BASF SE (BASFY) Q2 2024 Earnings Call Transcript

Jul. 26, 2024 3:52 PM ETBASF SE (BASFY) Stock, BFFAF Stock

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BASF SE (OTCQX:BASFY) Q2 2024 Results Conference Call July 26, 2024 2:30 AM ET

Company Participants

Stefanie Wettberg – Senior Vice President of Investor Relations
Markus Kamieth – CEO & Chairman of the Board of Executive Directors
Dirk Elvermann – Member of the Board of Executive Directors, CFO & Chief Digital Officer

Markus Kamieth

Yes. Thanks, Stefie. Good morning, ladies and gentlemen. Dirk and I welcome you to our analyst conference call. And it’s my first one since taking over as the Chairman at the end of April. And I’m really looking forward to many more of those calls and our discussions about BASF.

And you might have seen that something’s changed, some things stay the same. The music, at least, we have not changed while you were in the waiting line.

We will provide you with details on our business development in the second quarter, and we will highlight some notable aspects today.

Let’s start with an overview slide. Overall, the development of EBITDA before special items in Q2 was in line with our expectations and the analyst consensus. We saw a continuation of the dynamics of the first quarter marked by positive volume momentum across most of our businesses.

At BASF Group level, volumes, excluding precious and base metals, increased by 2.4% compared with Q2 2023. Sales declined by 7% to €16.1 billion, mainly due to lower prices. However, price pressure has eased.

We achieved an EBITDA before special items of €2 billion, which is at prior year quarter level.

Overall, stronger earnings in our Chemical businesses were offset by considerably lower earnings in the Agricultural Solutions segment due to a difficult market environment.

Here is a snapshot of how the markets and our segment volumes and specific margins developed in the second quarter. In a slightly improving market environment for base chemicals, we were able to realize strong volume growth in both divisions in the Chemicals segment. EBITDA before special items increased considerably despite slightly lower segment margins due to a margin decline in the Intermediates division.

In the Petrochemicals division, margins improved due to temporary supply constraints at competitors.

The Materials segment benefited from slightly higher volumes, particularly in Performance Materials in an overall improving market. A considerable increase in margins was largely driven by a few product lines in the Monomers division, especially in the ammonia value chain.

Industrial Solutions operated in an overall stable market environment. Nonetheless, both divisions achieved considerable volume growth and margin expansion. In particular, our Dispersions & Resins division contributed to the strong performance of the segment.

The global automotive production was basically flat in the second quarter. In this environment, volumes in our Surface Technologies segment had a considerable negative impact on EBITDA before special items. In particular, Environmental Catalyst and Metal Solutions recorded lower volumes. Overall, margins improved mainly due to a continued strong performance of our Coatings division.

The market environment for Nutrition & Care further improved in the quarter. The considerable increase in EBITDA before special items compared with the prior year quarter was supported by higher volumes in both divisions as well as margin expansion. In particular, in our personal care specialties and vitamins businesses.

The crop protection market is characterized by continued destocking and faced adverse weather conditions that negatively affected business development in our Agricultural Solutions segment. The segment’s EBITDA before special items was negatively impacted by considerably lower volumes and margins.

The factors I have just described led to the following developments in EBITDA before special items compared with the prior year quarter. Despite the considerably lower earnings in Agricultural Solutions segment, EBITDA before special items of BASF Group was at the prior year quarter level. While the Materials and the Surface Technologies segments recorded slightly lower earnings, we were able to increase EBITDA before special items considerably in the Industrial Solutions, Chemicals and Nutrition & Care segments as well as in Other.

Christian Kepler

All right, good. To Markus, well done for your first official analyst call. Two questions, please. First of all, what is your current order book visibility in your more traditional Chemical activities? Would it be fair to assume 4 to 6 weeks? And what kind of demand trends do you see at present in automotive, construction and electronics out of this order book? And then I’ll come back with the second question.

Markus Kamieth

Yes. Thanks, Christian. Analyst call is not over yet, so let’s wait, I would guess. So overall, I think the current order book visibility is tough to always put one number in there. But it hasn’t changed dramatically. It has been shorter than historically visible already for quite some time, and I would say 4 to 6 weeks is probably a good guess. Some businesses are a little bit longer, of course, some businesses less. But overall, across our Chemicals business, that’s a pretty good assumption.

I comment a little bit on trends that we see. Currently, I mean, heading into the third quarter, I already said in my speech that the current momentum that we see — that we saw in the second quarter already shapes up to be valid for the third quarter as well. So in most industries, rather sideways movement on demand and that also relates to the segments that you have pointed out.

Automotive has been, for the first half of the year, flat compared to prior year. And we expect the second half to be even a bit more under pressure, so maybe even a slightly lower number compared to last year’s number if you look at the global picture. And this comes with a bit of a conservative look also on the inventory developments in the automotive history, which are increasing, especially in Asia. So a bit of a cautious approach there. Overall, we expect build numbers, automotive, to be in line with last year, roughly around 89 million cars.

Construction overall, also, I would say, unspectacular development right now. A little bit positive developments in the more commercial construction segment, and infrastructure is also doing okay in all regions. But the residential construction market is depressed, especially in Europe and in North America. And here, the high interest rate environment and the inflationary environment certainly are not going away so quickly.

And then electronics, I have to say also, here, this is one of the few exceptions where we see continued good growth, especially in the more — in the semiconductor/chips segment. When you go into the consumer electronics segment, I would say also here, rather a sideways movement because also here we see consumer spending and consumer confidence in most areas not really growing strongly.

Peter Clark

Nice to hear you, Markus. I’ve got one clarification and two questions. The first clarification, in September, we’re going to hear from the divisions as well as the update on Ludwigshafen.

And then the questions you announced the ring-fencing in December. So we’re almost 9 months on from the ring-fencing of the Verbund by the — versus the pure-play business. Just wondering how that’s progressing and we’re still looking at 2026.

And then on the fixed cost performance. Obviously, in the first quarter, I was certainly encouraged that fixed costs pretty much went down in every segment. A couple of segments saw them up. I know the one-off effect is preparing for a shutdown, et cetera. But just getting on top of that fixed cost, again, as we go forward from here and making sure all the divisions or segments start to see them come down.

Markus Kamieth

I’ll try to take the first two questions, but I didn’t quite get the second one, so you might have to help me with that, Peter. So yes, to clarify on the Capital Markets Day, we are going to give you, let’s say, in the keynote strategy update so where the Board sees the priorities for BASF Group going forward, what’s our strategic pathway. We’re going to go into the divisional details — into the segments. And we’re also going to give an update on what we call target picture Ludwigshafen, so basically where we will — how and where we will develop the site towards short term and long term.

The question on the capital market reference to last December, I didn’t quite get that question acoustically. Could you repeat that, please, Peter?

Peter Clark

Yes, the ring-fencing was announced in December last year, obviously, with the target date of ring-fencing Verbund operations from Ag, Coatings, et cetera, by ’26. Just wondering how that’s progressing because we’re 9 months in from that announcement.

Markus Kamieth

Okay. I didn’t quite get that word ring-fencing. That’s a word I would not have used. But anyway, I get your question. Yes, we are well underway with our structural measures. As we have announced, we are in the course of putting our non-Verbund businesses into a more independent structure with regards to legal entities, but also on — in the process environment, IT, for example, putting them on separate SAP instances and so forth. And these projects are all progressing well and in line with our original plan. So no further updates or news there.

Georgina Fraser

I’ve got two questions. The first one is, would you agree that given the weak local demand and a lot of extra capacity that China has been responsible for a lot of the pricing pressure that you’ve seen in the first half of the year and that we might be starting to see a stronger antidumping duty response from other producing regions that are feeling pressure from China. Does your expectation of improving pricing power factor in a tighter global tariff regime? And just any comments that you could give on the impact of possible tariffs for BASF.

And then my second question is a bit more philosophical, and it’s following up on the question that Peter asked about the Verbund. What do you think is the reason that we haven’t seen more recent players in the chemical market, thinking particularly in China and Asia, adopt the same Verbund business model and the reason that some players in regions like the U.S. have been exiting this business model in recent years? Would love to hear your thoughts on that.

Markus Kamieth

Yes, Georgina, thanks for your questions. First of all, I would say that the situation in China certainly has an impact on the overall pricing situation in the world. That is — there’s no question on that because China is by far the largest chemical market in most of the chemical categories that we are looking at here. As you know, we talk always about the overall chemical market, China represents 50%.

And of course, it requires tremendous capacity buildups to continue to support the growth of maybe in the past 5%, 6%, 7% per year in this industry. Now China over the last 3 years has grown lower than expected in GDP, in industrial activity. And that also meant that overcapacity is also in the chemical markets have built up. And these products are looking for a home. And of course, that sets price pressure. There’s export pressure also in all regions impacting pricing.

However, given the size of the Chinese industry, that also can change very quickly because when China’s industrial activity also goes up, domestic manufacturing again strengthens. With currently in 2024 is happening, then this capacity will also be quickly absorbed.

But I would say, overall, you see in especially export markets for China that are easy to reach, Southeast Asia, South Asia, Latin America, where you see particularly strong price pressure coming from the Chinese volume. So I think this is fair.

I cannot talk so specifically to your question on antidumping duty response, it’s a bit hypothetical. I think overall, I have not seen a wave of antidumping tariffs now being applied for, being implemented overall. This is not something that drives our thinking. And that’s certainly also not something we see as a general theme in the industry. There’s always specific cases that you look at where we are also, of course, protecting our interest in the one or the other case. But it’s spotty, it’s not a general broad theme, I think, in the chemical industry.

Your question on the Verbund business model, it’s very difficult to answer, I have to say. Because this word Verbund means a lot and it means a lot of things. And I think our specific setup that we have at our Verbund sites works very well for us. It’s a particular strength for us. And we also build our future view of BASF very much on this strength that we have in the Verbund — at our Verbund sites because it will give us a lot of opportunities, especially in the new regime where the green transformation of the chemical industry will happen over the next 10, 20 years. And this is where Verbund sites, so integrated setups, will play out their particular strength.

So we very much are convinced that for a large part of our portfolio, Verbund or a more specific integrated production setups really make a lot of sense and also in the future will rather gain in competitiveness than the opposite.

So I cannot comment now specifically on why other people chose other different setups, but we feel very comfortable with what we are doing. And as you know, our new site in South China is a very integrated site. And also here, we expect, especially with regards to lowering the carbon footprint, introducing circularity that the Verbund setup will definitely be a strong asset for BASF also in the future.

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