BASF SE (BAS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to BASF's conference call on the third quarter 2023 results. Today's presentation is being recorded. [Operator Instructions] Today's presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in opportunities and risks of the BASF Report 2022. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. With me on the call today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Dirk Elvermann, Chief Financial Officer. Please be aware that we have already posted the speech on our website at basf.com/Q32023. Now I would like to hand over to Martin Brudermüller.

Good morning, ladies and gentlemen. Dirk Elvermann and I would like to welcome you to our analyst conference call on the third quarter of 2023. Let's start with the development of global chemical production. Based on currently available data, the chemical industry was under further stress in Q3 as all regions exhibited a decline in production versus the prior year quarter with the exception of China. The development in China was driven by recovering domestic demand for a broad range of chemical products in association with low sales prices. Whereas global chemical production in total grew by 4.8% including China, it decreased by 4.4% without China. In Europe, chemical production slowed considerably compared with the prior year quarter. This was due to lower demand resulting from high inflation, increased interest rates and a renewed rise in natural gas prices as well as front-loading of durable goods consumption during the COVID years. In Q3 2023, European natural gas prices were still around 40% higher than the average between 2019 and 2021, and 4x higher than the Henry Hub quotation for the quarter. Consequently, European chemical production continued to decline in Q3 2023 and shrank by 6.6% compared with the prior year quarter. In North America, chemical production also declined compared with the prior year quarter in an environment of weak domestic demand from industries and end consumers. Compared with the prior year quarter, chemical production was also weaker in Asia, excluding China. Subdued consumer spending and a strong import competition from China were the main reasons for this. Let's again have a closer look on current and historic levels of indicators for inventory in the manufacturing industry. On the slide, values below 50 indicate declining inventories. Values above 50 indicate restocking. In our Q2 2023 conference call, we mentioned that these indicators were below their long-term averages and in the range of historical inflection points from destocking to inventory buildup for Western Europe and North America. The figures for Q3 2023 broadly confirm our expectations. The indicator for Western Europe improved marginally, signaling a slightly lower decline in inventories. The indicator for North America has moved further towards neutral. In Asia Pacific, the inventory indicator is continuing to edge up, pointing to increasing inventories amid the ongoing slow recovery of industrial production. Overall, these observations and statistical data remain in line with the current development of order entries in our developing divisions -- operating divisions. Particularly in China and India, we see firmer demand, while order entries are stabilizing in the other regions. We now move on to BASF performance. Overall, BASF Group sales declined by 28% to EUR 15.7 billion in Q3 2023, mainly due to lower prices and volumes. Prices fell particularly in the Materials, Chemicals and Surface Technologies segments. But we are able to increase prices in Agricultural Solutions. Sales volumes were considerably lower than in the prior year quarter across all industries with the exception of automotive. In the Surface Technologies segment, which supplies most of its products and solutions to the automotive industry, volumes, excluding precious metals, were fairly stable. In the course of the year, the sequential volume decline slowed down. In the third quarter of 2023, volumes declined by 3% compared with the second quarter of 2023. Compared with the prior year quarter, earnings in the Agricultural Solutions and Surface Technologies segment increased while the remaining segments recorded considerably lower earnings. Overall, EBIT before special items declined by EUR 772 million compared with Q3 2022 and amounted to EUR 575 million. This is in line with the average analyst estimates of EUR 601 million compiled by Vara on behalf of BASF in October 2023. With that, to Dirk for more financial information.

Yes. Thank you, Martin, and good morning, ladies and gentlemen, also from my side. I will now provide you with further details of BASF Group's key financial figures in the third quarter of 2023 compared always with the prior year period. EBITDA before special items decreased by 34% and amounted to EUR 1.5 billion. EBIT before special items declined by 57% to EUR 575 million. I will go into the details at segment level on the next slide. Net income amounted to minus EUR 249 million compared with EUR 909 million in the prior year quarter. Besides the lower EBIT, this decline was driven by the overall negative earnings of Wintershall Dea due to special items. In Q3 2023, Wintershall Dea recognized impairments on assets in the Middle East and also booked provisions for restructuring measures relating to the adjustment of the company structure that they announced in September. BASF's cash flows from operating activities increased by 17% to EUR 2.7 billion, mainly due to considerably higher cash inflows from changes in net working capital. This resulted particularly from reductions in inventories. Now let's take a look at EBIT before special items in the segments in Q3 2023 compared with the prior year quarter. The Agricultural Solutions and Surface Technologies segments increased EBIT before special items compared with Q3 2022. The considerable increase in Agricultural Solutions mainly resulted from higher prices and a one-time effect from insurance payments. The slight increase in Surface Technologies was driven by considerable earnings growth in the Coatings division on account of higher prices and volumes. This more than compensated for significantly lower EBIT before special items in the Catalysts division. Overall, BASF's earnings reflected significantly lower EBIT before special items in the Chemicals, Nutrition & Care, Industrial Solutions and Materials segments. In the Chemicals segment, both divisions recorded significantly lower EBIT before special items, mainly due to lower margins and volumes. In the Petrochemicals division, the unplanned outages of the crackers in Port Arthur, Texas and Nanjing, China in September additionally burdened earnings. In the Materials segment, the considerable decline in EBIT before special items was driven by significantly lower earnings in the Monomers division, particularly as a result of lower prices. Earnings in the Performance Materials division fell slightly, mainly due to lower prices and volumes. The Industrial Solutions segment recorded considerably lower EBIT before special items in both divisions, particularly on account of lower volumes and margins. EBIT before special items in the Nutrition & Care segment declined significantly. In the Nutrition & Health division, EBIT before special items was negative, mainly because of currently very low prices in the vitamins industry. This was partly offset by positive earnings in Care Chemicals. These were, however, also significantly below the level of the prior year quarter due to lower margins on account of lower prices. While earnings in the individual segments diverged from average analyst estimates, EBIT before special items at group level was in line with consensus. I will now continue with our cash flow development, again focusing on our performance in the third quarter. Cash flows from operating activities increased by EUR 384 million to EUR 2.7 billion. This is a remarkable improvement in view of the significantly lower net income. The cash flow generation was largely driven by cash inflows of EUR 1.9 billion from changes in net working capital. This is an increase of EUR 1.2 billion compared with Q3 2022. Lower inventories resulted in a cash release of EUR 488 million, while in the prior year quarter, inventory buildup of EUR 834 million had tied up cash. This reflects our high discipline in inventory management as part of our self-help measures in the currently difficult economic environment. Compared with the prior year quarter, payments made for property, plant and equipment and intangible assets rose by EUR 215 million to EUR 1.2 billion. This increase was mainly related to our growth projects, particularly our investment in China. In the third quarter, free cash flow increased by EUR 170 million compared with Q3 2022 and reached EUR 1.5 billion. Let's now take a look at our balance sheet at the end of September 2023 compared with year-end 2022. Total assets declined by EUR 1.9 billion and amounted to EUR 82.6 billion. This decline was driven by lower current assets, mainly on account of lower other receivables and miscellaneous assets, reduced inventories and lower trade accounts receivable. Overall, current assets decreased by EUR 3 billion. Noncurrent assets increased by EUR 1.1 billion, particularly because additions to property, plant and equipment exceeded depreciation. On September 30, 2023, net debt amounted to EUR 18.9 billion. This was an increase of EUR 2.6 billion compared with year-end 2022 but a decrease of EUR 1.4 billion compared with June 30, 2023. Compared with September 30, 2022, net debt was slightly lower. The equity ratio at the end of the third quarter of '23 was slightly higher than at the end of the year 2022 and stood at 48.8%. Overall, this demonstrates BASF's financial strength. We have a strong balance sheet and good credit ratings, especially compared with peers in the chemical industry. We are also consistently working on our cost structures to improve BASF's competitiveness, particularly in Europe. As announced at the end of February, we are executing a cost savings program focusing on Europe and are adapting our Verbund structures in Ludwigshafen. By the end of 2023, we will achieve the run rate of more than EUR 300 million from our cost savings programs with a focus on Europe, as already indicated in our Q2 reporting. For the end of 2024, we now expect annual cost savings in non-production areas to reach more than EUR 600 million by the end of 2026. We anticipate savings of more than EUR 700 million. These figures include measures related to Europe in the Global Business Services and Global Digital Services units. Additional measures in these two service units in other regions will contribute a further EUR 200 million. Together with the EUR 200 million savings from the adaptation of the Verbund structures in Ludwigshafen, we are confident of reaching total annual savings of around EUR 1.1 billion by the end of 2026. With that, back to you, Martin.

In the light of the current macroeconomic environment, we have significantly trimmed our CapEx for 2023 to EUR 5.3 billion, EUR 1 billion less than the figure of EUR 6.3 billion announced in February 2023. In addition, we will reduce CapEx further by a total of around EUR 3 billion over the next 4 years. Thus, for the 5 years period from 2023 to 2027, planned CapEx will be EUR 24.8 billion, EUR 4 billion lower than our original budget of EUR 28.8 billion. While reducing the overall CapEx, we remain fully committed to our growth projects and our transformation towards climate neutrality. With the cut in CapEx, we are not only simply postponing projects and investments. We are reducing the number of projects, we'll implement alternative measures that involve less lower CapEx and take advantage of the subdued market environment to lower investment costs, as our procurement team in China is impressively demonstrating. On February 23, 2024, we will present the new CapEx budget for the planning period from 2024 to 2028. We are continuing to broaden the foundation for BASF's future profitable growth. In this context, let me provide you with an update on our Verbund site project in Zhanjiang. The project execution is on time and in budget. Last month, the second downstream plant for thermoplastic polyurethanes, in short, TPU, successfully started up. We are stepping up our construction activities according to plan. And there are currently more than 15,000 construction workers on the site every day. The photo of the site shows the impressive progress that our team in China has achieved. We are taking advantage of the attractive financing conditions in China and are financing the Zhanjiang Verbund site with a combination of around 20% equity and 80% debt. The equity is funded by dividends from the BASF existing group companies in China. The debt financing will be based on the Chinese capital market and local bank financing. We are proud that BASF is able to independently execute such a megaproject in these challenging economic times. With that, Dirk, back to you for an update on Wintershall Dea.

We continue to pursue our strategic goal of selling BASF's 72.7% share in Wintershall Dea and are working on monetization options. Wintershall Dea is currently in the process of legally separating its Russia-related business. This separation is planned to be completed by mid-2024 and marks an important milestone in the overall process. Significant federal investment guarantees are in place for the Russian assets. Related claims are not accounted for as receivables in our balance sheet. They thus provide an upside potential. For the business year 2022, BASF already received around EUR 290 million as common dividend from Wintershall Dea. We do not expect any further dividend payments this year. Wintershall Dea has adjusted its corporate strategy to reflect the changes in the energy sector and particularly its exit from Russia. Currently, Wintershall Dea is reorganizing its company structure with a target of reducing administration costs by around EUR 200 million per year. In the future, the Management Board will comprise 3 instead of 5 members. As part of the restructuring, the company plans to reduce around 500 positions. And now, finally, back to Martin.

Thank you, Dirk. Before we continue with the outlook, I will add a few more comments on our portfolio management. A few weeks ago, you may have noticed some media articles speculating about planned divestitures of parts of BASF Group during my term. Let me be clear about the specific businesses that were referred to. We have a clearly defined and known position on Wintershall Dea, which Dirk just reiterated. We are very satisfied with the carve-out of ECMS, BASF Environmental Catalyst and Metal Solutions, which was successfully completed in July. The stand-alone structure prepares the business for the upcoming changes in the internal combustion engine market. This allows strategic options in the future. But we have no intention to sell this business at this time. We are particularly satisfied with the currently very strong performance of our Coatings division and have no plans to divest this business or any parts of it. As far as the Illertissen side is concerned, we have confirmed that we are examining strategic options for this rather small food ingredients business that has only limited synergies with the rest of our portfolio. The optimization of our site footprint with around 240 production sites worldwide is generally an ongoing task. Now I will conclude with the outlook. In the fourth quarter of 2023, we expect global chemical production to further stabilize. However, in the current interest rate environment and in view of increasing geopolitical risks, the macroeconomic outlook remains extremely uncertain. In particular, rising raw material prices would weigh on demand and margins since pricing power is limited in the times of low demand. As announced in July, we anticipate sales of between EUR 73 billion and EUR 76 billion as well as EBIT before special items of between EUR 4.0 billion and EUR 4.4 billion in 2023. We meanwhile expect sales and earnings at the lower end of these respective ranges. If chemical production does not further stabilize, there are risks from a further decline in volumes and a sharper-than-expected price reduction. We are maintaining the underlying assumptions for the global economic environment at the levels presented in July. Looking ahead, we do not expect an easy start to 2024. As soon as demand really picks up again, BASF will defend and expand its market shares with good competitiveness through leaner structures and good cost positions. In this way, we will provide powerful support to our customers worldwide. To conclude, I would like to state once again, an attractive dividend is of high importance for the BASF Board. This also holds true in challenging times. Therefore, our practice of keeping the dividend at least at the previous year's level remains unchanged. Our strong balance sheet, high equity ratio and good credit ratings give us the necessary financial strength in this regard. Thank you. And now, Dirk and I are glad to take your questions.

[Operator Instructions] The first question now comes from Christian Faitz, Kepler Cheuvreux.

First question, can you specify and also quantify the insurance payment in Agricultural Solutions? And then my second question, if I might sneak that in, is how do you currently, and also perhaps with a view into 2024, see the underlying demand/production volumes for the global automotive market?

I'll start with the insurance payment. What I can say here? So if we deduct the insurance payment from the Q3 results of Agricultural Solutions, we would have been more in line with average analyst estimates, which are slightly negative. So overall, the slightly positive result that we get for ag is on the back of this insurance payment. Insurance payment, as you might remember, related to a damage that was part of a third-party processing plant and reported negatively in EBIT bsi in 2022. And now this is turned back and compensated in this regard. On automotive, we stay positive. Automotive, besides ag, these are the two businesses that really hold strong for us in the year 2023. And if you look into the stats, in terms of units to be produced, you'll see that with the unit order of magnitude of 88.5 million units, this is a strong sector and we are benefiting from that, particularly with our Coatings division. Coatings, again very strong in terms of prices and volumes, had the strongest quarter in its history in Q3. And the other divisions are also benefiting from the auto industry, a little bit weaker behind Coatings, but overall, a very positive picture for auto.

So the next questions are from Gunther Zechmann, Bernstein.

Can I just ask on your revised CapEx budgets and the cuts, please, especially on the 2023 to 2027 one, a 14% reduction from original budget. So the question is, do you assume a lower chemical production now? And do you still hold on to your ambition to outgrow global chemical production? Or would you be comfortable being diluted in volume terms if profitability is as low as it currently is in the upstream segments?

Yes, Gunther, maybe let me also start with the China project because that's a big chunk of that. Let me clearly say that we are in budget here because the environment is actually pretty good for investments. First of all, the China inflation is very low. It was 1.9% in 2022, and it's only expected 0.7% in 2023. So there's no cost driving elements over there. Beyond that, also from the chemical -- from the contractor side, they are rather willing to make good contracts, favorable contracts for us to actually employ their people. And we also do not have the material price increase over there. So that's why our team made very, very good contracts over there. And let me really state here that we might even come below the budget at the very end with this whole project. So that's one contribution here. The second element is certainly that the utilization rate now globally with this demand crisis is rather low. And that means we have to, first, fill our plants. Again, I don't happen to think that, that happens overnight. That gives us also some time to consider and to think when do we do expansions and what is the right staggering, which projects we might hold back longer. So that's a kind of a postponement part. But we will also look in the number of projects. We want to reduce the number of projects. And I think that's normally what engineers come for. They also, all the time, have steel and iron solutions. You can also solve some of the topics by measures that need less CapEx, organizational and alternative ones. And that is two elements that very clearly contribute to this. We will not refrain from our growth targets, very clear. So we will not let ourselves dilute. But we simply keep our discipline here. And I think in this environment, this is the right thing to do. And I would expect that will really give a good development for BASF to be a little bit more tight here on the capital in the years going forward.

Okay, so we move on to Sam Perry, UBS.

Two, please. Firstly, on inventories, you are around EUR 1 billion lower than at the end of '22. How much of that is a function of reducing your own volumes of inventory and how much marking-to-market for lower prices? And how much scope do you have to reduce this further by the year-end? And then secondly, a more strategic question. And I acknowledge your comments in the opening remarks around dividend payout retention at these levels this year. If I think longer term, perhaps once you've managed to exit the Wintershall asset and noting that the dividend from Wintershall has historically not been an insignificant portion of the free cash flow, do you think there would be scope for a discussion around resizing after this?

Yes, I think maybe I'll start with the inventory question. So we have it both. We have a significant reduction in the inventory volume, so the OIVs. We also have certainly backwind from FX and prices. But a substantial part of the inventory reduction is coming from the volumes build-down. So we really started here a structural inventory improvement program, which is a rolling program. This goes further and further. And we are intending to continue with that. Just to give you glimpse of an idea, we were in the years until 2017 running our inventory level of EUR 10 billion and still able to generate EBITDAs at a level of EUR 10 billion to EUR 11 billion. And I think this indicates, now we're currently sitting at EUR 15.1 billion, that there is still room for improvement, and we will vigorously continue with that. Yes, over to Martin.

Yes. Sam, to the dividend, I mean I will not give any indications further for the future policy. But there's no reason to now change anything in our guidance for the dividend policy. And I think what is also clear, we are in a business that has a certain cyclicality. We all know that. And for that reason, it's also important to hold the expectations here. We had also in the past, in the 2014, actually a cash flow -- a free cash flow that did not support the dividend payout; also, by the way, in 2022 -- in 2020, sorry. And 2014, we increased the dividend. In 2020, we kept it. So I think this is an important part to monitor this and to also manage this. And I think given the fact that we have a very stable and solid balance sheet, that we have a good credit rating, that we have a high equity rate, so that is all supporting that we can manage this. You also know that basically, the top which comes on top of normal BASF activity is our China development. And this will then also add something on the CapEx side in '24 and '25 but then also return on normal levels. And I think we have to be clear that the China investment, where we are convinced that this is a very important one, supporting also the growth of BASF, is actually one source of the future capability to pay a dividend. So you said something about the Wintershall dividend, which then might go out if we exit. But we add something with the new Verbund site, which will encourage us and will also enable us to pay good dividends also going forward. So I think this is what I have to say about this.

So now the next questions are from Matthew Yates, Bank of America.

Martin, when you took over as CEO, one of your priorities was to get better downstream performance. I appreciate it's not been an easy environment at the moment. But to see the Nutrition & Care division loss-making is quite a dramatic outcome for a business with EUR 8 billion of capital employed. What's the strategy here to improve the profitability of the business? Is it simply just a matter of waiting for the volumes to come back? Or do you actually need to demonstrate some more market leadership in terms of your pricing strategy, especially around vitamins? And then the second question, if I can, again, Martin, perhaps for you, but I'm a bit confused on the strategy for your auto catalysts business. I mean typically, when a company carves out an asset as a separate legal entity, it tends to signal the start of the disposal process. But you were pretty vocal in your remarks that, that wasn't the case for BASF, at least not at the moment. So what additional operational or strategic flexibility does this carve-out give you in navigating that transition in the combustion engine that you referenced?

Yes, Matthew, maybe from my side, a little bit to the downstream situation, I mean the downstream is a mixed bag. That is very clear. But if we look on ag chemics, ag, which is performing very well, I think we clearly improved the performance. I think also the Industrial Solutions actually provide a very stable performance through difficult times. We talked about Coatings and as it's really super-run now even in this difficult time. So I think we have to really differentiate a little bit the view on our different downstream pieces here. The Nutrition & Health, very clear, we are not confident with that. But if we compare in that case also the numbers of our major competitors, by the way, one also is releasing numbers today, then I would say we have also very much a market topic here, particularly in the vitamins business, capacity topics, overcapacity topics but also a very weak and soft market development. So we have actually already in July 2022 announced that we are restructuring the nutrition business. We have actually brought together the human nutrition and animal nutrition business units into one business unit, which is Nutrition Ingredients. So that's repositioned ourselves as an ingredients provider. And you know that our very strong also Verbund integrated aroma chemicals, citral vitamins business is actually going into both areas in markets on human and animal and also the carotenoids with this. Let me also mention that we are very confident going forward because with all of the investments we have done in vitamin A, both on capacity but also formulation side, we have a very clear indication that we, also in the past but even better in the future, have the best cost position in the industry. Is that, let's say, a situation that improves tomorrow? Most probably, there will be some battle. But normally, the strongest goes out from the yard is the strongest. And I think this will be also the case with BASF. So it is a repositioning. It is a partial restructuring here. But I think we have good cards in our hands to go on with that business in a very strong path and in a strong way and contribute also to the downstream performance of BASF in the future. And with that, for ECMS business and to Dirk.

Yes. I'll take the ECMS question. So first of all, we are very satisfied with the carve-out. It was completed exactly as we hoped for. And now we have their business fully dedicated. It's an excellent go-to-market organization, lean back-end structure, service structures, dedicated ERP systems sitting there. And we think it sits in the right place. It is very industry-focused. And I think important is here to understand, this business is still a very cash-generative, fully invested, highly profitable and it has a long tail. I mean it's a sunset business ultimately because everybody is clear that the combustion engines market will not last forever. But we believe that there is a quite noteworthy period still. And we are enjoying very much this business. Does it also create flexibility at the end if you have such a business carved out? This is certainly the case. But let me be very clear, so the first and foremost intention was really to profile the business better in the BASF Group of companies and not to divest it.

So now we come to Chetan Udeshi, JPMorgan.

I think the first question I had was you mentioned the impact from cracker outages in the U.S. and China. Are these crackers even profitable at these levels? I'm just trying to understand whether you actually lost any earnings because of these outages or actually it saved you from having bigger losses in your upstream business. That's the first question. And the second question I had was I see you are sort of implying Q4 to be sequentially down versus Q3, which is normal seasonality. But if you had to -- if you can give us some sort of feel of how you see the earnings development by different sort of segments, as we think about Q4 versus Q3, I think it will be useful, especially given the number of moving parts on energy costs and clearly now the naphtha prices also going up, what it means for your upstream business. And last question is on your ag business. Of course, we've seen a few of your peers seeing significant earnings pressure. I think so far, from Q3 perspective, we've had very weak volumes but also much better pricing. Can you talk about what you see in Q4? Because I think your peers are talking about weaker LatAm demand for the ongoing season in LatAm. How do you see that dynamic in volumes and pricing play out in Q4?

Chetan, Dirk speaking. So maybe I'll take the first and the last question. Starting with the cracker, yes, indeed, we would have loved to avoid the cracker outages because both profitable. The one in Nanjing, China, which is already onstream again is -- so there, the impact was, I'd say, limited also due to the short time of the outage. So this was a mid-single-digit million amount. The harder hit was the cracker in Port Arthur, which is now, as we speak, being ramped up again. And here, we are talking a double-digit -- mid-double-digit amount. So yes, we would have loved to avoid that. Unfortunately, it hit us. But the good news is that the one cracker is onstream again and the other is about to be onstream again. On the ag situation going forward, and you referred to the competitors who are also coming with not-so-good forecast into the press, but I'd say if you take them, and I'm not now going one-by-one, there's always special situations why the performance is as it is. I think we, this year, have, in terms of portfolio, also in terms of timing, we had quite a preferable situation with strong pricing power overall with a very strong first half of the year. And now obviously, in the second half, first of all, it's anyway the weaker half of the year. There's high seasonality in the business, as we know. And also, we see now that the Southern Hemisphere, first of all, is delayed. It is coming later in than in the previous years and it's also coming a bit weaker. So we also see that. But I'd say we are in a comparatively resilient situation compared to what you might have heard elsewhere.