BASF SE (BASFY) Q2 2023 Earnings Call Transcript

Jul. 28, 2023 8:01 AM ETBASF SE (BASFY), BFFAF

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BASF SE (OTCQX:BASFY) Q2 2023 Earnings Conference Call July 28, 2023 4:00 AM ET

Company Participants

Martin Brudermüller – Chairman

Dirk Elvermann – Chief Financial Officer

Stefanie Wettberg – Senior Vice President Investor Relations

Martin Brudermüller

Good morning, ladies and gentlemen. On July 12, we adjusted our full-year’s outlook and released preliminary Q2 figures. Today, the first time with Dirk, we will provide you with further details.

Let’s start with the development of Global Chemical Production. Based on currently available data, global chemical production stagnated compared with the prior-year quarter on account of weaker global demand. Among the large chemical markets, only China recorded growth. However, this was largely due to the low baseline resulting from the COVID-related lockdowns in Q2 2022.

In Europe, chemical production again declined strongly compared with the prior-year quarter. This was due to lower demand resulting from high inflation, frontloading of durable goods consumption during the COVID years, as well as elevated natural gas prices.

In Q2 2023, gas prices were still around twice as high as the average between 2019 and 2021 and 5x higher than the Henry Hub quotation for the quarter. In some cases, this has already led to temporary or permanent shutdowns of production capacities in the European chemical industry.

In North America, chemical production also declined compared with the prior-year quarter in an environment of weak demand for consumer goods. Lower demand and increased energy prices were also the main reasons for the decline in chemical production in Asia, excluding China, with the notable exception of moderate growth in India.

Despite recessionary developments in Europe and the United States and a subdued economic development in China, we do not expect a further weakening in demand at the global level of the second half of 2023. Inventories of chemical raw materials in most customer industries have already been greatly reduced.

Let’s take a closer look at the current and historical levels of indicators for inventories in the manufacturing industry by region. On this slide, values below 50 indicate declining inventories, values above 50 indicate restocking.

In Western Europe and North America, the indicators are already below their long-term averages. Furthermore, indicators in these two regions are now in the range of historical inflection points from destocking to inventory build-up. From this perspective, we should have likely reached the trough. Inventory indicators for Asia Pacific are above the long-term average, but have to be interpreted in the context of a somewhat higher growth momentum in industrial production.

Overall, these observations and statistical data are in-line with the current development of order entries in our operating divisions. Some customers are recognizing that they cannot expect further prices – further expect purchase prices to fall further. This should also support gradual demand recovery combined with a cautious rise in consumer confidence.

Moving on to BASF performance. Q2 2023, we faced low demand from our key customer industries, except automotive. Overall, BASF Group sales declined by 25% to EUR17.3 billion in Q2 2023, mainly on account of lower prices and volumes. Negative currency effects also lowered sales.

Compared with the extremely strong prior-year quarter, EBIT before special items decreased by EUR1.3 billion and amounted to EUR1.0 billion. The decline was especially driven by the upstream segments. Dirk will go into more detail on the development of the segments.

Already in January 2023, BASF broke ground on the third and final phase of the MDI expansion at our Verbund site in Geismar, Louisiana. We will increase production capacity to approximately 600,000 metric tons per year by 2026 to support the ongoing growth of our North American MDI customers.

We are investing $780 million in this final expansion phase from 2022 to 2025. Including the first and second phase, this investment volume totaled around $1 billion. This makes the MDI expansion project BASF’s largest wholly owned investment in North America. For future investments in the United States, we will evaluate incentive schemes provided by the Inflation Reduction Act.

Martin Brudermüller

Thank you, Dirk. Ladies and gentlemen, as announced on July 12, we expect weaker second-half sales and earnings than previously forecast. We adjusted our outlook for the full year 2023 accordingly. We now anticipate sales of between EUR73 billion and EUR76 billion. And EBIT before special items is now expected to reach between EUR4.0 billion and EUR4.4 billion in 2023. Based on the expected weaker earnings performance, we now anticipate a ROCE of between 6.5% and 7.1%.

Matthew Yates

Hi, good morning everyone. And welcome, Dirk. Now that you’re all warmed up, I can maybe ask a slightly tougher question. So the press release mentioned you’re planning to have sharper focus on cash management. As you’re probably aware, there’s a lot of anxiety from your shareholders around the balance sheet as we go through this period of tough trading, combined with high CapEx spending.

So can you talk a little bit more about the different levers you think you can pull to improve that cash management of the group? Are we talking about sort of cost-cutting, CapEx plans, working capital management, disposals or all of the above? Because I think there’s an anxiety from investors that BASF doesn’t have a Plan B if the cycle doesn’t quickly turn for sustaining that dividend. Thank you.

Martin Brudermüller

Clearly for the new CFO.

Dirk Elvermann

Thanks, Matthew, for the question. So yes, and first of all you see the focus on the cash management already, I think in the second quarter results, which we have just explained. So what are the levers that we are pulling?

So (a) CapEx we talked about. We started the year with a EUR6.3 billion expectation for this year. We have trimmed this down first to a little bit below EUR6 billion as you know, and now we’re at EUR5.7 billion. And this is attributable to savings in the base CapEx I’d say, which is the maintenance and funding of our overall asset footprint.

But also with regard to our growth projects, we came down here and this is a little bit of FX effect certainly, but this is also smart negotiations with partners in China. So that we are not just postponing CapEx to the outer years, but that we are really also reducing it to now 5.7 billion. This is I think a comfortable number, which will not be higher and I think that’s the step in the right direction.

Cost savings; I mentioned we are having the various dimensions. We have the focus projects, cost-saving projects on Europe, EUR 500 million run rates from non-operating activities, and then until 2026, also the streamlining of the Verbund in Ludwigshafen with the further 200 million. And then we have the running programs for the service units, which we have also explained. So altogether, it’s a little bit more of EUR1 billion run rate as of 2026, the latest.

And then on inventories, that’s close to my heart also. You know the typical inventory profile of the group, so we are normally peaking around late summertime. This year, we stayed very focused on inventory build-down alone in June. Just to give you an idea, we are more than 400 million lower than in May in terms of our inventories, and if you compare it with June last year, we are more than 550 million lower. So this shows you in which direction we want to go there.

Last not least, accounts receivable. There we will see of course the build-down in the second half when the cash collection from the agricultural business is at its peak, and also here we see some cash release. So in short, in a nutshell, we are pulling all levers that we have.

Sebastian Bray

Hello, good morning, and thank you for taking my questions. I have two, please. The first is on the automotive sector. This has been a source of relative strength over the last two years. There may be some lead indicators that demand starting to slip a little. You mentioned earlier Martin, the comments around the slight pickup in orders on a near-term basis for the industry. But is this also the case for automotive or is it more appropriate to talk about a slight weakening there, is there any change?

My second question is on the mission’s control business, together with the precious metal activities that have been carved out. Could you give us any idea if the economics of this business, either in terms of its absolute sales or profitability currently? Thank you.

Martin Brudermüller

I mean, overall the order income from automotive I would say is rather stable. Also, when I said weakness or getting maybe a little bit weaker, that has also to do a lot with the base effect over there. So I see actually automotive rather stable, particularly the emission catalyst business and Dirk will come to this in a second, is also stable. And you see also that we have a very strong coating business, currently is performing actually very well, and that shows you there will be no car produced or sold, that is not painted, so that’s always very, very good indicator over there.

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