BASF SE (PNK:BASFY) Q3 2023 Earnings Call Transcript

BASF SE (PNK:BASFY) Q3 2023 Earnings Call Transcript October 31, 2023

Stefanie Wettberg: Good morning, ladies and gentlemen. Welcome to BASF Conference Call on the Third Quarter 2023 Results. Today’s presentation is being recorded. All participants will be in listen-only mode throughout. The presentation will be followed by a question-and-answer session. [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.

A close up of a laboratory beaker filled with colorful chemicals, signifying the company’s specialty chemicals.

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.

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 four times 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.

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Q&A Session

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 €15.7 billion in Q3 2023, mainly due to lower prices and volumes. Price 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 €772 million compared with Q3 2022 and amounted to €575 million. This is in line with the average analyst estimates of €601 million compiled by Vara on behalf of BASF in October 2023.

With that, to Dirk for more financial information.

Dirk Elvermann: Thank you, Martin and good morning ladies and gentlemen also from my side. I will now provide you with further details of 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 €1.5 billion. EBIT before special items declined 57% to €575 million. I will go into the details at segment level on the next. Net income amounted to minus €249 million compared with €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 €2.7 billion, mainly due to considerably higher 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 segment 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 import 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 €384 million to €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 €1.9 billion from changes in net working capital. This is an increase of €1.2 billion compared with Q3 2022. Lower inventories resulted in a cash release of €488 million, while in the prior year quarter, inventory buildup of €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 €250 million to €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 €170 million compared with Q3 2022 and reached €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 €1.9 billion and amounted to €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 €3 billion. Non-current assets increased by €1.1 billion, particularly because additions to property, plant, and equipment exceeded depreciation. On September 30th, 2023, net debt amounted to €18.9 billion. This was an increase of €2.6 billion compared with year-end 2022, but a decrease of €1.4 billion compared with June 30th, 2023.

Compared with September 30th, 2022, net debt was slightly lower. The equity ratio at the end of the third quarter of 2023 were slightly higher than 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 worked 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 €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 nonproduction areas to reach more than €600 million by the end of 2026. We anticipate savings of more than €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 €200 million. Together with the €200 million savings from the adaptation of the Verbund structures in Ludwigshafen, we are confident of reaching total annual savings of around €1.1 billion by the end of 2026. With that, back to you, Martin.

Martin Brudermüller: In the light of the current macroeconomic environment, we have significantly trimmed our CapEx for 2023 to €5.3 billion, €1 billion less than the figure of €6.3 billion announced in February 2023. In addition, we will reduce CapEx further by a total of around €3 billion over the next four years. Thus, for the five years period from 2023 to 2027, planned CapEx will be €24.8 billion, €4 billion lower than our original budget of €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.