BASF SE (BAS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and a warm welcome to our press conference. Today, we are going to present the financial figures of BASF Group for the second quarter 2026. And I would like to welcome our Chairman of the Board of Executive Directors, Markus Kamieth and Dirk Elvermann, our CFO. So before we begin, let me give you a few points of housekeeping. The conference language is German and there's going to be a simultaneous translation into English. The presentation is available for download at basf.com and the direct link for that will be found in the chat. So let's start with the presentation, and we are looking forward to your questions afterwards. And the floor is yours, Markus.

Thank you, Thomas. Before I start, welcome to you. It's your first press conference in your not brand-new position, but welcome again, and we look forward to having a few more press conferences with you. .

Thank you. .

Good morning to you. Dirk Elvermann, and I are pleased to welcome you to today's press conference. In mid-July, we already pre-released our results for the second quarter as our EBITDA before special items considerably exceeded average analyst expectations. We were able to increase earnings in nearly all segments. This was driven by stronger prices and higher volumes as well as lower cash fixed costs. We thus further strengthen BASF's position in the market and made major advances with our restructuring as well as portfolio measures. At our annual press conference in February, I presented to you our priorities for 2026. Today, I'm pleased to say that we are making very good progress in all these areas. We have reduced our costs. We have brought down our capital expenditures. We have increased capacity utilization at our plants. Our team in Zhanjiang successfully ramped up the new Verbund site and the sale of our coatings activities marks an important step forward with our value-enhancing portfolio measures. As you can see, we are successfully implementing our Winning Ways strategy. We will provide you with more details about that later. To begin, let's take a closer look at BASF's sales development and the key influencing factors. In light of the geopolitical developments, we are presenting monthly figures compared with the corresponding months of the prior year. These figures are adjusted to exclude the impact of metals on sales in the Surface Technologies segment. At the beginning of the year, declining prices for key raw materials such as naphtha and natural gas resulted in lower sales prices. Following the escalation of the conflict in the Middle East and the blockade of the Strait of Hormuz, this trend reversed in the second quarter of 2022. In response, we successfully implemented significant price increases, particularly in our upstream businesses. We also achieved considerable volume growth throughout the first half of 2026. This was supported by the start-up of our new Verbund site in China. Another decisive factor was our ability to maintain uninterrupted supply by leveraging our local-for-local production footprint by flex feed, steam crackers and dedicated trading operations to source key feedstocks. BASF's unique setup DID and DAS provide a clear competitive advantage. Volume growth accelerated significantly in March. The high uncertainty in the markets led customers to secure supply through some advanced purchases. In the second quarter, volumes continued to grow considerably compared with the prior year months particularly in the core businesses. Currency headwinds eased over recent months. Moreover, portfolio effects were minor and were mainly caused by the sale of the decorative paints as well as the food and health performance ingredients businesses in the second half of 2025. A slightly positive portfolio effect resulted from the acquisition of Ag biotech, a company specializing in biological insect control solutions completed in March this year. Ladies and gentlemen, let's now take a brief look at regional volume and price developments compared with the prior year quarter, once again, excluding metal sales. Following the strong momentum in the first quarter of 2026, we continue to deliver considerable volume growth in Greater China, supported by the successful ramp-up of our new Verbund site in Zhanjiang. As a result of the Middle East conflict, prices rose significantly in Greater China as well as in almost all other regions, particularly in the upstream businesses. In Asia Pacific, excluding Greater China, we also recorded considerable volume growth, mainly driven by the Chemicals segment. In this region, too, prices rose considerably, especially in the Materials and Chemicals segments. In Europe, all core businesses contributed to the volume growth. Prices in Europe increased strongly, especially in the Chemicals and Materials segments. In North America, we recorded slightly lower volumes mainly on account of a scheduled turnaround of the steam cracker in Port Arthur, Texas. By contrast, prices increased considerably. Now let's move to earnings by segment. EBITDA before special items rose significantly by 54% to EUR 2.4 billion. This increase was primarily driven by continued volume growth and higher specific margins. Earnings grew in all segments except Surface Technologies. The strongest contributors were the core businesses, particularly the Materials, Chemicals and Industrial Solutions segments. Other also contributed to the considerable earnings increase, mainly due to commodity derivatives used for hedging. In the Materials segment, higher contribution margins and lower fixed costs led to a considerable increase in EBITDA before special items. The strongest contributions came from the polyurethane and ammonia value chains. The Chemicals segment recorded a considerable increase in earnings, mainly driven by the Petrochemicals division due to higher contribution margins. Scheduled maintenance turnarounds in Ludwigshafen and of the cracker at the Port Arthur side were a drag on earnings growth. The Industrial Solutions segment also delivered strong results. The significant earnings improvement was driven by lower fixed cost in the Performance Chemicals division and higher contribution margins in the Dispersions & Resins division. In Nutrition & Care, segment earnings came in slightly above the level of the prior year quarter, mainly due to lower fixed cost in the Care Chemicals division. By contrast, EBITDA before special items in the Surface Technologies segment fell considerably. Compared with the prior year quarter, earnings in the ECMS division declined mainly because of lower earnings in precious metal services. This was partly offset by higher earnings in the emissions catalyst business. In the Battery Materials division, earnings declined due to the expiry of subsidies, which led to higher fixed costs compared with the prior year quarter. Let's now turn to Agricultural Solutions in more detail. The next key milestone for our largest and most profitable stand-alone business is achieving IPO readiness by mid-2027, and we are well on track here. Agricultural Solutions delivered a very robust performance in the first half of this year. While sales declined slightly on account of currency headwinds and slightly lower prices, we captured volume growth in all regions. Volumes rose particularly in fungicides, herbicides and seed treatment. Thanks to the earnings increase in the second quarter, EBITDA before special items almost matched the strong level recorded in the first half of 2025. In the current market environment, this is a strong achievement by the team. At 29%, the EBITDA margin before special items almost matched the level of the first half of the prior year. Ladies and gentlemen, as I mentioned at the start, we are continuing our efforts to further enhance BASF's competitiveness. We have once again accelerated the pace to make our global organization more streamlined and efficient. As you can see on this slide, in the first half of 2026, we already reduced more positions than in the prior 2 years combined. I'd like to emphasize 2 figures that further illustrate the momentum behind our efforts. From January 2024 until the end of June 2026, we reduced the number of employees worldwide by 7,000. This figure excludes both the reductions resulting from divestitures and the workforce buildup associated with our Zhanjiang, Verbund site. And in May 2026, the number of FTEs at BASF SE in Ludwigshafen, was brought below 30,000 for the first time since 1954. This is an important and necessary step towards restoring the site's competitiveness. Now let me continue with further updates on the structural improvements at our Ludwigshafen Verbund site. We are well advanced with the necessary asset restructuring. Since 2024, the share of highly competitive production units at this site has increased from 78% to 88%. Ludwigshafen is by far our largest site with a very broad and diversified portfolio of upstream and downstream chemicals and a very high degree of integration. Over the past few years, the site has increasingly focused on supplying the European market. This is in line with our global strategy of local-for-local production. More recently, plant utilization rates improved amid the supply disruptions caused by the Middle East conflict. We will continue to review and adjust our asset portfolio as needed so that we can be a reliable and best-in-class supplier for our customers from various industries. We are also fully on track with our cost-saving programs and very confident of achieving our target of annual cost savings of around EUR 2.3 billion by the end of the year. At the end of June, the measures already implemented were equivalent to annual cost savings of EUR 2 billion. We continue to expect total onetime costs of at least EUR 1.9 billion by year-end 2026. We have also made progress with our portfolio measures. As you know, we successfully closed the Coatings transaction with Carlyle on June 30. The enterprise value of the transaction amounted to EUR 7.7 billion and the cash consideration received was around EUR 5.8 billion on a pretax basis. The disposal gain after taxes of EUR 3.5 billion is reflected in net income and earnings per share of BASF Group in the second quarter. We now hold a 40% equity share in the company, [ Cervantes. ] Through this equity stake, we will continue to participate in the future value creation of the Coatings business while sharpening BASF's strategic focus. This successful closing marks a key milestone in the swift execution of our Winning Ways strategy to unlock the value of BASF stand-alone businesses. We have also accelerated the sell-down of our participation in Harbour Energy. Since March 2026, this has generated cash proceeds of more than EUR 800 million for BASF. We have monetized a significant portion of our participation in Harbour Energy and reduced our stake in the company to below 25%. This was achieved through the sale of 80 million shares via a so-called accelerated book building in March 2026. The agreed block sale of 150 million shares in May and a number of smaller share sales into the market. Our remaining share in the company is currently worth roughly EUR 1 billion. As communicated on various occasions, it is our strategy to exit the financial investment in Harbour Energy over time while being mindful of the value. Ladies and gentlemen, with the stand-alone businesses on their own successful parts, our core has become more focused and coherent. This creates new opportunities for our core businesses to unlock synergies and to work more effectively together across BASF. As announced in May, we aim to operate the core businesses at up to 20% lower net cash fixed cost by 2029 compared with the 2024 baseline. In the first half of 2026, our ongoing measures to improve competitiveness already led to a 4% reduction in net cash fixed costs in the core compared with the prior year period. And there was strong positive momentum in the second quarter. This figure relates to BASF's core businesses and other and is adjusted for currency, portfolio and onetime effects making it comparable. Since the baseline for core shift is 2024, part of the cost savings measures already initiated contribute to the program. However, core shift will go significantly further. We will create a new tailor-made operating model for our core and leverage synergies across the core businesses, R&D, service units and corporate units. We focus our activities on what truly matters. We harmonize our processes across the core and expand the use of AI and we standardize our systems and tools to create even more synergies, reducing variety, enforcing common solutions and focusing on what works best overall. At the same time, we increased flexibility, for example, in task location and organizational design to realize cost savings and benefit from synergies through bundling. In a nutshell, we change what holds us back and boost what makes us strong. This will position us to win in our markets and create the financial flexibility we need to keep strengthening and growing our core businesses. I'm convinced that our core has the scale and strength to lead the focus to compete, the power to perform, and of course, best team. And with that, I'll hand over to Dirk Elvermann.

Thank you, Markus, and good morning, ladies and gentlemen. Let's now take a look at the key financial figures of BASF Group in the first half of 2026 compared with the prior year period. At EUR 4.8 billion, EBITDA before special items improved significantly by EUR 715 million compared with the prior year period, especially the Materials, Industrial Solutions, Chemicals and Surface Technologies segments contributed to this increase. Cash fixed costs of BASF Group declined by around 4% to EUR 7.9 billion. This was the result of the ongoing restructuring efforts, particularly in our core businesses and favorable currency effects. Net income improved by EUR 4.2 billion and came in at EUR 5.1 billion. This includes the disposal gain of EUR 3.5 billion after tax from the coatings transaction with Carlyle. Free cash flow decreased and came in at minus EUR 1.6 billion. Lower payments made for property, plant and equipment and intangible assets partly offset the decline in cash flows from operating activities. Let's turn now to the cash flow development in the second quarter of 2026. Cash flows from operating activities declined to EUR 524 million, mainly due to higher cash tied up in the net working capital. This resulted primarily from 2 effects. First, higher sales led to higher trade accounts receivable. And second, capital tied up in inventories increased as a result of higher raw material prices. In addition, cash flows from operating activities burdened by spending of around EUR 200 million related to the transformation of BASF Group. In particular, this was for cash effective restructuring measures and the introduction of the new ERP systems needed in Agricultural Solutions and the core businesses. Payments made for property, plant and equipment and intangible assets decreased to EUR 713 million. Free cash flow thus came in at minus EUR 189 million compared with plus EUR 533 million in the second quarter of 2025. We still expect to achieve our full year free cash flow forecast. In the second half of the year, our operating divisions are expected to collect even higher receivables than last year. The level of inventory reduction will largely depend on price levels. Payments made for property, plant and equipment and intangible assets are likely to come in below the EUR 3.4 billion forecasted for the full year. Now we come to our capital allocation framework. On the left side, you can see the cash contributions, which Markus Kamieth has already largely covered. I will now focus on the use of cash on the right-hand side. We are committed to attractive shareholder distributions and paid a dividend of EUR 2.25 per share for the business year 2025 at the beginning of May. We're also making swift progress with the second pillar of shareholder distributions, so share buybacks. I will provide more information on the next slide. As previously communicated, we used a significant share of the cash proceeds from portfolio measures to strengthen our balance sheet through deleveraging. We will continue to do so in order to support our single A credit rating. Compared with the prior year planning period, we will reduce capital expenditures by 20% in the full year planning period until 2028. We expect CapEx to consistently stay below depreciation until 2028. At the same time, we will also consider value-accretive M&A as a potential lever to strengthen and grow BASF's core businesses. In the current market environment, the relative attractiveness of acquisitions versus organic growth has increased. Ladies and gentlemen, we have just announced a EUR 1 billion share buyback program that will be executed between August 2026 and April 2027. This is part of the total buyback volume of at least EUR 4 billion by the end of 2028 that was announced in September 2024. This is the second part. Between November 2025 and June 2026, we already bought back around 3.5% of the outstanding shares for around EUR 1.5 billion. Given our strong cost position, we are now continuing this successful program with the next tranche. Furthermore, we are accelerating our deleveraging. This is supported by the maturity profile of outstanding bonds and loans as well as the opportunity to repay liabilities earlier than planned at attractive conditions. In the first half of 2026, we repaid a bond with a nominal value of EUR 1 billion as well as a loan of EUR 250 million. In the second half of 2026, we will repay maturing bonds and loans with a total value of EUR 900 million. In addition, we will redeem bonds and loans with a combined nominal value of around EUR 1.6 billion in 2026, ahead of the maturities, which extend through 2029. This includes bonds with a nominal value of EUR 1.25 billion that will already be redeemed in August. Let's now briefly touch on our balance sheet at the end of the second quarter compared with the end of June 2025. At around EUR 84 billion, total assets increased by 8%, mainly on account of higher current assets. The main reason is the considerable increase in cash due to the closing of the coating transaction and the related purchase price payment by Carlyle. BASF's equity ratio improved by 1.5 percentage points to 44.6% and remained very solid despite our ongoing share buyback program. Net debt declined by EUR 4.2 billion to EUR 17 billion. We continue to have a single A credit rating, which ensures unrestricted access to financial markets and favorable financial conditions. And with that, back to you, Markus.

Thank you, Dirk. In light of the better-than-expected business development, as you saw, we increased our earnings forecast for the full year 2026. We now anticipate EBITDA before special items of between EUR 6.9 billion and EUR 7.7 billion in 2026. We kept the range between the lower and upper end of our forecast unchanged at EUR 800 million due to continuing geopolitical uncertainties. For free cash flow, we continue to expect between EUR 1.5 billion and EUR 2.3 billion in 2026. We anticipate higher earnings and lower capital expenditures to offset the higher working capital buildup. . The forecast for CO2 emissions also remains unchanged. BASF's outlook is based on the adjusted assumptions regarding the global economic environment shown on the chart. And now Dirk and I, we'll be glad to answer your questions. Thank you for your attention.

Thank you, Markus. Thank you, Dirk. Now we have time for your questions. You can click on the hand icon to get the floor, and then we will give you the floor. You're all on mute. So please remember to unmute yourselves. And of course, we'll be very glad to see you as well, so maybe you can activate your camera. We start with questions in German, and then switch over to the English channel. So please ask the question in the language of your respective channels so that the interpretation works in both directions, and you will receive the answer in the question of the channel. I think Mr. Buran of the Manager Magazine is going to start.

Good morning to all of you. Thank you for the opportunity to ask questions. Now regarding acquisitions, Dirk Elvermann said, potential acquisitions are more attractive right now. What is the direction BASF has in mind here?

Well, if that's your only question, let me start.

Yes, I wanted to give everybody else to the opportunity to ask questions.

Acquisitions, we announced that, well, in the current environment in the chemical industry, we see more and more of a momentum regarding transactions, mergers, acquisitions, divestitures. So a lot of things going on in the market. On the other hand, since 2024, when we started the strategy, we said that, of course, we are basically or mainly interested in strengthening our core businesses. Restructuring and consolidation in the chemical industry is an opportunity for us. Given the current environment where markets are getting tighter and the outlook regarding margins, especially in commodities, becomes more difficult, I would put it this way, the relative attractiveness of acquisitions compared to investments, especially major investments, is shifting at the moment. And this is why we are looking around in the current environment to find out what are the opportunities of strengthening our core businesses. I don't want to be more specific, but you can derive from our strategy, it doesn't make any sense to acquire a stand-alone business. Of course, we would to try strengthen our core portfolio chemicals and to make sure that to become the preferred chemical company for the green transformation of customers to abide by this.

Now let me ask further. In Europe or anywhere else?

Well, we are operating globally with our portfolio. We want to operate long value chains and if possible, have assets in the regions where we are active. And active companies, of course, would be a good match, but I don't want to continue with speculation. It's not our main task to look for acquisitions. But we are observing the market, and we think the current momentum is quite exciting. So we are looking at a few things here, but that's as specific as it gets.

Ms. Martin, Bloomberg is next.

Good morning. Two brief questions. Zhanjiang first. You said it's starting now. Can you be more concrete? What about the current capacity utilization? And what do you expect for Q3 and Q4? And you said in the analyst call that you expect disruptions in Europe even though you are well prepared. Maybe you can talk about your expectations regarding European supply chains maybe more details on effects that you expect for BASF even though you have more ships that are operating and so on.

Okay. Zhanjiang. Thank you for your questions, Ms. Martin. Capacity utilization in Zhanjiang is as expected. And as we announced last year, very high. And this is a development we've seen very quickly. So the hypothesis, we are building something that is competitive, and that makes it possible in the commodity markets to have high capacity utilization at a high speed. While this turned out to be true. We have a very good capacity utilization. I don't have the exact figures, but many of the core product lines in Petrochemicals is close to 90% or higher regarding capacity utilization. Some assets are operating at a lower capacity utilization at the moment, either because we are still in the middle of customer qualification processes. We are also producing for our Care Chemicals division, where the product go into consumer products like detergents or skin care products, and you have to go through customer qualification processes, which sometimes take a few months. So capacity utilization is increasing a little more slowly. It's different from commodities where you switch on and are present in the market. And some assets for technical reasons are not operated at full capacity utilization. But technically speaking, we can operate the site at a very high capacity utilization, and this will stay the same -- and this will remain the same for the years to come. There won't be any significant changes in the future and ramping up of the Care Chemicals portfolio, I already mentioned it. .

Okay. The Rhine River, of course, the low water levels are concerning us and site management teams and supply chain are looking into this. This means that we are taking a lot of measures to make sure that we do not see any negative economic effects. And as Markus said, we are much better prepared than in 2018. And for the incoming products and for the outgoing product, we are alternatives at the moment, not only the so-called low-water barges. These are barges that can operate at low water levels, but we are also looking at alternative ways of transportation; trucks, trains, and so on. And we think that we can manage quite well. I don't see any looming economic damage. Of course, logistics costs will increase in such a situation. But I think everything is under control, and we have to wait and see when we will have higher water levels.

And my comment on the analyst call, I don't know if you listened, I didn't want to say that this is no problem. It's a challenging situation. But I was in the Board of Executive Directors in 2018 and the difficulties were very grave and that led to economic downturns in our company. In the comparison with 2018, I didn't want to compare, I just wanted to say how very much better we are prepared and how further developed we are and how our teams deal with it. So my comfort level, how the organization is very hands-on in tackling the situation and finding alternatives. It shows and when the pressure is high in BASF, there are people that do really smart things and make things possible. That's our observation now.

Okay. Then let's go on. Mr. Freytag, I think, is next of FAZ.

Good morning. Yes, I have a few questions on the job reductions. It was said 7,000 and many -- how many of them are for Ludwigshafen? And the job cuts, will it continue at this speed? And I also would be interested how the situation is at Ludwigshafen. Is Ludwigshafen profitable? Or is it not yet? And how many plants have been closed? And the third question, Mr. [indiscernible]. I would like you to tell me that the job reduction program costs EUR 1.9 billion, and we talk to somebody who is aged at the end of his 50s, and he can retire. And until the end until his retirement, he gets 70% of his salary paid by BASF. And I would like to ask you, how does that contribute to the sentiment in the chemical industry? And industry going to Berlin and asking for help and easier transformation part less CO2 emissions. But at the same time, you you can have enough money to pay a lot for people who go into retirement.

Well, let me start with the first part. The 7,000 jobs you're talking about, they were shown in an adjusted fashion because with a number of people that work at BASF, we have different effects of portfolio building, Zhanjiang and others. So since the beginning of 2024, it's these 7,000 positions that we have already eliminated. And of those, if I remember correctly, 2/3 have occurred in Germany. And the exact figure for Ludwigshafen, I don't have. But there's always well, a ballpark because for us in Germany, Germany is always the biggest country, and it's not only Ludwigshafen but 2/3 occurred in Germany. So the momentum that we see now, and we showed it on the chart, is that there is a growing momentum '24, '25, '26 and that will still continue because the programs and the employee programs have fully started restructuring programs on ongoing jobs are actually reduced. So we have a run rate for the first semester 2026 of approximately 300 to 350 positions per month that are being reduced, and that will go on like that for a while. There is no target figure. So frequently, we have been discussing what is the target figure. We don't have it because we say, okay, we have measures. We do it by what we want to change positively and what will contribute to the value of BASF. And job reduction is the consequence of what we want to achieve. It's not the target as such, but we will see the same momentum for a while. The employee programs like severance programs, for example, they -- well, we are not the only ones that do that. Of course, we look at our peers. We try to compare. We do not publish anything here. But we do look around and benchmark. And there are legal rules in Germany that we have. There is a legal environment. So in Germany, too, it is quite expensive for companies to do restructuring. That's also under discussion. We can't get out of this situation. And we have a site agreement, which is negotiated and which we have and we built upon. And so redundancies for operational reasons are excluded here. So you have to talk to your employees when you are affected. So we have to pay the severance payments, for example. And you, Dirk, would you like to add?