Urethane Highlights from BASF Investors Call
BASF SE’s (BASFY) CEO Martin Brudermüller on Q3 2021 Results – Earnings Call Transcript
BASF SE (OTCQX:BASFY) Q3 2021 Earnings Conference Call October 27, 2021 4:00 AM ET
Stefanie Wettberg – Investor Relations
Martin Brudermüller – Chairman of the Board of Executive Directors
Hans Engel – Chief Financial Officer
Good morning ladies and gentlemen. Thank you for joining us today. I would like to begin with the highlights of the third quarter of 2021. Demand remained solid over the summer, enabling us to continue to grow profitably. Compared with the third quarter of 2020, we increased prices by 36% and volumes by 6%. Increases were realized especially in the Chemicals, Materials and Industrial Solutions segments. EBIT before special items rose by around €1.3 billion compared with the weak third quarter of 2020 to reach €1.9 billion. This is also considerably above the pre-pandemic level of €1.1 billion in Q3 2019.
With strong earnings contributions from the Chemicals and Materials segments, the earnings mix in the third quarter of 2021 was comparable with the second quarter of 2021. Overall, margins in the upstream businesses remained at a high level but softened slightly compared with Q2 2021. Our downstream businesses are still confronted with further rising raw material, energy and freight costs. Price increases in most downstream businesses could only partially offset these higher costs. In addition, higher fixed costs weighed on earnings. The semiconductor shortage severely hampered the global automotive industry in the third quarter. Temporary shutdowns and lower run rates in production have negatively impacted our automotive-related businesses, particularly in the Surface Technologies segment.
At the beginning of the year, LMCA projected global light vehicle production would reach 87.6 million in 2021. In the meantime, LMCA has revised its forecast to 76.7 million units. We do not rule out the production of only 75 million units in 2021. We expect the semiconductor shortage to persist, at least in the first half of 2022. It is interesting to note that the production cuts are predominantly related to vehicles with internal combustion engines and not battery electric vehicles.
Let’s now turn to the macroeconomic data. According to the currently available estimates, global chemical production increased by around 4% in Q3 2021 compared with the prior-year quarter. All regions recorded growth; it was most pronounced in Europe and in Asia excluding China. However, several temporary factors, such as the global semiconductor shortage, hurricanes Ida and Nicholas in the U.S. as well as power cuts in some provinces of China, led to overall lower growth rates compared with Q2 2021. The slowdown was particularly evident at the end of the quarter. With an increase in sales volumes of 6%, BASF Group again grew faster than the global chemical production in Q3 2021.
This slide shows our volume growth by region. Sales volumes are compared with the volumes in the respective prior-year quarters. In Q3 2021, volumes grew considerably in North America and in Europe. The prior-year quarter in these regions was still heavily impacted by pandemic-related restrictions. In Greater China, we recorded a slight volume decline compared with the very strong prior-year quarter, when we had achieved growth of 17%. The volume decline was almost entirely due to lower volumes in our mobile emissions catalysts business in Greater China associated with the decrease in automotive production. In Q3 2020, the introduction of China 6 emission standards for light-duty vehicles had supported volume growth.
Let’s move on to the volume development by segment. In the third quarter of 2021, we increased volumes in all our segments, except for Surface Technologies. The automotive industry, which is currently strongly affected by the semiconductor shortage, is the dominating customer sector for this segment. The volume growth was most pronounced in the Chemicals, Industrial Solutions and Materials segments. Volumes in Nutrition and Care and Agricultural Solutions grew by around €100 million each. Overall, volumes increased by 6% or €872 million in absolute terms compared with the prior-year quarter.
We now look at our sales development compared with the third quarter of 2020. Sales of BASF Group increased by €5.9 billion to €19.7 billion. Considerably higher prices and volumes were the main drivers for this. In total, organic sales growth amounted to 42% compared with the prior-year quarter, which was weak due to the pandemic. Currency effects of plus 1% were mainly related to Asian currencies. Portfolio effects influenced sales by minus 1%; they mainly resulted from the sale of the pigments business.
This slide shows the growth in EBIT before special items by segment. As already mentioned, we achieved considerably higher earnings in the Chemicals, Materials and Industrial Solutions segments. In the downstream businesses, price increases were not yet sufficient to compensate for the higher raw materials, energy and freight costs.
Compared with Q3 2020 EBIT before special items in above improved considerably. This was mainly due to the adjustments of bonus provisions as they were allocated to the divisions.
I will now provide you with further details regarding the unsatisfying earnings development in some of our downstream businesses. In the Surface Technology segment, we were confronted this the unexpectedly low demand from the automotive industry. According to LMCA global light vehicle production declined by 16% compared with the prior year quarter. Despite lower automotive volumes, sales in Surface Technology increased on account of higher prices. These price increases were mainly related to the precious metal trading and mobile emission catalyst businesses.
EBIT before special items declined due to significantly lower earnings in the Coatings division. Higher fixed cost and increasing raw material prices could only partially be passed on in such a deteriorating OEM business environment. The Catalyst division was able to slightly increase EBIT before special items on account of higher margins. These resulted from among other things, a favorable product mix. In the nutrition and care segment sales increased because of higher volumes in both divisions and price increases in the Care Chemicals division. By contrast prices were flat in Nutrition and Health. EBIT before special items declined to significantly higher or increased raw material, energy and freight costs, which could only be partially passed onto customers, as well as higher fixed cost.
Let me also address an underlying challenge in our Nutrition and Health division. Our Vitamin A plant expansion successfully came onstream in late summer. Still, we are struggling with the production challenges for Vitamin A 1000 since the ramp up of the animal nutrition formulation plant is ongoing. No commercial volumes from this formulation plant are available due to time needed to ensure stable operations. Therefore, we expect to be volume restricted for several months to come with a step-wise return into the market.
The Agricultural Solutions segment was severely hit by supply constraints in combination with higher input factor cost two to various shortages. Nevertheless, sales increased compared with the prior year quarter, mainly in the seed and traits business in South America and the fungicide business in Europe and South America.
EBIT before special items decreased on account of considerably higher fixed costs among other things to a higher bonus provision, as well as higher raw material and logistic costs and an unfavorable product mix. The higher costs could only partially be passed on to customers since prices had mostly been negotiated prior to the season.
Since we are currently receiving a lot of questions about the impact of recent natural gas price developments, I would like to provide you with further information on this topic. As a result of the strong economic recovery, overall lower gas production rates and comparably low gas storage levels, gas prices in Europe increased significantly, reaching a historical peak in October 2021.
In Europe, we require most gas for our Verbund site in Ludwigshafen. Our second-largest gas consumer is the Verbund site in Antwerp. We use gas to produce electricity and steam in our combined heat and power plants. Furthermore, gas is used as a feedstock to produce, for example, ammonia, acetylene and hydrogen. As you might have read, we recently had to curtail our ammonia production in Antwerp and Ludwigshafen. Due to the recent rise of natural gas prices in Europe, the economics for operating ammonia plants in the region have become very challenging.
To secure our natural gas supply, we have long-term supply contracts with different suppliers in place. The pricing is predominantly based on spot prices. Part of our gas price exposure in Europe is compensated via our shareholding in Wintershall Dea. The remaining exposure is partly hedged through financial instruments. For our European sites, the additional costs due to higher natural gas prices amounted to around €600 million in the first nine months of 2021, with a significant increase expected following the price hike in October. At BASF Group level, this amount is partly mitigated by the above-mentioned measures.
Yes. Thank you, Stefanie. Good morning, Martin and Hans. Two questions please. First what if any sickness are you getting from your key automotive customers in terms of production plans heading into 2022? And then the second question do your own assets face any noteworthy logistics or supply challenges at this point in time? Thank you.
Christian, good morning. I mean the sickness we get from the OEM producers is actually they live from hand to mouth when it comes to semiconductors. There’s every week, they basically decide on the availability of the semiconductors, what the next week’s production is. That is also why short work schemes has partly come up again. We feel that most prominently and directly in the coatings business, because some of the OEMs have actually produced costs where you let components. They are actually on the yard and they to be completed, but you cannot produce a car without painting it. That is why we have a pretty good sensor here.
So what you hear from that it’s connected to two or three incidents, you know that, I mean, it is the overwhelming demand, which is also coming with all the devices you need for teach realization. So semiconductors as such are short I think they all work on capacity expansions, which you also know that takes two, three years. So that is not a long time since that became evident after the recovery. And then there were also two outages, actually the one in Malaysia, which was related to COVID, which are basic chips almost in all the costs really hamper their production.
So overall, I think the good thing is Christian, the demand for cost is very high. Every car that is produced is sold. Actually, they could sell much, many more costs than they actually produce. So we take – we think that takes a little bit until maybe mid of the year, slowly easing step for step. But that is something where you have to be really well connected. This the customer, it’s not overall totally depressive, but I think the hopes that this year we’ll have significantly production increases towards 2020 were not fulfilled. We will be about the level of that and then slowly coming up in 2022.
Christian, this is Hans. Thanks for your question on the supply chain challenges. I mean I could start with the beginning of the year, the freeze of the U.S. Gulf Coast continue with the Suez channel go to the closures COVID-related of Chinese ports on the East Coast congestion at the U.S. Pacific course I could go on and on through the hurricanes Ida and Nicholas in there. So this is a continuous challenge that we are facing and this may be the wrong place, but it’s maybe the right time to say a big thank you to the BASF team how we’ve handled and the team has handled the entire situation.
Are we affected? Yes, we are affected. The – it just give you one idea. The freeze on the U.S. Gulf Coast has led to shut-ins of chlorine plants. And these – the issue is will that continue have an impact on isocyanate production in the U.S. force majeure as a result of that declared and still ongoing we have a number of force majeure situations due to supply chain issues that unfortunately our customers are very much aware of we’re doing what we can, has this led to situations where we had to shut down production, actually not really.
So we were able to cope and manage, but it has clearly an impact on the business. But it’s a situation that to a certain extent when we saw what happened, how quick the demand came back that we – I don’t want to say had expected, but something that to a certain extent we had at least foreseen going back to the year 2020, sorry, 2010, when due to increased demand there, we’ve seen lots of similar issues can prepare for them, can only try to handle them in the best possible way and that’s what we’re trying to do.
Yes. Thanks, Stefanie. Morning, Martin and Hans. Couple of questions. First one was on energy costs. My rather rudimentary back of the envelope gave me a much bigger number than the energy inflation you pointed to in the slides. So my question is to what extent has hedging protected you so far? And is there a broad guidance you could give for 2022 on energy costs, if we just assume spot persist with – which I get may not happen. So that’s the first question, a rough guidance on current sensitivities.
And the second question is more broad brushed around China. I saw at the weekend, the Chinese government or the NDRC most specifically put out some targets for closures across the petrochemicals industry. I just wanted what your first thoughts are on this policy. Thank you.
Thanks, Andrew for the question. Rough guidance on energy cost that’s actually a good one. So what have we provided you with, we have provided you with the $600 million in additional costs that only relate to European gas purchases. So that’s what we’ve given you, you’re right. In total, when we look at the situation, the cost impact is obviously on the energy side, but also if I go broader on the raw materials side much higher than that. If I look at raw materials in total and I only compare Q3 this year with Q3 last year, and this is only the price impact, and there’s about $2 billion price impact in other words, cost impact if you leave raw material volume at the same level that comes here from prices that puts a lot of pressure obviously on the system, but also in all businesses, because clear expectation is that these prices are passed on.
With respect to Q4, they’re giving guidance is extremely difficult. Coming back to natural gas prices in Europe, you’ve seen natural gas prices in Europe during the course of this month spot prices at levels of €140, €150 per megawatt hour. Currently, we’re sitting at a level of €88 per megawatt hour, so significant decline. But this is 6 to 7 times if I think back 6 to 7 times where we were in the beginning of this year. So due to the volatility please understand that I can’t give you specific guidance. It is a very interesting situation that we are in, that we have to cope with. There’s a significant cost pressure coming from raw materials in general, natural gas in particular and with that energy and it’s also clearly reflected in the results, but so far if you look at Q3 earnings as I said, we’re able to cope with it.
Andrew, I’m not totally sure of what exactly you mean, whether this is the energy related topics NDRC communicated, because they communicate continuously comes in…
Yes. Sorry, Martin. Yes, it was specific to some of the de-carbonization plants. So they talked about potentially emphasize, potentially closing smaller facilities across China. And it mainly an ethylene and ammonia, but just wondered if you had any thoughts on that.
Yes, yes. This is what I just said this energy intensity. I mean, overall I would say this is a positive development. I actually would also say the energy shortages are to a certain expect extend also a positive sign from China, because we are complaining now, but that is actually also showing that they take CO2 reduction in energy intensity furious. I mean that they shut down partially their industry knowing that goes on cost of GDP, because let’s say the guidelines and the KPIs for energy consumption and they said also for CO2 emissions have actually been overtaking.
I think this is a very good sign. So they go on the energy intensive industries and chemical industry is one of those. And there are tremendous inefficiencies in the chemical production landscape in China. There’s a lot of coal based chemistry. And am I right that actually as one more step built among many to basically go for structural improvement of the chemical industry, that means clustering them shutting down those who are inefficient.
So that is all overall great for us, Andrew, because that is actually bringing the industry benchmark closer to what BASF is anyway doing. I think we showed you also on our capital markets today, how we actually address CO2. And I have to say when we have the new side in Chancheng, there will be a lot of competitors look pretty ugly when it comes to CO2 emissions. And I’m quite sure it will put pressure on them that they have to do something against this. So I like that it’s a little bit similar like we had 10 years ago with EHS where we were operating on a high level and the industry was on much lower level.
Now in the meantime, EHS is a tough issue in China. So they are forced to produce under the same circumstances. And this is, we have a more a global level playing field. So I very much like that. And I would say, we should acknowledge that that China is not only about building coal fired plants, power plants, but also curtailing CO2 and energy intensity.
Good morning. Thanks for squeezing me in. Just wondering on chemicals and materials, can you give us an idea of where current spreads sit right now versus historical averages and, what’s the extent of industry force measures right now as well?
Rob, that’s not so easy to answer for – of the segment as such, because there’s a logic on each and every on the line. But I mean, with many of the key products we are talking about whether this is MDI, whether this is acrylic acid, whether this is BDO. We have far above let’s say last five years average margin. Now, this is what I said at the very beginning. I don’t want to now quantify that, but it is partially significant over the five years average. And this is also, why this cannot be a new normal to slightly come down. It’ll come down with more availability, but I mean, I want to, I really want to make clear that there is not coming a negative tone now, that we run into a disaster with margins upstream, because we just talk about a slight normalization and we will remain also going forward at least for the next more months, we will see on a very attractive level in the upstream business.
So just don’t get that, in the wrong way. And then as this is also the last question, I really would like to use that again to say, you see us here in positive mode, you saw that the guidance was taking up I mean, two years before we now come to a year’s end that we raised this again, significantly besides of the automotive industry, which is a little bit head to mouth and where no one can say actually all the remaining business have strong demand. And we see this all continuing in 2022. And the only question is now to handle a little bit all the shortages everywhere. But I think based on that, it’s more a production and availability topic and not a demand topic.
And I think we should really finish with that few, which is actually a good one. I would be much more conservative with the other way around. And we will certainly then update everything in February when you – give you the final numbers for 2021. And then also give you an outlook that goes a little bit beyond what I said today, but we should now really say we will get that year over and finished in a very good manner. And we will also start in the next year very well. So that’s maybe my final message.
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