BASF SE (BAS) Earnings Call Transcript & Summary

[Interpreted] 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 third quarter 2026. And I would like to welcome our Chairman of the Board of Executive Directors, Markus Kamieth; and Dirk Elvermann, our Chief Financial Officer. Let me start with some piece of housekeeping. The conference language is German with a simultaneous interpretation into English. The presentation you will see is in German. If you want to see the English version of the presentation, you can download it on the bsf.com under media or you find a direct link here in the chat. Let me start with the presentation of Mr. Kameith. And afterwards, we're looking forward to your questions. And the floor is yours, Markus.

[Interpreted] Thank you, Thomas. Good morning. Dirk Elvermann and I are pleased to welcome you to today's press conference. Before we start with the discussion of our third quarter results, I'd like to speak about our offer to Evonik. With our Winning Ways strategy, we strive to maximize the value of our stand-alone businesses, and at the same time, strengthen and grow our core businesses, both organically and through value-accretive M&A. I'm convinced that a potential combination with Evonik would be a logical and meaningful step in this direction. The timing is right, not only for BASF, but also for the chemical industry. Consolidation in Europe is underway and BASF is well positioned to drive and shape it. From our perspective, the strategic and financial logic of such a combination is compelling. The portfolios and strengths of both companies complement each other very well. a combination could create an even more competitive and significantly more resilient global player, building on the world's most advanced Verbund platform of BASF. But let me be very clear. Our commitment to financial discipline remains unchanged. This includes shareholder distributions of at least EUR 12 billion between 2025 and 2028. And I also want to make clear for us, acquisitions are could do, not a must do, and we do not see them as vital for the success of our strategy. And we will only pursue a potential transaction with Evonik if it is value accretive for our shareholders. We will not overpay. Let's now turn to our results for the third quarter. I see 3 key takeaways. First, BASF delivered another strong quarter with considerable growth in EBITDA before special items driven by all core businesses. Second, disciplined capital allocation enabled us to further reduce net debt, strengthen our balance sheet and continue our share buybacks. Third, the strong year-to-date performance of our core businesses gives us confidence to narrow our forecast range for EBITDA before special items upward. Let's take a closer look, starting with an explanation of the key drivers of sales performance in our core businesses. Here, you can see how dynamics have evolved over the past 3 quarters compared with the corresponding prior year quarters. In the second quarter, following the escalation of the conflict in the Middle East, we increased prices, particularly in our upstream businesses. The positive momentum continued in the third quarter and was driven by price increases in all 4 core segments. During the first 9 months of 2026, we also delivered volume growth in all core segments. This was supported by the successful ramp-up of our new Verbund site in China and by our resilient integrated production network and local-for-local strategy. Volume growth accelerated in the second quarter, in part due to customers securing supply in the midst of heightened geopolitical uncertainty. In the third quarter, we continued to capture solid volume growth across our core businesses,, with the strongest contributions coming from the Chemicals and Nutrition & Care segments. Currency headwinds eased over recent quarters and turned into slight tailwinds in the third quarter. Here, you can see the regional volume and price developments in our core businesses compared with the prior year quarter. Following the strong momentum since the first quarter of 2026, we continue to deliver considerable volume growth in China, supported by our Zhanjiang Verbund site. Driven by the ongoing Middle East conflict, significantly higher prices in China provided additional support, particularly in the upstream businesses. In Asia Pacific excluding China, we also delivered strong volume growth and achieved considerable price increases. In Europe, sales grew considerably on account of significantly higher prices. We increased prices in all core segments, particularly in Chemicals and Materials. Volumes were broadly stable overall. In North America, we achieved strong price increases and solid volume growth. Prices rose particularly in the upstream businesses. Volume growth was mainly driven by the Chemicals and Nutrition & Care segments. Moving on to our earnings development. EBITDA before special items rose by 15% to EUR 1.6 billion as a result of the strong performance across all core businesses. The earnings increase in the core businesses was mainly driven by higher specific margins, solid volume growth and lower cash fixed costs. By contrast, EBITDA before special items in the Surface Technologies segment was considerably below the level of the prior year quarter. This was primarily due to the earnings decline at Metivo, which was attributable to a positive one-off effect resulting from government grants in the prior year quarter. Metivo is the new brand name of the business previously called ECMS. Agricultural Solutions recorded a decline in earnings in the third quarter, and I will provide more information about this shortly. EBITDA before special items in Other declined compared with the prior year period, among other things, due to higher additions to bonus provisions. Let's turn to Agricultural Solutions. In the third quarter, which typically sees lower seasonal activity, sales declined by almost 20% to EUR 1.4 billion. The main driver was considerably lower volumes resulting in part from the very challenging market environment in South America. In addition, as we previously communicated, there was an expected effect in the third quarter because sales were brought forward into the second quarter ahead of the ERP software migration on July 1, 2026. The IT rollout in the region has now been completed and pricing was mainly affected by high competitive pressure in South America. As a result, EBIT before special items declined compared with the prior year quarter. Lower fixed costs partially offset the decline. For the fourth quarter of 2026, we expect the usual seasonal strengthening compared with the third quarter. Portfolio management plays a significant role in the execution of our Winning Ways strategy. We continue to generate considerable cash inflows from portfolio measures. At the same time, we are sharpening the focus of our core portfolio and strengthening its strategic coherence. Let me briefly highlight our achievements. This year, we have sold Harbour Energy shares and generated cash inflows of around EUR 1.3 billion to date. We still hold around 16% of our outstanding Harbour Energy shares with voting rights and we will sell them over time being mindful of value. We divested the Decorative Paints business in 2025 and completed the transaction with Carlyle in 2026 at a combined multiple of 13. This resulted in net cash inflows of more than EUR 6 billion. With our 40% equity stake in Surventis, we will continue to participate in the future value creation of the Coatings business. And we are also working on further portfolio measures. In early October, for example, the divestment of Stahl Group Specialty Coatings business to Henkel led to a cash inflow of more than EUR 250 million via our indirect participation in the Stahl Group. This amount will be recognized in BASF Group's financial statements in the fourth quarter of 2026. The preparations for the planned IPO of Agricultural Solutions are on track, giving us confidence that the business will be IPO-ready by mid-2027. The transition of the global business into separate legal entities with an industry-specific ERP system is already largely completed. With that, I hand over to Dirk.

[Interpreted] Well, thank you, Markus, and good morning, ladies and gentlemen. I would now like to take a look at the key financial figures of BASF Group in the first 9 months of 2026 compared with the prior year period. At EUR 6.4 billion, EBITDA before special items increased by more than EUR 900 million compared with the prior year period. All core businesses contributed with the highest contributions coming from Materials and Industrial Solutions. Cash fixed cost of BASF Group declined by around 3% to EUR 11.8 billion. This is the result of the ongoing restructuring efforts, particularly in our core businesses. Net income came in at EUR 5.2 billion, including the disposal gain of EUR 3.5 billion after tax from the Coatings transaction with Carlyle. Free cash flow was minus EUR 1 billion. Considerably lower payments made for property, plant and equipment and intangible assets partly offset the decline in cash flows from operating activities. We are making great progress streamlining our global organization. As you can see here, in the first 9 months of 2026, we reduced more than twice as many positions as in all of 2025. Since January 2024, we have reduced the number of employees by around 8,600. Please note that this figure excludes both the reductions resulting from divestitures and the workforce buildup associated with our Zhanjiang Verbund site. I will now explain the cash flow development in the first 9 months of 2026. Cash flows from operating activities declined to EUR 823 million, mainly due to the EUR 1.5 billion higher net working capital requirements. This resulted primarily from 2 effects. On the one hand, higher sales led to higher trade accounts receivable. On the other hand, capital tied up in inventories increased as a result of higher raw material prices. In addition, cash flows from operating activities were burdened by spending of around EUR 570 million related to the ongoing transformation of BASF Group. In particular, this related to cash effective restructuring measures and the introduction of the new ERP systems needed in Agricultural Solutions at the core businesses. We continue to maintain a strict focus on net working capital management as reflected in the 2 KPIs for our core businesses. Compared with the prior year period, average days of inventories value declined by 6% and average days of sales outstanding decreased by 3%. Payments made for property, plant and equipment and intangible assets decreased by around EUR 980 million to EUR 1.9 billion. Free cash flow, thus, came in at minus EUR 1 billion compared with around minus EUR 870 million in the prior year period. Our full year free cash flow forecast is unchanged. In the fourth quarter, our operating divisions are expected to collect more cash from outstanding receivables than last year. However, the inventory reduction will largely depend on price levels. For the full year 2026, we now expect payments made for property, plant and equipment and intangible assets to come in clearly below EUR 3 billion. In February 2026, we had forecast EUR 3.4 billion. We continue to deleverage too and further strengthen our balance sheet. Compared with the end of September 2025, we reduced net debt by 20%. We used a significant portion of portfolio proceeds to repay maturing financial debt and to redeem bonds and loans ahead of their maturities. We expect net debt to reach around EUR 15 billion by year-end 2026. The strengthening of our balance sheet supports our single A credit rating. This Monday, Fitch confirmed our single A credit rating with a stable outlook. We also remain fully committed to attractive shareholder distributions via dividends and share buybacks. For 2024 and 2025, we paid total dividends of around EUR 4 billion to shareholders of BASF SE. Between November 2025 and October 23, 2026, we bought back shares for around EUR 1.9 billion. This amount is part of the overall program of at least EUR 4 billion that we announced in September 2024. Despite the continued execution of share buyback program, our equity ratio increased by almost 3 percentage points to 47.2%, and this underscores our commitment to maintaining a strong financial profile. That brings us to the outlook. Back to you, Markus.

[Interpreted] Thank you, Dirk. Ladies and gentlemen, as the business year has progressed and we now have greater visibility regarding the expected earnings development, we are able to provide a more specific forecast range for BASF Group's EBITDA before special items for 2026. We expect EBITDA before special items of between EUR 7.4 billion and EUR 7.8. Compared with our previous forecast, we've raised the lower end of the range and slightly increased the upper end. Given the continuing uncertainties surrounding further geopolitical and global economic developments and their impact on oil and gas prices, in particular, we maintain the forecast range for the free cash flow of between EUR 1.5 billion and EUR 2.3 billion. In view of this uncertainty, we are also leaving the macroeconomic assumptions published in July unchanged. And now Dirk and I will be glad to answer your questions.

Thank you, Markus. Thank you, Dirk. With this, we start the Q&A session. [Operator Instructions] Okay's. Let's start with the first question. Now who asked for the floor? Mr. [ Freitag ], [ SAZ ].

Okay. First question on Evonik, or maybe 2 questions. First of all, this increased offer you made, did you receive any reaction, from whom? And what was the reaction? And the only public reaction we heard of was the organization running [ Mahlen Wesserling ], who are quite skeptical. They said they would rather like to continue without the Verbund. And could you comment on that? And one more question regarding Agricultural Solutions. You mentioned the business in Latin America is difficult. Maybe you can briefly explain what exactly the reasons are.

Mr. Freitag, let me comment on Evonik. Regarding your first question, please bear with us that we cannot comment on the details regarding the transaction. We expect confidentiality from the other party. They can expect the same thing from us and details, including potential offers and so on, I cannot and I do not want to comment on that. I read the comment by the [ Sinek ] management somewhere. It's not a contradiction. I think it was pointed out that this company running the site needs some degree of freedom. We see it the same way. This is why GmbH, the operating company in Schwarzeider is also structured in a very independent way. And I can understand that management says, in order to make a company that is running a chemical park successful, we need certain freedom. And I didn't see any discrepancy in this. I am of the same opinion. So there is no reaction as of now. Did I understand you correctly? I do not want to comment on that.

Okay, Mr. Freitag, this brings us to Agricultural Solutions. First of all, let me put this in perspective. The third quarter normally is the weakest one in Agricultural Solutions by tradition. In the third quarter, the issues were the technical migration of our IT systems. Markus Kammid mentioned it in the presentation. And part of the sales in South America were booked in the second quarter. So they were missing in the third quarter. And in South America, the business as a whole is difficult for the whole industry. Volumes went down, prices are under pressure. This is related to the weather. The weather conditions in South America as well were not very favorable for crop protection and seed product sales. And it is also related to the pricing opportunity of the farmers. So the income of farmers, how much can they pay for such products, this still is under a lot of pressure. This brings us to the fourth quarter. The fourth quarter is a seasonally stronger quarter. This also includes South America, but goes beyond South America, and we are very confident that our performance of the last fourth quarter can be repeated. So technical problems are behind us, and the team is highly motivated for a successful fourth quarter.

[ Olaf Lisman ] of [ Rheinzeid ] is next.

How would you characterize the state of context to Evonik? Is it cautious exploratory negotiations or have negotiations already started officially or unofficially? My second question is -- how does the low Rhine level, the water level of the Rhine burden BASF, that is Ludwigshafen? And would you have to bear additional costs this year because of this?

Well, Mr. [ Lisman ], please bear with me status of talks, negotiations. I do not want to comment on this because this is part of the confidentiality. Confidentiality is very, very important. Of course, this is being discussed widely in the public. This is not what we wanted to happen, but apparently, we weren't able to avoid that a lot of this is reported in public and some people make up stories about this, but we want to stick to confidentiality. And this is why I do not want to give you any details regarding negotiations or status of the discussions. Please bear with me. Now regarding the Rhine water level. I think at the last press conference, we mentioned it, the message we gave after the second quarter still applies. Our team has prepared very well for the now long phase of the low water levels. Individual bottlenecks, yes, we saw some in the area of raw materials and feedstocks, but you saw how our volumes are developing. And overall, it did not cause any significant economic damage for us. Of course, I do not want to deny that there were some bottlenecks here and there and problems with customer supplies, but this was limited to a shorter period of time. So we use low water barges that are able to produce a lot of product even if the water level is low, and we then switched to trains to the rail and to the road, to trucks. So we are very satisfied with how our team dealt with this and how we went through this situation.

The next question is from Bernd [indiscernible].

I hope you can hear me and maybe you can also see me now. Okay. I have 3 questions. First of all, you said that every transaction that you make should not be burdening your financial targets of BASF. Could you say again which are the concrete targets, particularly when you are talking about deleveraging? What are your targets there? Second question, whether there is one or some people who say, okay, BASF has such a bad track record in the past. So what is your comment on that? And the third question is for BASF, Syngenta will be the one having an IPO with the agricultural segment. So there are EBITDA figures in the -- or being discussed between 15 and 20. So can you comment on these figures and on the evaluation of this IPO?

Okay. I will start with deleveraging. We said very clearly that we want to have a disciplined approach, both when it comes to the target and also when we're talking about sales and ourselves. So we keep to our promises for our shareholders between 2025 and 2028 to cash out EUR 12 billion, EUR 8 billion of which in the form of dividends. around about and EUR 4 billion about share buybacks. And we will not change this approach. And we are on a very good path towards this target. The first or second tranche of share buybacks is up and running, and we made a lot of this EUR 1 billion already, and we will also continue with the remaining tranches. This is very fixed in terms of our target. And also when it comes to our dividends that we want to pay out. At the same time, we have the possibility with paying into our portfolio measures that we did to strongly deleverage. We -- our orientation is our rating target. So we have a single-A rating in the market in the chemical industry. We're not alone here, but almost alone with this rating, and that is -- continues to what we want to have. And this is part of our discourse also with the rating agencies. You've seen that 1 of the 3 rating agencies just now updated our rating and said, okay, everything that you do and everything you are planning means for us that you are a candidate for a Stable rating. So that fits together. And both for us is equally important, a strong balance sheet and also attractive payouts or distributions to our shareholders. So you see the 70% or 47%, which is very stable.

Yes. And maybe I can comment on the comment that BASF doesn't have such a good track record with acquisitions. I've heard that before. Well, let me put it this way. This has spread out, this rumor, but we don't quite understand that. We know our portfolio. If you look at the core portfolio of BASF today and look for the strong part carrying this attractiveness also of -- in the third quarter, there's a lot coming from acquisitions in the core business, both [ CIBA, Cognis, Engelhard ], there's many businesses that today make out a very strong part of our portfolio. When it comes to acquisitions, looking back, you can always say, did you pay a fair, low or high price? Well, in some discussions that might be talked about. But to say that these acquisitions in the past have not improved BASF, well, there's no proof for that. We believe that our track record for acquisitions is much better than what was recently discussed. And we are very satisfied. And looking forward, we believe that acquisitions are a viable way to strengthen our core business capital-wise, and I can't say more about it really. And actually, if you really go into it, the track record of BASF to build a portfolio with acquisitions is good. Yes. And the third question on Dirk, will you want to answer that?

Well, yes, I can do that, answering the Syngenta question. We are very well on track when it comes to the preparations of the IPO readiness. And we have the time line, which is confirmed in the middle of next year, we will have concluded it. And already today, 80% of the business have been sourced out or carved out. So we are doing good progress here. And we're looking at ourselves because this is a very good and strong business, which on the Capital Market Day in November will be also presented. So we will also have a look at what do the others, and we have the 4 banks that accompany us closely. We selected these banks. We published those. And then, of course, you look at the situation. You have one company that you mentioned. Well, with all the other companies that move in this environment, there are slight differences. So the listing location or the business model and also the composition of seed and crop protection. So in no case, it really has a perfect fit. And you can never say, okay, if they succeed in this way, it will be the same for BASF. But of course, you have a look, you draw conclusions and you work looking forward.

And Mr. [ Fonta's ] questions were answered, and Patrick [indiscernible] is next.

Please bear with me, I also want to ask a question for Evonik. You said it is not a must, it is a can, and that you don't want to pay too high prices. And can you maybe say if Evonik doesn't -- or continues not wanting to do this deal, that you will also take into consideration a hostile takeover because you have some background here with the Engelhard takeover? So it is 8,600 positions that have already fallen away. So is that the end of reducing positions? Or does it continue? And if there is a merger with Evonik, you said that dismisses for operating reasons will be excluded, but of course, positions can be reduced also otherwise?

Well, yes, maybe let me answer the question on -- your first question was -- well, the first question was about hostile takeovers. Well, this is not only a question, I mean, when it goes to transactions, it's also a hypothetical question. And this is what I don't want to answer at all. So we assume that we made a very serious and valuable offer. And on this basis, we would like to, well, initiate constructive talks. And everything else I don't want to talk about or speculate upon and that will also lead into the wrong direction. The second question, position -- development on positions and job reductions. Well, we always report 2024 to today. You were mentioning 8,600. Of course, we are on a journey. And at the beginning of the year, we announced that with our core shift program until 2029, we want to further optimize our core business. The net cash fixed costs are to reduce by 20%. And that means, of course, that restructuring has to go on and also positions have to be reduced. So this is not finalized. So the momentum that you see now will continue for quite a while because now in October, only now do we start with the measures of core shift. So from now to 2028, 2029, you will continue seeing significant restructuring and also reduction of positions.

Then I would say let's continue with the next question, and that comes from [ Hartmut Reitz], SWR.

I would like to talk about reduction of positions. Again, you gave us concrete positions, 8,600 globally. Can you also mention what the share of the Ludwigshafen site is in this figure? And if I understood you correctly, this is real reduction. It doesn't include what was built up in Zhanjiang or what fell away by selling parts of the business. This is real reduction of positions. And you also said that the Evonik acquisition would be the right point in time really. I imagine that an integration of such a big company puts a strain on all employees, particularly also here in Ludwigshafen. So it's a lot of work. And with the saving programs going on, are you not stressed enough already? And is it not quite a good point in time?

Okay. Back to the timing. You have to bear in mind, and I don't want to talk about the mechanism of a potential transaction, but you have to bear in mind that this transaction of this size does not take place overnight. Comparable transactions, if you take a look at those and looking at the status we have at the moment, you need approvals, all kinds of approvals. And until starting integration, well, this will take some time. And I already mentioned, even if we were to start right now, we do not expect a closing of such a transaction before, I would say, 2028. That's realistically speaking. You need to bear this in mind. Some people think that in Q1 of 2027, something will happen. This is not true. So this -- where something that takes place at a later point in time. I mean we spent a lot of time thinking about this, thinking hard. And we diligently prepared this discussion with Evonik over a lot of months. And we thought about do we have the resources and what about how does it fit our resources, our availability of people that you need for a project like this. So it was diligently prepared and well thought through and well. We could go ahead. And regarding the Ludwigshafen site, Mr. Reitz, 8,600, this is the figure we published. We comment the reduction in positions in hindsight. So what happened? As a matter of fact, the majority affects Germany and Europe and Ludwigshafen, you may say 1/3, 2/3, but it's a global program. And of course, more positions were affected in Europe in Germany. 2/3 are Europe of the 8,600, just to make it clear. Of the 8,600, 2/3 affect Europe. And well, proportionately, Ludwigshafen, the Ludwigshafen site is very big in Europe, but the exact figure, we cannot give you the exact figure.

Okay. Let's continue, Matthias.

We have a very fragile global economic situation, but you mentioned price increases that you realized almost everywhere. How is this possible? Is this due to your market power? Maybe you could comment on this. And how much of the growth you reached is due to price increases? How sustainable is this growth? Redundancies, well, situation looks a little better for BASF. And could we say that when it comes to the job cuts, do you have less pressure now compared to 1, 2 years ago? And it was good to hear for the journalists here that you no longer mentioned any plants that will be closed. Was this by coincidence? Is there something to happen there? Or are you done with that?

Maybe you can comment on prices. Let me start with the job cuts, and is there less pressure? We don't feel any pressure being released now. And due to our strategy, we reached a situation whereby structurally separating our stand-alone businesses. It enables us to develop our core better and make it fit for the future. We have to adjust costs. And the chemical market globally is becoming more and more difficult. And of course, we want to make sure that we can still win and winning means growing. So pressure, I don't want to call it pressure. It's an opportunity for us to start the [ Core Shift ] program right now. Of course, we will reduce structures. We will reduce HR costs. There will be a reduction in positions, but it is an opportunity to make sure that this pure, so to say, core business reaches another level. Our workforce would not confirm that there is less pressure. It's rather the other way around because we now are starting to implement Core Shift. And of course, we will reduce HR expenses all over the world. So I wouldn't call it reduced pressure. On the other hand, however, we can say that the efforts of the last 2 years we went through when it comes to restructuring now are reflected in the results. If you look at the earnings development quarter-by-quarter, it turns out more and more that the reduction of our cash fixed costs that you really see this now. So the hard work, the difficult decisions now are reflected in profitability. And we need to continue along this path. Regarding plant closures, very briefly, we can never say that in Ludwigshafen, aside of such complexity of such size, we will have reached the end of closing plants and investing. We are investing a lot of money at the moment. We are building a lot of new plants, new infrastructure projects. And I always say that this is not mentioned often enough. And in future, we will close plants because it is part of the natural development process of Ludwigshafen. But at the moment, we don't have any plans to come up with major plant closures because we saw further development over the last 2 years. And the analysis about which plants are competitive in Ludwigshafen, this shows that these numbers are going up. I think I mentioned this before. So we are on the right track in Ludwigshafen. We took the right measures, but it doesn't mean that we will stop acting.