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Letter to the Editor

BASF Plans Additional NAFTA Restructuring

Thanks to its cost-reduction program, the company achieved second-quarter EBIT before special items of EUR832 million - an increase of 1.2 percent compared with the same period of 2002. Sales declined by 1.6 percent to EUR8.2 billion. This was mainly due to the drop in the value of the U.S. dollar by more than 20 percent compared with the previous year. BASF increased sales volumes by 3.2 percent and prices by 3.0 percent. Disregarding the translation effect of the weaker dollar, the company would have posted sales of EUR8.8 billion, or 4.4 percent more than in the second quarter of 2002.

"You can rely on BASF's strength, even when we have to operate in an economic climate that offers very few encouraging signs," explained Dr. Jurgen Hambrecht, Chairman of the Board of Executive Directors of BASF Aktiengesellschaft, during his presentation of the interim results for the second quarter of 2003.

Second-quarter EBIT after special items was EUR774 million, or 5.3 percent lower compared with the previous year. Special charges of EUR58 million in the second quarter were associated with provisions for restructuring measures in the NAFTA region and the integration of BASF's latest acquisition in the Agricultural Products division. Net income fell by 61 percent to EUR195 million as a result of higher income taxes, mainly due to a one-time effect of EUR124 million related to corporate income tax. Earnings per share were therefore EUR0.35 in the second quarter compared with EUR0.86 in the same period of 2002.

Thanks to the very good first quarter, cumulative sales for the first half of 2003 were more than EUR17 billion or 2.8 percent higher than in the first half of 2002. Adjusted for currency effects, sales would have been EUR18 billion or an increase of 8.3 percent.

EBIT before special items for the first half of 2003 was almost EUR1.8 billion or 8.3 percent higher than in the same period of 2002. All operating divisions were in the black.

In the first half of the year, cash provided by operating activities increased significantly to EUR1.9 billion, exceeding the amount for the same period in 2002 by EUR1 billion. This increase is the result of the substantially lower additional financing requirements for net current assets.

BASF's Chairman does not expect there to be an upturn in the economic climate until the fourth quarter of 2003 at the earliest. "High unemployment rates, which continue to rise in the eurozone and in the United States, suggest that growth triggered by private consumption is unlikely. The signals from our customers also fail to show any signs of an upturn in the short term," said Hambrecht.

In the second quarter, the level of orders and the number of incoming orders have been lower than in the same period in 2002. Hambrecht is therefore not particularly optimistic with regard to sales and earnings development in the third quarter. "We expect sales at the same level as in 2002 and lower EBIT before special items. It is even more difficult to give a prognosis for the full year because of the continuing uncertainties. Considerable risks must be overcome if we are to achieve the same level of sales and earnings as in 2002. In particular, these risks are associated with volatile oil prices, the uncertain development of the U.S. dollar and persistent stagnation in important economies. Major efforts are therefore needed to match last year's achievements," he said.

The company aims to make additional savings by reducing its fixed costs through a two-phase restructuring program for the NAFTA region.

In the first phase, BASF wants to optimize the effectiveness and efficiency of service functions such as human resources, IT, purchasing, finance and legal with the goal of saving $100 million. These measures are expected to incur one-time costs of $55 million, of which $41 million has already been accounted for as special charges in the first half of 2003.

In the second phase of the NAFTA restructuring program focuses on further optimizing product portfolio and site structures. The goal is to concentrate on business areas with high growth and profit potential. At the same time, BASF will sharpen the customer focus of its business processes and exploit market potential more fully. The second phase is expected to result in total cost savings of at least $150 million, which are to be realized by 2006.

The goal of this two-phase program is to earn the cost of capital in the NAFTA region. The company cut its workforce in the NAFTA region by 1,200 last year and expects to cut 1,000 jobs in the NAFTA region by year-end as part of its restructuring efforts.

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