November 6, 2023

Tempur Sealy Earnings Call Highlights

Tempur Sealy International, Inc. (TPX) Q3 2023 Earnings Call Transcript

Nov. 02, 2023 11:17 AM ETTempur Sealy International, Inc. (TPX)1 Comment

141.65K Followers

Q3: 2023-11-02 Earnings Summary

EPS of $0.66 misses by $0.17 | Revenue of $1.28B (-0.48% Y/Y) misses by $25.12M

Tempur Sealy International, Inc. (NYSE:TPX) Q3 2023 Earnings Conference Call November 2, 2023 8:00 AM ET

Company Participants

Aubrey Moore – VP, IR

Scott L. Thompson – Chairman, CEO & President

Bhaskar Rao – EVP & CFO

Scott L. Thompson

Thanks Aubrey. Good morning everyone and thank you for joining us on our 2023 third quarter earnings call. I will start by sharing some highlights for my third quarter performance and then Bhaskar will review our financial performance in more detail. After that I will provide an update on a proposed acquisition of Mattress Firm before opening up the call for Q&A. Today we are reporting the third best third quarter sales and ETF in the company’s history. For the third quarter of 2023, we reported net sales of approximately 1.3 billion and adjusted EPS of $0.77. Our results are approximately consistent with the third quarter of last year despite a more challenging macroeconomic operating background.

The U.S. betting industry as a whole underperformed our expectations with estimated volume down low double-digits in the quarter. We mitigated the impact of the softer than expected U.S. market with solid company performance that exceeded our expectations on both a relative market performance and year-over-year gross margin expansion. Internationally, the betting industry and our operations performed in line with our expectations. Overall, despite down markets and the disruption of a major cyber security incident in the third quarter, our strong relative performance and cash flow generation demonstrate strong — strength of our brands, operations, and team. We believe Tempur Sealy is well positioned for continued success.

Turning to highlights for the quarter. First, our industry leading brands and products continue to resonate with the U.S. consumer, driving our strong performance relative to the broader market. All of our new Tempur products and supporting advertising initiatives has strengthened Tempur’s appeal to the premium, relative minded consumer. The incremental cooling and comfort innovation of our new lineup of breeze mattresses generate robust retail advocacy and favorable mix in the quarter compared to the prior year. The lumbar feature acoustic massage, the wake up and wind down technologies, and our new smart based lineup continue to strengthen the value proposition of our adjustable offering driving an improvement in detachment rates year-over-year. These innovations drove a 5% increase in Tempur Mattress and Foundation ASP in the third quarter. Looking ahead to 2024, we expect to complete the full refresh of our U.S. Tempur portfolio by introducing our next generation of adapter products. We expect strong returns on investment and our new products for years to come.

Over the quarter we continued to support our new Tempur products and along from health of our Tempur brands with continued investments in national and digital Tempur-Pedic advertising. These marketing investments support very solid e-commerce performance and drove an increase in US Tempur search interest year-over-year. Our strategic investment and product distribution and marketing also continue to drive strong performance and expand brand awareness of Stearns & Foster in the U.S. market. We completed the roll out of our all new Stearns & Foster mattress collection earlier this year. We continue to see these new products connecting with the premium traditional inner spring consumer driving sales growth year-over-year. The consumer centric innovation, elevated design, and pants step up opportunities are resonating with premium inner spring customer. We are thrilled that our high end products are performing well and the ASP of Stearns & Foster product is up double-digit from last year. Additionally, Stearns & Foster’s search interest and e-commerce traffic were up 50% this year. Clearly our multiyear strategy for Stearns & Foster is working well for us and our retailers.

Second highlight, our international operation is performing well and driving solid sales growth amid the current macro backdrop. We successfully launched our new international Tempur lineup in over 90 markets worldwide including the rollout in nearly all the key markets in Europe and Asia. The launch is on track and will be substantially completed before the end of the year. The new products are being well received. Additionally, Dreams our UK retail operation is also performing well in both sales outperforming versus the broader market and has a record customer satisfaction. This quarter performance demonstrates the strength of our international strategy and pain [ph], highlighting the long-term opportunity for the international operations.

Third, we choose significant consolidated growth margin expansion year-over-year, and are progressing towards normalized margins. After multiple years of COVID overhang, rapid inflation, macroeconomic disruption, pressured margins for a while, we are pleased to report 340 basis point improvement to consolidated adjusted gross margin year-over-year thanks to the successful management of commodity fluctuations, improved supplier contracts, and operational improvements. This is a significant step towards driving profitability, which the team remains laser focus on achieving. The growth driver of our gross margin improvement is our ability to pass on pricing to offset commodity inflation. As you may recall we experienced approximately 400 basis points of margin compression between 2020 and 2022. This commodity price has increased at a historical pace. Now that pricing changes have been implemented, the commodity prices have started to normalize. You can see the positive results in our reported financial statements. Additionally, we’re optimistic that our scale in the market and our new product innovations would drive further gross margin expansion.

Bhaskar Rao

Thank you, Scott. In the third quarter of 2023, consolidated sales were approximately $1.3 billion and adjusted earnings per share was $0.77. While these results were slightly below our expectations, we believe we continue to outperform our competitive set in a challenging market. We have approximately $32 million of Pro Forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to cost incurred in connection with the planned acquisition of Mattress Firm and the previously disclosed cyber event.

Turning to North American results. Net sales declined 3% in the third quarter. On a reported basis the wholesale channel declined 4% and the direct channel declined 1%. North American adjusted gross margin improved a very robust 300 basis points to 43.2% driven by favorable commodities and operational efficiencies partially offset by deleverage. North American adjusted operating margin improved 50 bps to 20.3% driven by improvement in gross margins partially offset by investments in growth initiatives.

Now turning to international. International net sales increased a very solid 12% on a reported basis and 7% on a constant currency basis. As compared to the prior year, our international gross margin improved a robust 320 basis points to 56.6% driven by commodities, mix, and favorable leverage. Our international adjusted operating margin improved a 150 basis points to 16.2% driven by improvements in gross margin partially offset by investments. Global commodity prices continued to brand largely in line with our expectations. We continue to expect favorable commodity prices for the remainder of the year, though remaining significantly elevated from 2020 levels. In addition to the benefit of favorable commodity markets we assigned multiple agreements with certain global suppliers who have recognized our scale momentum. These relationships will benefit our gross margins over the long-term

Scott L. Thompson

Thanks. Nice job, Bhaskar. Before opening up the call for questions let me provide a brief update on our pending acquisition of Mattress Firm. Consistent with our expectations we’re currently responding to the Federal Trade Commission’s robust second request, which we expect to complete in the fourth quarter of 2023. We continue to expect the transactions to close in mid to late 2024. We continue to work closely with Mattress Firm’s leadership team. We received high level updates on numerous topics, including their financial performance. Mattress Firm has an October 3 fiscal year end and will report their physical results when their audit is complete, most likely in early December. The preliminary results are in line with our expectations.

Finally, I’m pleased to share that Tempur Sealy and Mattress Firm continue to make joint progress in planning for post-closing, including solidifying key supplier relations ahead of the expected close. Since announcing the acquisition in May Tempur Sealy has signed numerous post-closing supply agreements with existing Mattress Firm suppliers and one supply agreement for the company not currently supplying Mattress Firm. These contracts are consistent with our expectation for Mattress Firm to continue as a multi branded retailer post-closing. A few additional discussions regarding supplier relations are ongoing.

In summary, our progress towards the transaction close is on track and we look forward to joining with the Mattress Firm team. And with that, I’ll open up the call for questions. Operator.

Susan Maklari

Thank you. Good morning, everyone. Scott, why don’t we start by talking a bit about the demand environment. I think that, obviously things felt a little softer in the quarter than maybe some had anticipated and appreciating the color you gave in your comments. But, can you talk a bit more about how things trended during the quarter, any sort of anything of note in there, and how you’re thinking about the business as we progress through the balance of this year?

Scott L. Thompson

Sure. Thanks for your question, Susan. I mean, first of all, let’s not overlook that the international team had good solid growth in the quarter. And I think your question is really more directed towards North America. And then to kind of streamline your question even further, our Mexico operations had a great quarter and Canada was solid. So kind of ratcheted down our largest market, which is where your question is really focused is the U.S. market. As far as how that quarter progressed, the same trends that I think we talked about probably in the second quarter we saw in the third quarter, which is in non-holiday periods, the troughs had gotten deeper and then during holiday periods, we’re seeing growth in the market. But the holiday periods haven’t been strong enough to offset the trough. So that would be we’ll call that in quarter kind of trend. That’s the same trend that we would expect in the fourth quarter. It continues to be what I’d call the normalization of the seasonality that the business used to incur before COVID with maybe slightly deeper troughs, and slightly higher peaks during the holiday period.

I think you also kind of asked in general, just like demand. I mean, I think as you well know, the industry has been — from a unit standpoint has been in decline for nine quarters, making it where we currently are sitting at great recession kind of volumes in the industry that we’re working through and ensure some of that has to do with slowdown in the general economy. And we’re talking U.S. here and wallet shift. There’s probably some minor pullback, a pull forward from COVID. Although we’ve never really thought that that was a big number. I think the biggest thing that the industry is working through is really advertising. And, as you know, we’ve got a lot of smart people, a lot of analytics that go on to look at advertising both ours and the effectiveness of it, what goes on in the industry. And in looking at it as we tried to understand why the industry is having such a tough slug compared to historical volumes that were offered trend lines.

If you look at it manufacturer advertising over the last three years is down 40%. And if you look at the retailer’s, their advertising is down 20%. And yeah, that’s an issue. But I think probably a bigger issue is when you dive into that reduced advertising and you look at the mix of what people are doing both from a manufacturing standpoint and a retailer standpoint. They’ve moved from top of funnel advertising over the last three years to the bottom of the funnel. The manufacturers have moved about 40% of their advertising from the top of the funnel to the bottom. And retailers have also moved probably 40% to 40% plus of their advertising from the top of the funnel to the bottom of the funnel.

So what’s that mean? That means we’re not putting enough customers in the funnel triggering, they’re thinking about mattresses, and we’re all kind of fighting for the few customers that happen to trip into the funnel is what’s going on in the industry. If you play with the math, that means total top funnel advertising for manufacturers is down 64% when you include the decline in advertising plus the mix change. And for retailers, it’s down 44%. That is an enormous amount of advertising dollars taken off the top of the funnel. And I think that’s the big problem in traffic. I think that’s actually the bigger issue than share of wallet and other things that people like to talk about.

Now from our standpoint, we continue to support the industry as a manufacturer and in our advertising expense we have not cut. So with us not cutting, you can see the other ad manufacturers are clearly not helping pull the funnel forward. We have moved some to the bottom of the funnel and we’re looking at that. And what we’re doing to help kind of get the industry back on track is we’re working with other retailers and major retailers, walking them through some of this analysis, talking to them about it. And it’s resonating with them. And some of the large retailers are really looking at their advertising mix in dollar amount.

Jason Haas

Hey, good morning, and thanks for taking my question. Scott, in light of your comments to a previous question, I’m curious if you could say what you think is needed for the industry to get back to more normalized unit levels, do you think we need to see a pickup in industry advertising, do we need to see more housing turnover, is it just going to take time, what do you think is key to get there?

Scott L. Thompson

Yeah, I think we all fell in love with low funnel advertising. And some others pulled back on their advertising hoping to draft on other people. I think the bedding is an industry that you have to trigger the customer to think about. People don’t wake up one day and say let’s go buy a bunch of beds and the industry is very successful when it advertises. And so I think it’s primarily a lack of advertising by people and probably a little bit of a mixed fine tuning. I think I would also point to if you look at what Tempur Sealy has done, I mean, look, it’s not any secret. We’ve gathered a lot of market share and you can see that in our Stearns & Foster product where we’ve done higher than historical advertising dollars in there. So we’ve proven that advertising works. Yeah, the product is great, sales team is great but you got to have the advertising in there. And so yeah, I think advertising is the key. You’ll hear retailers talk about traffic and that is the issue and everybody needs to get back to working a little bit on the top funnel and getting people in the funnel rather than waiting till the last minute grab them off their purchase journey at the end. Things like manufacturers slot mind are doing spiffs those kinds of dollar investments are all just fighting over the customers in the marketplace and aren’t productive. And they really aren’t something that Tempur Sealy is done. We’ve had some other manufacturers try to work that angle.

Brad Thomas

Hey, thanks, good morning. Scott, was hoping I could get a little bit of your kind of first blush on how you’re thinking about the industry as you look out to 2024. Obviously, some of the leading indicators of the health of the consumer like ramping student loan payments could be a headwind, obviously interest rates are going higher. Housing has been slower. So curious, your early take on 2024 and if the industry stays challenge, can you help us think about how Tempur might change strategy if at all in that kind of environment? Thanks.

Scott L. Thompson

And we certainly see and agree that there are some headwinds in 2024 and don’t want to underestimate those or let you think that we’ve got our head in the sand. Those are those are all good points of why the macro, there should be some headwinds in there. But if you look at the industry, we’re already so far on the bottom from historical standpoint that I think that we probably are in good shape. I think some of this is self-inflicted from our execution of an industry standpoint on advertising. So I’ve used the term bouncing around the bottom. Probably the industry took a little bit of a step down, probably bounced a little further down in the bottom. But I think you either get in 2024 bouncing around the bottom or you get this slow recovery that we’ve been looking for in the industry. What that means for Tempur Sealy, I see nothing going on in the marketplace that would make me think that we would not continue to take market share. And so without I don’t know what 2024 looks like yet, we haven’t finished our budgeting. But I think even if it’s we’ll call it a softer overall market, I think more market share gains will help offset issues there. And then as I mentioned earlier on the call, we’ve got some internal issues that we’re in control of from a cost standpoint, that I think give us some optimism, as to we’ll call it EPS, when you get down there. Top line is going to be a little more volatile to look at but I think we feel relatively comfortable going into 2024 with more details coming when it’s appropriate.

Carla Casella

Hi, thank you for taking the question. You commented on commodities and how they’re improving or normalizing a bit but there’s still some that are well above the pandemic. Can you just break it down a little bit in terms of what some of the key commodities that you’re seeing?

Scott L. Thompson

Absolutely. So the way I think about that is just from a framing standpoint is that we indicated historically that we’ve been able to cover the cost of the commodity inflation through taking price however, from a mathematical standpoint that created a margin, meaning the math issue approximately 400 basis points. So sitting here today, we think there is still about half of that to go. The way I think about from a commodity overall standpoint, it’s really puts and takes. Everything is definitely off its peaks and whether that be chemicals, lumber, steel, etc. However, if you look at where we started this journey, there’s still a way, there’s still a way to go. However, commodities in and of itself is not the story. It is that there’s also another component of that story, which is we continue to work with our suppliers, our major suppliers to make sure that they understand the potential from a company standpoint and the momentum that we have. So yes, we’ve seen some tailwinds from commodities over the last couple of bps. However, what we’ve also done is we’ve entered into very constructive win-win contracts and relationships with our existing suppliers to ensure that the gift keeps on giving not only from a commodity standpoint but as a relationship, strategic relationship to see benefits from an EBITDA standpoint.

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November 6, 2023

Highlights from L&P Investors Call

Leggett & Platt, Incorporated (LEG) Q3 2023 Earnings Call Transcript

Oct. 31, 2023 10:34 AM ETLeggett & Platt, Incorporated (LEG)

Q3: 2023-10-30 Earnings Summary

EPS of $0.36 misses by $0.04 | Revenue of $1.18B (-9.19% Y/Y) misses by $64.81M

Leggett & Platt, Incorporated (NYSE:LEG) Q3 2023 Earnings Call Transcript October 31, 2023 8:30 AM ET

Company Participants

Cassie Branscum – Senior Director, Investor Relations

Mitch Dolloff – President and Chief Executive Officer

Ben Burns – Executive Vice President and Chief Financial Officer

Tyson Hagale – Executive Vice President and President-Bedding Products

Mitch Dolloff

Good morning, and thank you for participating in our third quarter call. I would like to start the call by thanking our employees for their tremendous efforts in what was another challenging quarter. Ongoing weak demand impacted our bedding products and furniture, flooring and textile product segments, but was partially offset by continued demand strength in our specialized product segment. Sales in the quarter were down 9% versus third quarter 2022 from lower volume and raw material related price decreases. Acquisitions added 2% to sales.

Third quarter earnings per share were $0.39. This includes $5 million or $0.03 per share of gain from the sale of real estate. Excluding this item, adjusted earnings per share were $0.36. Earnings decreased year-over-year, primarily from lower metal margin in our steel rod business and lower volume in our residential end markets. These decreases were partially offset by lower incentive compensation and bad debt expense.

Cash flow from operations was $144 million, up $78 million versus third quarter of 2022. We are lowering our full-year guidance to reflect continued volatility in the macroeconomic environment, continued low consumer demand in residential end markets, and the modest impact we’ve experienced so far from the UAW strike on our automotive business. We are focused on anticipating and adapting to market changes, improving operating efficiency, driving strong cash management, and engaging with our customers on new product opportunities. We are evaluating opportunities across our businesses, including further integration of our specialty foam and interspring operations that are expected to support improved profitability, a strong balance sheet, and continued shareholder returns.

Now moving on to segment results and demand trends. Sales in our betting product segment were down 17% versus third quarter of 2022. Demand in the US betting market remains soft, but relatively stable sequentially. We continue to anticipate full-year mattress consumption to be down high single digits. In the quarter, we saw modest sequential improvement in innerspring and mattress units, but we expect a deceleration in units sequentially in the fourth quarter due to normal seasonality. Metal margin expanded to its highest point in mid-2022 and narrowed as expected. We still anticipate metal margin to be down mid-teens versus 2022.

While our commercial teams continue to evaluate customer opportunities and commercialize new products, soft demand remains the largest headwind to profits. In the near term, we continue to drive operational efficiencies, especially in our specialty foam business to help offset soft volume. Additionally, we believe meaningful opportunities to increase profitability exist and are evaluating a number of possibilities, including the further integration of our specialty foam and innerspring operations I mentioned a moment ago, which should drive manufacturing savings and product development gains, optimizing our production and distribution capacity to service our customers effectively and efficiently, and enhancing our value proposition to our customers through expanded product capabilities and growing content at attractive price points.

Sales in our furniture, flooring, and textile product segment were down 11% versus third quarter 2022, driven by soft demand across the segment. Sales in home furniture, fabric converting, and flooring were down year-over-year, but roughly in line with second quarter levels. Work furniture demand has softened modestly with slower activity in European markets. In geo components, demand continued to soften in home improvement retail and civil construction end markets. We expect demand across the segment to decelerate sequentially in the fourth quarter due to normal seasonality.

Susan Maklari

Good morning. I want to start on the specialized segment. Perhaps a couple of things in there as we think about auto, especially. I guess first, can you talk about your ability to return to volumes as the strike eventually hits full resolution and those OEMs start getting back to work in there. How should we think about that potentially coming through the business? And then I also noticed in the release you mentioned that you had consolidated some facilities in there. Any thoughts on, one, the impact to the margin perhaps this quarter, but two, just how we should think about the cost structure of that business and any further improvements or things that you can do there?

Mitch Dolloff

Yes. Sure, Susan. I’ll try and get to all those. Remind me if I miss them.

Susan Maklari

I know it’s a lot.

Mitch Dolloff

That’s good. On the UAW impact, let’s start there. I mean, of course, things appear to be moving in a better direction now with tentative agreements reached among the big three U.S. auto producers. Still have to be approved by the union members themselves, so still some uncertainty out there, but definitely appear to be moving towards a better spot than could have been possible. And so, a little tricky there for us on the guidance because of the way the strike progressed against all three OEMs in a different facility. So really each of those steps had a different impact.

You saw for us that the impact was pretty minimal in the third quarter. And so far, as we’ve gone through the fourth quarter, through October, basically, not too significant as well. I think that’s due mainly for three reasons. One, as I said, it’s very facility-specific at the OEMs. And so it’s a different impact to everybody. I also would say that I think that as you go through the tears in the supply chain, I think people, all of us, including us, have tried to learn from the difficulties that we had during the pandemic. And so, while the orders decreased some and sales decreased some, people were trying to be very cautious through the supply chain and not put ourselves in a position where we couldn’t respond with the strike ended.

And so that gets to your question. So I think that as now the labor is coming back and those facilities are getting back up and running, I don’t think it’ll just have to go back to normal overnight, as we know. But I think if we continue to move forward as we are, there’ll be a little bit of a slowdown, but it shouldn’t be too significant. Hard to tell. We’ve baked in, of course, in our outlook what we’ve seen through our order book so far. So maybe it gets a little bit worse, but if things return in a decent way, I think that will continue to move forward pretty much as we are. So we’ll stay posted there. I don’t think that it is likely to be a significant change to us, but if it is, then we’ll think about whether we need to report on that or not.

Then in the consolidation there, yes, I think that’s a good example of us continuing to look for ways to improve our operating efficiency and cost structure and really optimizing our footprint there in the automotive business. So facilities in Asia that had a relatively small one and a large one that made the same type of products. And after doing some work, realized that we could pull those together. So it did have some cost impact for us in the third quarter. It should drive some good gains for us going forward. It wasn’t a huge consolidation, but I think it’s a good example of taking advantage of the opportunities that we have. And we’ll continue to look for more of those across the full business.

I think the outlook for automotive continues to be strong. We still have low inventories. We have an aging vehicle fleet. There’s certainly some dynamics that have been showing up in the market and the forecast, I would say, especially with the UAW strike, but kind of ups and downs in China as well. But I think the long-term outlook is encouraging there for us. Finally, I think we’ve making — the team is doing a good job of making progress in solving some of the production issues that we had here in the U.S. that we talked about at one of our facilities earlier in the year. So, we still have some work to do, but have made significant progress there. And we’ll continue to drive margin improvement across the business, continue to make progress in our inflation recovery there, probably up to about 85% recovery, and with some of the commodity costs deflating now, probably about the end of us talking about that online. But feel good about our outlook there, and we’ll continue to drive larger improvements.

Bobby Griffin

Good morning, everybody. Thanks for taking my questions. I guess, first I want to talk about — first I want to hit on the bedding product segment. It’s more just of a longer term question. A lot’s changed in that segment over the last, call it, 18 months, especially with the spread coming down. So if we’re in a world where the spread on rod is kind of stays where it is today or is under a little bit further pressure, would volumes come back in a recovery scenario? What is the margin profile of that business in that type of setup? We used to think of that business as a 10-ish, 9-ish to probably 11-ish EBIT margin business? What could it be if the spread doesn’t ever go back to those all-time high levels?

Tyson Hagale

Hey, Bobby. This is Tyson. I’ll jump in and try to answer it for you. I think we — obviously, there have been a lot of changes over the last 18 months, a lot of craziness, supply chain and demand related. I think over the longer term, we still think the fundamental margin profile exists. We have some work to do. The top drag, of course, we’ve said it quite a few times is volume and so a big part of this will be what the recovery looks like and exactly where it comes from and what type of products.

We’ve mentioned our work that we need to do to not only integrate but improve the operating efficiencies in our specialty foam business. That’s a big driver for us as well. On top of that, just continuing to try to think how we can most effectively serve our customer base from our manufacturing operations and distribution. And then also continuing to work in our product development and commercializing our new products, and especially with content games. So I think all of the market is changing a lot and continues to. We have a lot of different things that we push on that we think gets us kind of to that same type level in terms of margin.

Bobby Griffin

Okay. And then I think this is the second time you guys have called out about the potential of facilities, rationalizations, or just some work you’re doing inside the ECS business and looking at some different options. Is there a time frame to kind of complete that initial dive through where we could think about maybe the potential impact from some of these changes, or are we still in the early innings of looking at all the different options?

Mitch Dolloff

Bobby, I think we’re still in the early innings. It’s a great question. And also about the changes in the bedding market. I think that’s really fueling us to go back and say, hey, how do we need to adjust our outlook and take actions to make sure we’re driving profitability and strong cash flow and shareholder returns. And so, that’s what we’re doing. We still have work to do. I think the consolidation that we mentioned in automotive is a good small example of that. So we’ll look across other businesses, but certainly a lot in bedding that we’ve mentioned before.

But Tyson, anything you would add there? I know there’s not a lot more that we can say at this point.

Tyson Hagale

Sure. No, I mean, we’re working on a couple of things in specialty foam. I can’t remember if we’ve mentioned them in the past, but just trying to optimize our footprint. We have some on the west coast where we’re just trying to reduce some of the complexity and also in the southeast part of the United States where we’re already working on some there as well. But I think it probably also goes, Bobby, to what we’ve talked about where we had to pause, the integration of specialty foam into L&P. And even beyond that, when Leggett acquired the ETF business, it was four companies that were also being brought together. So on top of that, as Mitch said, it’s early innings because we still have a lot of that work that needs to be completed.

Keith Hughes

Okay. And in the bedding, your specialty foam business compared to US Spring has done better, really for every quarter this year. Could you talk about, do you think that’s share wins, is that just the market as a whole? What’s going on with the dynamic between those two? And I’m speaking to unit performance.

Tyson Hagale

Sure, Keith. This is Tyson. We talked about this, I think, going back to last year where we had a pretty heavy emphasis in our specialty foam business with our digitally native customers and, even more so than the broad bedding market in the U.S., that segment of the market was really disrupted. And so we talked about the need that we had even in the early part of the recovery, as the market recovers, that we needed to diversify our customer base. And so, our commercial team has been working really hard, even in a tough market, trying to uncover those opportunities and they’ve been making some progress there. And so, I think it’s more of — more that the nature of the improvement there is just as we’ve been able to pick up some wins, even in the [sole] (ph) market, diversifying the customer base and that’s helping us even as the market’s recovering.

Keith Hughes

And that’s in foam you’re referring to, correct?

Tyson Hagale

I’m referring to foam, yes.

Keith Hughes

Yes, okay. And I guess final thing on this, if you look at the customer list in specialty foam, are — at one time I think [ECSI] (ph) was very concentrated with a couple. Can you give us an idea of the largest customers, how much they represent of foam sales?

Mitch Dolloff

It’s kind of a tough question to answer, Keith, but going back into history, it was more concentrated, like with the digitally native customer list. Don’t want to get into how many that represented, but we still have some key customers, but we are growing that as we try to diversify the customer base.

Ben Burns

Yes, so Tyson, is it right to say, I mean, at the time of acquisition, as you said, focused in the D&Bs, still a decent list of them. It wasn’t just one or two. And as that part — that segment of the market has struggled a little bit, the team has done a good job of diversifying our customer base.

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November 2, 2023

Huntsman Earnings Call Urethane Highlights

Huntsman Corporation (HUN) Q3 2023 Earnings Call Transcript

Nov. 01, 2023 3:44 PM ETHuntsman Corporation (HUN)

SA Transcripts

141.44K Followers

Q3: 2023-10-31 Earnings Summary

EPS of $0.15 misses by $0.04 | Revenue of $1.51B (-25.11% Y/Y) misses by $60.92M

Huntsman Corporation (NYSE:HUN) Q3 2023 Results Conference Call November 1, 2023 10:00 AM ET

Company Participants

Ivan Marcuse – VP, IR

Peter Huntsman – Chairman, CEO & President

Phil Lister – EVP, CFO

Peter Huntsman

Ivan, thank you very much, and thank you all for taking the time to join us this morning. This past week, I had the opportunity to visit one of our largest aerospace customers with our Board of Directors. We watched firsthand as Huntsman’s composite raw materials were applied to some of the most fuel efficient and modern aircraft built anywhere in the world today. We also visited one of our plants that is making Germany’s premier sports cars lighter and consume less electricity. We spoke to our associates at the same plant who are responsible for making components for a smarter, more reliable power distribution and grid system.

I’d go on about the numerous applications that Huntsman is now pushing to serve a less energy intensive, but more energy-reliant economy. All this give me cause for optimism, and it’s a great reminder about our company’s position in the global marketplace.

Over the past 24 months, we’ve seen some of the strongest economic performance as we recovered from a global pandemic and subsequently among the most chaotic economic conditions as European energy policy seemingly collapsed, China’s bounced back stumbled along and North America’s construction markets took a beating over high interest rates and consumer uncertainty.

As we now have some visibility into the beginning of the fourth quarter, as I said during our last earnings call, we expect this to be a tough quarter depending on the amount of customer deinventoring we see and lack of consumer confidence. Our projections for the fourth quarter remain murky, as the real year-end seasonality does not yet start for a couple more weeks.

However, our customer and plant business demonstrates how vital our products are in an evolving global economy. We continue to see the recovery of the aerospace industry. In all of our other divisions, we will be a vital supplier to both the EV and ICE automotive industry. We continue to see growing demand in power and electronics, building insulation materials, cleaner solvents for the chip industry and expanding markets for lightweight and stronger materials.

We will pace our share buyback program to make sure we are both returning value to our shareholders and preserving a strong balance sheet that will assure our flexibility and allow us to capitalize on M&A opportunities.

During 2024, we will complete a $280 million cost realignment, a European restructuring program we announced over the past 2 years. This will help offset inflation, flatten our organization and allow us to compete more aggressively and respond quicker to market conditions.

As mentioned in our prepared remarks, we will be very conservative on our capital spend this next year. We will spend what is needed to assure our reliability and safety as well as investing in high-priority growth projects. Depending on the speed of an expected recovery in 2024, we will be ready to proceed with other projects as market conditions may warrant.

In short, as we conclude what has been a year with more challenges and opportunities, we believe that we’re in a unique position to rebound quickly as markets shift direction. We will also be calibrating our operations around a conservative approach to and capital allocation towards long-term shareholder return and reliability.

Aleksey Yefremov

Peter, it seems like China could be one of the main reasons, things global or so tough in MDI, in particular. Do you see anything in China to suggest a path for better 2024?

Peter Huntsman

Well, I think that it’ll — actually, first of all, it’s good to hear from you. And as I look at China, look, we’ve been saying for the past year that we’re seeing a slow and steady recovery taking place in China. I think we’re a little bit of an outlier earlier in the year when we were saying that people we’re expecting that there was going to be a very sudden bounce back. But I — we’re seeing in the housing market that interest rates are dropping. And typically, that will mean that there’ll be a recovery following, but we’re not overly reliant on that.

I think where we are invested on the domestic energy conservation in China around insulation, around building materials, around the EV market. We continue to get market share in the auto, both in ICE and in EV and in consumer goods and appliances. So our focus is not on the export segment of the Chinese economy rather the domestic consumption and building side of the Chinese economy.

And in that, I think that we’re going to just continue to see slow but steady growth and recovery in that area. And to that end, as I look at Chinese prices from the beginning of the year, they’re actually slightly up from where they started the year. And I think that we’re going to continue to see continued improvement throughout 2024 in China.

Phil Lister

Yes. Aleksey, I think it’s clear we’ve got a headwind going to the fourth quarter, particularly when you look at benzene, which averaged about $3.10 in quarter 3. It settled in October over $4. It settled for November at $3.65. Spot price is lower, but that is our largest raw material. Natural gas in Europe has also risen from approximately $10 a Btu to about $14 to $15 today. So some headwinds there, there are some benefits in the chlorine chain, with chlorine coming down, epichlorohydrin is falling. But those are outweighed by benzene and natural gas.

Michael Sison

Peter, when you think about, I guess, Polyurethanes in total, you’ve done a lot of things over the last several years going downstream and trying to improve the quality of the business. This year’s, for a lot of businesses, look really tough to see those changes. But when you think about, again, just thinking where the business see when things recur, maybe talk about whether EBITDA margins can get back to all this destock in difficult times end?

Peter Huntsman

Yes. I think that as we look at MDI, fundamentally, I do think that we’re in unprecedented downdraft right now with MDI, putting it mildly. The reason I say that is this is a product since I’ve been in it for the last 25 years, and some of the veterans that been in the last 30-plus years, we’ve not seen 2 consecutive years of falling demand. And that’s largely not about because of macroeconomic conditions. We’re not seeing competing materials. We’re not seeing a lots of people that are — or stopped building homes with OSP. They’ve stopped using MDI and furniture and bedding. And so it wasn’t anything. We see MDI continuing to expand its application base, its chemistry base and getting better.

So — I mean, if I look at the bare fundamentals, there’s absolutely no reason why this material during normal economic conditions, or even normal economic minus a bit, shouldn’t be doing immensely better than it’s doing today. And so I think that getting back to what I would see as mid-teens — plus mid-teens sort of margins. I personally don’t think that it’s going to take a great deal of change just from the sense that I don’t see any fundamentals in the business that have changed the broader outlook of MDI.

When U.S. housing comes back, that’s obviously a very large component of MDI demand. When people buy a new home, not only did the product that goes and build the home, but also to furnish a home and — means of furniture, bedding and paints and coatings, electronics and so forth. When you look at the automotive industry, particularly this last quarter, while we weren’t directly hit with strikes that we saw in North America, our customers weren’t hit by that. That did put more MDI on the market than you otherwise would have seen, probably having a detrimental effect.

And as we look at the global energy conservation and insulation areas around spray foam and insulation materials again, I look at those big macro issues. I see no reason why MDI shouldn’t recover. And when it recovers, I gladly predict — when it recovers, I think it’s going to surprise me how quickly it does.

Michael Sison

And as a quick follow-up. You referenced a Chinese MDIs in the prepared remarks. Where are we in the U.S. and Europe? And how much lower do you think will go into the fourth quarter on those prices? And do you think — what’s your thought about ’24? And what needs to happen to shore up all the regions?

Peter Huntsman

Well, fundamentally, in ’24, people need to stop tolerating losing money. And I think that, that fundamentally has to be a broad issue. It’s the age-old issue of any product that’s being bought and sold at very low margins, is that what’s the discipline of an industry to be able to sell a product and set a price to return money to shareholders. And right now, MDI is not doing that. And so fundamentally, I think that there needs to be a change in the entire MDI market.

Now that doesn’t just come about without economic recovery. It doesn’t come about through without customer demand returning. And those things will happen. But as I look at how close much of this is getting to fixed cost sort of return, it seems like we’re there. As I look at pricing in Europe, we’ve been able to get some modest increases in the fourth quarter. I’d like to say that’s because demand is improving, but I think it’s more just discipline. And there are signs that I’m saying or at least feeling that we’re to the bottom. But unfortunately, I think I’ve probably said that in the past. And so I’m not ready to call the bottom out, but I think that we’re very close to it.

Hassan Ahmed

On the polyurethane side of things, obviously, a bunch of questions around trying to sort of forecast demand, obviously, in our industry is always challenging to do. But it seems that the supply side of thing’s easier to forecast, right? So as you sort of sit there and look at polyurethane, sort of cost curves. I mean, in the response to one of your earlier questions, you talked about how margins are same for some of the marginal producers. You guys, yourselves, reported 8% EBITDA margins this quarter.

So I’m just trying to understand the marginal guys presumably are losing money right now. So with the supply looking the way it’s looking, I mean, do you forecast potentially shutdowns, more delays in capacity additions and the like and how will that play out as it pertains to a potential recovery going forward?

Peter Huntsman

I’m not sure that the recovery going forward is going to be dependent on any shutdowns. I am a bit surprised that, that hasn’t happened yet. As I look at the various regions, I look at the U.S. I don’t see a lot of shutdowns of total facilities in the U.S. because the major producers in the U.S. only have one facility. And I don’t see somebody exiting the North American market. And I think the same can be said for China.

Now there are people that are like — that have multiple facilities in China but I personally just don’t see them shutting one of down. They’re very competitive. They start with foam and they work their way through on a competitive set of economics.

Europe, in my opinion, longer term, when I look at the size of the facilities that are in Europe and the number of people that have multiple facilities in Europe, I do question the longer-term viability of some of those assets. But again, I’m not privy to decisions that are made, obviously. In those companies, I don’t know what their economics are. To the degree that they’ve got longer-term contracts with government-assisted money or with unions and so forth, I have no idea what limitations there might be on that. But fundamentally, I think that the industry is shutting down lines more than they’re shutting down facilities. And I think you’re probably going to continue to see that.

Phil Lister

The only supply coming to the market, Hassan, will really be 1 month over the next sort of 4 to 5 years, but there’s nothing else major that’s been announced and if the industry returns to its 4.5%, 5% growth level, then that will have strip supply as a rebound occurs.

Q – Unidentified Analyst

Perfect. And just a follow-up on the raw materials for MDI, besides a well-known increase in benzene prices, can you provide us a little bit with what you are assuming for Q4 in each of the key regions, Europe, China and the U.S. for other key raw materials, chlorine, et cetera?

Phil Lister

Yes. I think we said — so we outlined benzene, we outlined natural gas was headed in Europe intended to 15. Chlorine caustic under a little bit of downward pressure overall, so we built that in. This will remain I think — which are the two main raw materials, although they still represent a minority of Advanced Materials is coming off as well.

And then you’ve got ammonia, which is obviously a big raw material into Performance Products, which has been moving upwards. It moved down throughout the year, but it’s been moving upwards. That also impacts Polyurethanes in nitric — into nitric acid. So that’s the way to think about our raw material base pending still remains the biggest raw material that we purchase globally.

Peter Huntsman

And certainly, the most volatile — a lot of those products that Phil just mentioned on longer-term contracts or pass-through contracts with natural gas and so forth.

Matthew Blair

Peter, so it’s obviously a tough market, but your prepared comments did mention that building solutions volumes were up both quarter-over-quarter as well as year-over-year. So I don’t know that seems encouraging in the tough construction market. Should that be the read-through for investors? And do you have any more color here? And also, is this because you’re gaining share in the spray foam market or are there other dynamics at play?

Peter Huntsman

Well, a couple of things. First of all, last year, third quarter was a pretty tough year. I mean, it was a low point, I think, as we look at the overall business. But as you look at the third quarter, we’re up 2% from — versus the prior quarter. We’re up 10% a year ago.

If you look at some of our other products like the composite wood products and so forth, as we look at the order patterns thus far into fourth quarter, and I don’t want to get ahead of myself, but we’re seeing a positive year-on-year comparison there. And that’s the first time we’ve seen a positive comparison there for probably over a year on a quarterly basis.

So again, I’m not — I don’t want to get overly encouraged by this, but these are signs you first have to hit the bottom, and then you’re going to see a bounce back. So as I look at things from where we are in the third quarter, I think there’s some positive signs I’m seeing in HBS and the building solutions, all around in — areas around our total insulation business. From the prior quarter, it was up 3%.

From a year ago and again, this isn’t just spray foam. This is our installation that goes into rigid panels, construction panels and so forth, we’re down 4% over a year ago but up 3% sequentially. So starting to see, I think, signs that we’re hitting the bottom in some of these areas, and I’d like to think that we’re recovering in others of them.

So I would take those as — we call them green shoots, but I think it’s a tired metaphor because we’ve used it now the course in — and we haven’t seen much more than green shoots. But no, I think there’s probably more of those we see today than we did certainly a quarter ago.

https://seekingalpha.com/article/4646038-huntsman-corporation-hun-q3-2023-earnings-call-transcript?mailingid=33221649&messageid=2800&serial=33221649.759

November 1, 2023

Urethane Highlights from Covestro’s Investors Call

Covestro AG (CVVTF) Q3 2023 Earnings Call Transcript

Oct. 27, 2023 4:24 PM ETCovestro AG (CVVTF), COVTY

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Covestro AG (OTCPK:CVVTF) Q3 2023 Earnings Conference Call October 27, 2023 9:30 AM ET

Company Participants

Ronald Koehler – Head, IR

Markus Steilemann – CEO

Christian Baier – CFO

Markus Steilemann

After these encouraging news, let us now come to the highlights of the last quarter. On the next page, you see the overall economic situation has not improved during the last quarter. Low demand and industry-wide price pressure as a result of oversupply across many core products are still ongoing.

With that, in the normal pass-through mechanism of lower raw material costs, our sales were significantly down year-on-year to €3.6 billion. In line with our guidance, we achieved a third quarter EBITDA of €277 million. Free operating cash flow strongly improved in the third quarter 2023 and came out at €308 million. This was supported by our ongoing stringent working capital management. As usually, with our Q3 results, we are narrowing our guidance range for the full year 2023.

Before ending on the highlights, let me briefly address the ADNOC situation. On September 8th, we announced to enter into open-ended discussions with Abu Dhabi National Oil Company. We are pursuing these discussions in good faith, open-minded, and in the interest of our shareholders and all other stakeholders.

We remain fully compliant in our communication approach and will only comment on the progress of the negotiations, if required by the European Market Abuse Regulation. As that is currently not the case we will refrain from any additional comments regarding the ADNOC topic.

Let’s move to the next page. Despite the still economically challenging times, we keep investing into the growth of our business. In the second quarter 2022, we presented to you our investment plans for our solutions and specialties entities Elastomers and Coatings and Adhesives.

A little more than one year later and exactly on time and on budget, I have the great pleasure to announce the completion and soon start of operation of both expansions. The first ramp-up was done early Q3 with the new elastomer production line in our integrated site in Shanghai. This plant and its products will especially serve renewable energy markets like wind energy and solar panels and also heavy-duty applications. In line with our strategy, the business unit elastomers will continue to regionally enlarge its production footprint.

In our business entity Coatings and Adhesives, the investments in two plants for polyester resins and polyurethane dispersions reached the milestone of full mechanical completion.

Now, further work is ongoing to get the plan to the ramp-up phase in the first quarter 2024. This is the first plant that has been constructed in a modular way in line with our build faster and cheaper program, underlining our cost-leading asset structure.

The products coming from these units are supporting the profitable growth of our CA business in a variety of products, catering for the automotive, construction, sports, and leisure as well as furniture industry.

Let’s now turn to the next page. Coming now to the volume development in the third quarter of 2023. Year-on-year, the global sales volume decreased by 3.8%. This was caused by ongoing demand weakness across all regions and limitations in our internal availability.

However, the rate of decline is now smaller compared to the previous quarters. As a reminder, first quarter was down by 17% and second quarter by 8% year-on-year. We still expect a positive low single-digit year-on-year growth in the fourth quarter.

Historically, a volume turnaround has always been followed by an improvement in margins, at least with a certain time lag. Auto remains on a growth path, still benefiting from a healthy order book. After five quarters of declining volumes in furniture, the sector turned around in the third quarter with mid-single-digit growth.

Also, Electronics developed flattish after four quarters of decline. The weakest sector remains construction.

Looking into the different regions, and large showed a return to growth path with increases in three of four industries important to Covestro after we partially solved the limitation on our internal chlorine supply.

As a result of the low comparison base furniture stands out with significant increase, whereas construction and auto showed a slight increase. Electrode was still slightly declining.

Sales volumes in North America also increased slightly across the two industries, electro and auto. Furniture showed a flattish development, but construction witnessed an ongoing significant decline.

After the positive volume development in Asia-Pacific in the second quarter, based on a low comparison basis from the COVID lockdowns last year, growth rates have normalized. Furniture and auto now exhibited slight growth and electrode showed a flattish development. Construction was still affected by a significant decline.

Markus Steilemann

Yes. Thanks Christian. And we are now coming on the next page to the outlook for Covestro’s core industries, and we’re now on Page number 13 of the presentation. The global GDP expectation has been almost flat since our last review and is estimated to be 2.5%.

Sadly, this flattish development does not hold true for most of the industry is important to Covestro. Only automotive is experiencing a positive volume growth, and this trend is continuing with an improved outlook of 7.9% now. The sub-category of EV or battery electric vehicles is against this trend experiencing a slight downgrade of 7.2 percentage points in growth, expecting now 35.3%.

This is still above any other growth rate we currently see in our core industries. The outlook for the construction industry has deteriorated further to minus 2.2% and residential construction has lost more than 4 percentage points in growth down to minus 4.3%. The reason for this trend are well known. High interest rates and high cost of building materials. Also, the furniture industry is seeing a reasonably accelerated negative trend with an expected second year of declining markets between 4% and 5%.

Only the demand outlook for Electro is seeing a flattish development as 0.4% can hardly be counted as growth. Here, the appliance sector is against the trend seeing an upgrade in its growth projections and is expected to show an increase of almost 8%.

Summarizing the data we can see that the development of most of our industries has significant room for improvement. This underlines our own evaluation of the current market conditions that a turn to a positive development is currently still not foreseeable near-term.

With this, let us now turn to the Covestro outlook for the full year 2023. As explained in the outlook for our core industries, there is no substantial indication of a short-term improved — improvement of the economic environment. We expect the ongoing demand weakness to continue at least for the remainder of the year.

Christian Baier

Yes. Thank you, Markus, and Christian, thank you for the welcome. Look forward to our future interactions. With respect to the topic of debt refinancing, we are obviously looking at various products that we’re having. At the moment, there is very significant cash that we have out, especially when we look at the bond maturing in the next year, we are talking about interest rates of below 2%.

In the current market where we are a couple of percentage points higher, we will certainly be very flexible to use available funds but also tap other sources of financing. As just recently, we have tapped the European Investment Bank for a very strong loan facility that we got there. So, we remain active in the capital markets in order to really look at what is the best solution at the time at hand with having a very broad spectrum of tools that are always available to us also in the current markets without the significant increases in the interest rates.

Jaideep Pandya

Yes. hello. I hope you can hear me. My first question really is around — my first question is around the €3 billion investment on the MDI project. I know, Markus, you’ve mentioned about ADNOC. I won’t make you very uncomfortable. But obviously, this is a topic which is very strategic for Covestro.

So, could you just give us some sort of information about how are you tackling this in the light of your discussions with a low in the sense? Is this on the table and being reviewed in totality? Or is this actually off the table because you have taken the project off the table. That’s my first question.

The second question goes back to — it’s sort of tied to the first question. It goes back to your point about €1 billion EBITDA growth even at current margins, 20% volume growth, so how do we get that to the €2.8 billion? Would the €800 million really have to come from improvement in spreads? And what sort of spread improvement that sort of quantifies — if you could just give us some color with regards to that?

And then the final question really is around the competitive landscape. I assume that your availability improves next year and you would like to take back some share presumably in and in MDI from the chlorine issue that you had. Key competitor in China is increasing capacity quite aggressively.

So, could you tell us like in a backdrop of low volume growth next year how do you see the competitive behavior? I mean are you willing to go a bit aggressive on pricing to get back to share? Or are you going to defend pricing as well? Thanks a lot.

Markus Steilemann

Yes, Jaideep. Thank you so much for your questions. Let me start with the first one. And that is totally unrelated to ongoing open-ended discussions with ADNOC. It is just a general explanation of the rationale to invest in MDI.

And maybe one, if you allow minor correction, we’re not talking about a €3 billion investment but the investment costs are rather around €2 billion, depending on where you invest, maybe slightly lower, maybe slightly higher and also depending on how you invest.

That means the way how you construct the plant might also have a significant impact about the total cost of the plant. So, long story short, the number is rather around €2 billion and not in the order of magnitude of €3 billion.

So, having said that, the decision to pause an MDI investment was not driven by financial means. It was driven by the current, let’s say, short-term, at least turbulent market dynamics in the MDI market and also the worries that we already could foresee in the current construction market.

We know that mid to long-term MDI is still in high demand, and it is still the best raw material for insulation panels for commercial as well, sorry, for commercial and residential buildings.

But we also have to very carefully assess when that growth is, let’s say, kicking in. And as we currently see the construction market is under big pressure. The construction market worries us a little bit at current times.

And from that perspective, I think it was a wise decision not to go for the respective MDI construction at the time when we had it on the table because it would have just further increased the price pressure on MDI and in the MDI markets.

So, from that perspective, I would say we are currently once again assessing when is the right moment in time to invest and we will let you know as soon as possible when we have taken the decision.

If you look at the supply/demand balance, last sentence to this, we see that there is actually towards the end of the 2020s, beginning of 30s, no additional supply capacity coming.

And from that perspective, we think at the right moment in time to once again go back to that investment decision is coming soon. Was that in terms of the €1 billion related or, let’s say, with the way to the €2.8 billion, I would actually hand over to Christian. Christian?

Markus Steilemann

Thanks. And Jaideep, to your next question about — yes, you called it market share, you adopt name drop words like price war. I think what is important that this 20% is an average number and an average global number. And that is important. Why? Because it is not only MDI and TDI, where we try to gain market share back it is also other products where we see significant room in increased asset utilization also in the Solutions and Specialty area, not to that same extent. But to, I would say, still reasonably high extent that would also contribute and help us to get back to higher volumes out of existing assets.

Secondly, at least from our perspective, Wanhua has always been a return-driven competitor who behaved very logical.

Thirdly, we believe that there is first signs of growth opportunities, at least from the second half of next year. And we must also not underestimate that, let’s say, if I may say, so the leading docs on the place are not directly getting into an infight, but there’s still a smaller docs, let’s say, in the backyard, which also produced at much higher cost than we do. So, there’s also an opportunity for us to gain market share, whilst at the same time, not getting heads on with one of the largest players in this market.

Fourthly, Wanhua has currently its largest asset base in China. And we know that many customers are looking at us, particularly in Europe and would love to have more material from us. And we have, in Europe, cost competitive assets compared to imports from Asia-Pacific, so landed costs.

And so from that perspective, overall, we believe there is sufficient room to sell out our fully running assets, particularly but not limited to Europe. Particularly in the — but not limited to the MDI as well as TDI space without entering to a price war. I hope that gives you some flavor.

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November 1, 2023

Urethane Highlights from BASF Investors Call

BASF SE (BASFY) Q3 2023 Earnings Call Transcript

Oct. 31, 2023 10:56 AM ETBASF SE (BASFY), BFFAF

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141.27K Followers

BASF SE (OTCQX:BASFY) Q3 2023 Earnings Conference Call October 31, 2023 6:00 AM ET

Company Participants

Stefanie Wettberg – SVP, Investor Relations

Martin Brudermüller – Chairman

Dirk Elvermann – CFO

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. 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.

Dirk Elvermann

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.

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.

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. 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 polyurethane, 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 side 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 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.

Sam Perry

Hi, thanks for taking my questions. Two, please. Firstly, on inventories. You are around €1 billion lower than at the end of 2022. How much of that is a function of reducing your own volumes of inventory and how much mark-to-market for lower prices? And how much scope do you have to reduce this further by the year end?

Dirk Elvermann

Yes, thanks. Maybe I’ll start with the inventory question. So, we have it both. We have a significant portion in the inventory volume. So, the OIVs. We also have certainly, back wind 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 €10 billion and still able to generate EBITDA at a level of €10 billion to €11 billion. And I think this indicates now we’re currently sitting at €15.1 billion, that there is still room for improvement and we will vigorously continue with that. Yes, over to Martin.

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