BASF SE (BASFY) Q4 2023 Earnings Call Transcript

Feb. 23, 2024 8:33 AM ETBASF SE (BASFY) Stock, BFFAF Stock

Comments

Call Start: 04:30 January 1, 0000 5:40 AM ET

BASF SE (OTCQX:BASFY)

Q4 2023 Earnings Conference Call

February 23, 2024 04:30 ET

Company Participants

Stefanie Wettberg – Investor Relations

Martin Brudermuller – Chairman

Dirk Elvermann – Chief Financial Officer

Martin Brudermuller

Good morning, ladies and gentlemen. Dear gentlemen, I would like to welcome you to our analyst conference call. On January 19, BASF released preliminary figures for the full year of 2023. Today, we will provide you with further details.

Let’s start with the development of chemical production by region. The orange bar in the middle shows the growth for the full year 2023. Based on the available data, global chemical production grew by 1.7% in 2023 on account of growth in China. In 2023, chemical production in China increased considerably compared with the COVID-related low baseline of the prior year. The development there was driven by recovering domestic demand and exports, but was associated with low sales prices. All other regions recorded a decline.

In Europe and in Asia, excluding China, chemical production decreased substantially due to lower demand resulting from high inflation, frontloading of durable goods consumption during the COVID years as well as structurally higher natural gas prices. In 2023, natural gas prices in Europe were still around double the average between 2019 and 2021 and 5x higher than the Henry Hub quotation.

In North America, chemical production declined slightly compared with 2022 in an environment of weak domestic demand from industries and end consumers. In Q4 2023, global chemical production rose by 6.9%. This was a considerable increase mainly stemming from strong contribution from China. However, North America, Europe and Asia, excluding China, also grew slightly compared with the very weak prior year quarter. We now move on to BASF’s performance in the fourth quarter.

Overall, BASF group sales declined by 18% to around €16 billion in Q4 2023. This was mainly due to lower prices, which decreased across all segments because of subdued demand and in line with lower raw material prices. Currency headwinds also had a negative impact on sales. Sales volumes, however, remained almost stable. Excluding precious metals, BASF sales volumes increased by 2.6% compared with the prior year quarter. This confirms the bottoming out of the volume decline, which we had predicted in our analyst conference calls in the second half of 2023. EBIT before special items declined by €81 million and amounted to €292 million in Q4 2023. Higher earnings in the Industrial Solutions, Nutrition & Care, Surface Technologies and Materials segments could only partially compensate for lower contributions from Agricultural Solutions, Chemicals and other.

Today, I would like to additionally comment on our earnings performance by region. In 2023, an extremely difficult market environment with low demand, EBIT before special items declined by double-digit percentage in all regions. However, our teams delivered a positive earnings contribution in absolute terms in all significant countries with the exemption of Germany. Results in Germany suffered due to a substantially negative earnings at our largest production site in Ludwigshafen. On the other hand, this situation demonstrates the high competitiveness and under challenging conditions at the global level. On the other hand, the negative earnings at our Ludwigshafen site show the need for further decisive action here to enhance competitiveness.

At BASF, we have a track record of taking immediate action when we recognize developments that will have a lasting impact on our cost competitiveness. In October 2022, BASF was one of the first chemical companies to initiate a significant cost savings program to address the deteriorating competitiveness in Europe and Germany, in particular. This was done mainly in view of the significant increases in electricity and natural gas prices.

Consequently, in February 2023, we launched a set of measures to save costs in non-production areas in Europe and to adapt production structures at the Ludwigshafen site. As confirmed in our Q3 2023 reporting, total annual cost savings from all the measures announced to-date are expected to reach €1.1 billion by the end of 2026. At the end of 2023, we already achieved an annual cost reduction run-rate of around €0.6 billion from these measures. Onetime costs amounted to around €0.4 billion in 2023, which explains the limited P&L impact so far.

In the course of 2023, earnings of our largest product site in Ludwigshafen deteriorated further in an extremely weak market environment. There are two main reasons for that: first, the temporary low demand environment, which is affecting the volume development in both our upstream and our downstream businesses; and second, higher production costs due to structurally higher energy prices, which predominantly burden our upstream business.

The Board of Executive Directors is fully aware of the significant restructuring, cost reductions and efficiency improvements that our BASF team has implemented over the recent years, especially in Ludwigshafen. However, we must also acknowledge that the framework conditions continuing to be challenging, particularly for the upstream businesses in Germany. And these conditions are not expected to improve anytime soon because they have become structural.

To restore and defend our international competitiveness, we must rigorously address these new market realities. Therefore, we have decided to introduce additional measures to adapt the cost structures at our Ludwigshafen site. We aim to reduce costs annually by a further €1 billion by the end of 2026. The program will generate cost savings in both production as well as in non-production areas. It will include further reducing fixed costs by driving efficiency in company structures, adapting production capacities to market needs, and significantly trimming variable costs by redesigning processes.

The situation is serious, so we are explicitly not rule out any measures. The program will also lead to further job cuts. As usual, we will involve employee representatives regarding the various measures that will be further detailed in the coming months. The measures already announced in October 2022 and February 2023 will achieve another €0.5 billion in annual cost savings by the end of 2006. The total one-time costs for these measures as well as for the further program are expected to be up to €1.8 billion.

Besides the required cost reductions, we will do everything possible to increase the utilization rate of our competitive assets to bring them back to normal levels. In doing so, we aim to generate additional contribution margins to return to solid earnings at the Ludwigshafen site. This applies particularly to our upstream assets in the Chemicals and Materials segments, where plants require constantly high utilization rates of 80% to 90% to achieve industry typical earnings.

Currently, we are operating with utilization rates considerably below normal levels at the Ludwigshafen site. The low level of global market demand we are experiencing at the moment will, however, not continue over the long run. Sooner or later, customers will increase their orders again and markets will normalize. We at BASF will be ready to serve the increasing demand from our customers and earnings contributions will improve accordingly.

Historical data show that even under price pressure, such as step-up in utilization rates, will quickly lead to an increase in contribution margins. The chemical industry will be the first to benefit from reviving demand since we supply materials to the manufacturing industries at the beginning of almost all value chains. In parallel to the short-term program announced today, Marcus Kamit and the new Board team will update the longer term positioning of the Ludwigshafen site. This will reflect both the regulatory framework and the changed market realities in Europe and Germany. The target picture will give a clear strategic direction for the structural development and will set ambitious profitability targets.

The Board will provide details in the second half of 2024. What is undisputed is that the Board team stays strongly committed to the Ludwigshafen site. We want to develop Ludwigshafen into a leading low CO2 emission chemical production site with high profitability and sustainability. We will focus Ludwigshafen on supplying the European market to remain the partner of choice for our customers. To achieve this, it is essential that we implement the program consistently and as quick as possible. At the same time, we are systematically driving forward our business in those regions of the world that are growing more dynamically and offer attractive conditions for investments.

https://seekingalpha.com/article/4672905-basf-se-basfy-q4-2023-earnings-call-transcript?mailingid=34449244&messageid=2800&serial=34449244.744