strength
Before I go into our third-quarter figures in more detail, I would like to describe BASF's position in the currently tense economic situation.
At the beginning of the year, macroeconomic prognoses suggested worldwide growth in chemical production of about 4 percent. Economists were predicting a soft landing for the United States, a slight leveling off of growth in Europe and healthy growth in South America and in Asia. In the course of the year, these prognoses were corrected downward with increasing frequency.
Other indicators also fail to provide any grounds for optimism: Consumer confidence is continuing to decline heavily both in Europe and in the United States; order levels are also falling, and this applies to the chemical industry too; the capacity utilization of our plants is at its lowest level since the recession of the early 1990s.
Because of the low level of capacity utilization, it is virtually impossible to implement urgently needed price increases. In particular, products close to the start of the naphtha value-adding chain have been impacted by the high volatility of raw material prices.
We must face the fact that 2002 will be a very difficult year for the entire industry. This means that we are operating in a terrain that offers hardly any positive impulses and many unprecedented challenges for our business. Let me be very clear: BASF is not immune to periods of economic weakness, but we are prepared for the consolidation in our industry. In a difficult situation like the present, and even more so in the next upturn, it is very obvious which companies have put their business on a solid footing. We have confidence in our own strength because we act quickly and decisively.We will take measures to adjust production capacities that will be effective in the short term.In the medium term, we are preparing for the next upturn by streamlining our organization.In the long term, we are laying the foundations for growth and a sustainable increase in our value with our activities in the triad markets.We continue to pursue our successful Verbund strategy. We will use the current situation to further strengthen our Verbund sites.BASF is one of the most innovative companies in the chemical industry. My fellow Board member Dr. Stefan Marcinowski will tell you more about how we solve our customers' problems with our products and services.And finally: We have reduced our financial indebtedness and are operating on a solid financial foundation. The sale of our pharmaceuticals business has further increased our financial strength and opens up opportunities that we will be able to use actively in the coming phase of consolidation. We will continue with our share buy-back program, and thus further reduce our costs of capital.
Earnings in the black in 2001
In 2001, BASF has been in the black at the end of every quarter, and this is also the case in the particularly difficult months from July through September. Even though we cannot see any signs of the gloomy economic weather brightening in the few remaining weeks of the year, our year-end earnings will be clearly positive.
I therefore wish to express my thanks and my acknowledgment to the employees of the BASF Group, who remain highly dedicated and motivated in what are not easy times. We will continue to need their skills, their commitment and their power to innovate to ensure that BASF emerges even stronger from this difficult phase.
I would now like to report in detail on sales and earnings in our segments.

Chemicals: Consolidating cost leadership
Our Chemicals segment suffered as a result of very volatile naphtha prices, which particularly affected the Petrochemicals division. The price situation remains unsatisfactory: The prices of raw materials are considerably higher than they were two years ago, but sales prices have declined to the level of 1999.
Income from operations is burdened by a high level of investment associated with the construction of new plants and related start-up costs that is typical of our chemicals business. At the same time, these capital expenditures ensure that we can further extend our cost and technology leadership in this area.
In our Inorganics division, we saw positive earnings growth compared with the same period in 2000, in particular for inorganic specialties and electronic grade chemicals.
Third-quarter sales on the basis of ongoing business in the Chemicals segment were EURO 1.1 billion, or 3.4 percent lower than in the same quarter in 2000. Earnings on the basis of ongoing business were 18 percent down on last year's quarter at EURO 119 million.
Plastics & Fibers: New marketing channels
Sales in our Plastics & Fibers segment were adversely affected by weak demand from important customer industries. Many customers prolonged summer production stoppages and are using up their inventories.
In the third quarter in particular, there was a significant decline in demand for fibers and fiber intermediates worldwide. In the Styrenics division, sales volumes were approximately at last year's level, but generally weak demand has severely eroded prices. Although our Polyurethanes division also had to accept price reductions, it continued to stand up well to an extremely competitive environment.
Compared with the same period in 2000, third-quarter sales from ongoing business fell by about 14 percent to EURO 1.9 billion. Earnings on the basis of ongoing business were EURO 18 million, or 90 percent less than in the same period of the previous year.
We started to restructure our Plastics & Fibers segment some time ago and we are continuing to pursue this process. In addition to measures already implemented, we are closing unprofitable plants such as the Styrodur® plant in Antwerp, Belgium. Moreover, we are replacing old plants with new world-scale plants that offer corresponding cost advantages. Examples include our new TDI plant in Geismar, Louisiana, and our world-scale plant for styrene monomer here in Ludwigshafen.
As part of the reorganization of BASF, we will create far more efficient marketing and sales structures. New marketing strategies such as e-commerce and transregional sales teams will help us open up attractive new markets.

Performance Products: Capitalizing on opportunities
In the Performance Products segment, the fusion of our Specialty Chemicals and Colorants divisions is resulting in considerable synergy effects. The new Performance Chemicals division demonstrates how it is possible to cope with difficult times.
While further developing our organization, we have consistently succeeded in focusing on specific industries. Let me give you an example: We have now combined all products relevant to the printing industry, including pigments, in the business unit Performance Chemicals for the Printing Industry. As a result, we offer our customers system solutions from a single source.
In our Functional Polymers division, we closed our superabsorbents site in Birkenhead, United Kingdom, following a fire earlier this year. We are now planning to start operations at a new superabsorbents plant at our Antwerp site three months earlier than the originally forecast date of February 2002. This outstanding achievement is a testimony to the speed and flexibility of BASF and its employees.
Overall, our business with performance products did well despite difficult market conditions. Third-quarter sales from ongoing business in the segment were approximately EURO 2 billion, a decrease of 4 percent compared with the previous year's quarter. Income from operations was EURO 96 million, or 31 percent lower than in the same period of 2000.

Agricultural Products & Nutrition: On track
In the course of the year, the market environment for agricultural products proved more difficult than expected for all companies. Yet despite a contracting market worldwide, our Agricultural Products division remains on track. This is also true despite the fact that the financial situation in South America impaired growth in the third quarter.
In our Agricultural Products division we posted sales of EURO 530 million, or 2.6 percent less than in the previous year's quarter. Income from operations in the seasonally weak third quarter was around minus EURO 144 million.
Assuming that the economic situation does not deteriorate significantly, in particular in South America, we will achieve our sales goal of almost EURO 3.6 billion and our EBITDA goal before special items of around EURO 720 million in our Agricultural Products division this year.
With innovative products from our pipeline we will further extend our strong market position. For example, we are launching F 500®. This is the first new generation strobilurin and we expect it to be a major innovation in our fungicides portfolio.
In our Agricultural Products & Nutrition segment, business in the Fine Chemicals division continued to develop well in the third quarter. Sales increased, in particular with regard to products for animal nutrition and for the pharmaceutical and cosmetics industries. Sales were up by more than 20 percent and income from operations before special items climbed to EURO 31 million.
Oil & Gas: Strategic strength pays off
As in previous quarters in 2001, our Oil & Gas segment again made the largest contribution to BASF's earnings in the third quarter. Business generally developed positively, although sales decreased by 2.6 percent and earnings by 7 percent compared with the third quarter of 2000 as a result of a decline in oil prices by almost 17 percent. The oil and gas business again demonstrates its strategic strength in our portfolio in times of weak economic growth and high raw materials prices.
Together with partners, our subsidiary Wintershall is developing new oil and gas fields in Argentina and Brazil. We plan to provide customers with gas from the deposits in Argentina as early as 2003.

Spurring on expansion in the regions
The situation varies in the three regions, Asia, Europe and America.
Although third-quarter sales were higher than in the same period of the previous year in the Asia-Pacific region, we posted lower earnings as a result of the unsatisfactory price situation and the high level of investments.
In our home market Europe, sales declined in the third quarter. While inadequate capacity utilization of our production plants has burdened earnings, the contribution from our oil and gas business acts as a counterbalance.
We are concerned about the effects of the economic situation on our most important German Group company, BASF Aktiengesellschaft. Here, third-quarter earnings were down more than 80 percent on last year. Difficult adjustments lie ahead and will demand extraordinary efforts from all employees.
The situation in the NAFTA region has further deteriorated from the second to the third quarter. The horrific events of September 11 and their consequences have strengthened the existing trend toward recession in North America.
However, in reaction to these events we will not lose track of our long-term goals.
The NAFTA region is strategically important to us, and in the past years we have built up a strong position with new production plants. The new steam cracker in Port Arthur, Texas, is our largest single investment in the region. The new plant will form the backbone of our Verbund sites in Geismar, Louisiana, and Freeport, Texas, and will provide us with additional cost advantages by offering further backward integration in our own petrochemical feedstocks.

We act decisively and strategically
Overall, BASF is proving robust in an unprecedented year. Nevertheless, decisive and strategic action is more important than ever in the current economic conditions I have described.
Already in summer this year, we started a series of coordinated programs and initiatives that will act in the short, medium and long term.
The package of measures includes reducing capital expenditures to the level of depreciation, thus lowering the level of funds allocated to investments by ?400 million in the coming year. Despite this reduction, we will continue to exploit our growth potential.
In the consolidation of our plants and sites, we have identified additional savings potential of around EURO 50 million. As a result, we plan to increase savings in 2002 from the EURO 190 million already mentioned to a total of EURO 240 million.
At our major sites, capacity utilization has fallen to the lowest level for many years. As a short-term countermeasure we are examining which plants can be shut down temporarily.
In the first half of 2001, we recorded one-time costs of EURO 620 million for the implementation of this package of measures. We will also make provisions in the fourth quarter for additional measures. For the entire year, we anticipate special items of the order of EURO 850 million.

Structural improvements increase our competitiveness
The measures I have mentioned will improve our company's position. At the same time, we are driving forward additional projects to increase our competitiveness.
One example is the streamlining of our organization, which will not only result in short-term savings in personnel, material and marketing costs. What is important is that the new organization will allow us to extend and deepen our customer relationships. We will then be able to respond to our customers' needs more quickly and more flexibly. And, as a result, we will increase BASF's competitiveness, in particular in its home market Europe. Here, we have already made good progress: The new global and regional business units started their work this summer, and now European business centers are being established close to their markets.
In all, we expect the further development of our organization to provide cost advantages of EURO 400 million.
Our e-commerce activities also pursue the goal of strengthening our customer relationships, thus helping us to open up markets with even greater efficiency. Through tailor-made solutions we streamline and automate procurement processes and reduce transaction costs for our customers and for BASF.
In October 2001, "WorldAccount" went live. This is a worldwide uniform and integrated Web portal for our customers that combines previous systems. With this innovative electronic channel to all our customers, we are underlining our leading position in the use of e-commerce.

Balanced regional structure provides long-term strength
Our long-term strategy aims to gain a balanced share of the growth in the triad markets Europe, NAFTA and Asia.
In the last few years, we have already optimized our regional portfolio through organic growth, through acquisitions and joint ventures, but also through selling certain areas of the company and by streamlining our organization. We are now well positioned in all important markets. This provides our company with the strength needed to assert itself during the downturn in the global economy.
However, further efforts are needed to ensure sustainable success. As a result, we are resolutely stepping up our commitments, even though this will burden earnings in the short term as I have said.
In the Asia-Pacific region we have reached three important milestones for our future business in the third quarter:We have laid the foundation stone at the Verbund site in Nanjing, China, that we are building together with our Chinese partner. The investment volume for this project is in excess of ?3 billion.In addition, we have officially started operations at our first Asian Verbund site in Kuantan, Malaysia.The contract we signed in Beijing only a few days ago brings us a step closer toward the construction of production plants for the polyurethane precursors MDI and TDI at the Caojing site near Shanghai. The total investment for the complex, which we are building with partners, will exceed EURO 1 billion.
These measures demonstrate our confidence in the growth potential of the young chemical markets in Asia. Although, with the exception of China and India, the growth rates of the Asian markets have slowed, they are still far higher than in Europe or the United States. We know that stamina is important for success in Asia. As in other regions, BASF is synonymous with reliability and innovative, cutting-edge technology in Asia, and this will give us competitive advantages in these dynamic markets.

Outlook
With regard to the question of when there will be a reversal of the current economic trends and an upturn in the global economy, we have to say that simply no one knows right now. And in the current world political situation, the upturn will not depend on economic factors alone.
Currently, I expect that the United States and its allies, together with OPEC, will succeed in stabilizing the economic situation. However, the danger of a worldwide recession cannot be overlooked, and despite positive signals such as the stabilization of oil prices as well as low interest rates and low inflation, negative factors predominate. We are therefore preparing for a difficult year 2002.
But one thing is certain: Because the chemical industry is an early starter when there is an upturn in the economy, BASF will be among the first to register the signs in its order books when it comes.

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Contact:
Mister Michael Grabicki