BASF SE (PNK:BASFY) Q1 2024 Earnings Call Transcript

BASF SE (PNK:BASFY) Q1 2024 Earnings Call Transcript April 25, 2024

BASF SE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Stefanie Wettberg: Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the First Quarter 2024 Results. Throughout today’s recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]. This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be actual.

Such risk factors include those discussed in opportunities and risks of the BASF report 2023. BASF does not assume any obligation to update these forward-looking statements contained in this presentation above and beyond the legal requirements. With me on this early morning call today are Martin Brudermuller, Chairman of the Board of Executive Directors; and Dirk Elvermann, Chief Financial Officer. Please be aware that we have already posted the speech on our website at basf.com/Q12024. Now I would like to hand over to Martin Brudermuller.

Martin Brudermuller: Good morning, ladies and gentlemen. Dirk Elvermann and I welcome you to our analyst conference call. Today, we will provide you with details regarding our business development in the first quarter of 2024. Let’s start with the development of chemical production by region. Based on the currently available data, global chemical production grew by 5.4% in Q1 2024 compared with the prior year quarter on account of a strong growth in China. As in previous quarters, the growth in China was driven by recovering domestic demand and exports. However, this volume growth in China was still associated with low sales prices and is influenced by positive base effects. In North America, our chemical production was essentially flat.

While in the European Union, production increased slightly compared with the weak prior year quarter. And in Asia, excluding China, production decreased slightly. To sum up, the volume recovery continued, but slowly this trend is also seen in a sequential comparison as volumes increased slightly in Q1 2024 compared with Q4 2023. Still, we cannot yet confirm a fundamental turnaround in industry dynamics. For this, we will need to see the current positive trend continuing in the coming quarters. We now move on to BASF’s performance in the first quarter of 2024 compared with the previous — the prior year quarter. Overall, BASF Group sales were 12% lower at EUR 17.6 billion. This was mainly due to lower sales prices, which declined across almost all segments.

Prices predominantly decreased on account of lower raw material prices. In Agricultural Solutions, we were able to slightly increase prices. Currency headwinds dampened sales in all divisions. Volumes of BASF Group increased by 0.5%. Excluding pressures and base metals, volume increased by 2.1% compared with the prior year quarter. In terms of earnings development, we had a solid start to the year. EBIT before — EBITDA before special items amounted to EUR 2.7 billion. This is slightly below the figure of the prior year quarter and slightly ahead of analyst consensus. Higher earnings in the Nutrition & Care, Materials, Industrial Solutions and Chemicals segments more than compensated for the decline in other Agricultural Solutions and Service Technologies.

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Q&A Session

Let’s take a closer look at the volume development by segment. Volumes in the Chemicals, Materials, Nutrition & Care and Industrial Solutions segments increased, while Agricultural Solutions and Service Technology recorded a decline. Higher volumes in our upstream businesses led to improved utilization rates at our major plans and positively impacted profitability. Excluding precious and base metals, the Surface Technologies segment recorded a volume decline of only 0.9% on account of the — distribution. Volumes in the Coatings division increased, and Agricultural Solutions volume declined mainly to lower sales of herbicides and fungicides compared with the record prior year quarter. And with that, I hand over to Dirk for more financial information.

Dirk Elvermann: Thank you, Martin. Good morning, ladies and gentlemen. I will now provide you with further financial details for the first quarter of 2024 compared with the prior year quarter. As Martin already mentioned, EBITDA before special items decreased by 5% and amounted to EUR 2.7 billion. EBIT before special items declined by 9% and came in at EUR 1.8 billion. Net income declined by 12% to EUR 1.4 billion. In Q1 2024, the tax rate was 20% compared with 17% in the prior year quarter. Yet as cash flows from operating activities improved by 49% to minus EUR 513 million, free cash flow was minus EUR 1.5 billion compared with minus EUR 1.9 billion in Q1 2023. I will comment on the cash flow development in more detail on one of the next slides.

BASF’s equity ratio remains very solid. It amounted to 47.2% at the end of March 2024. Now let’s take a look at the development of EBITDA before special items by segment compared with the prior year quarter. BASF Group earnings performance was driven, in particular, by the significant decline in earnings and other, which was primarily attributable to higher bonus provisions as well as higher expenses from the long-term incentive program and lower contribution from BASF internal insurance companies. Agricultural Solutions and Surface Technologies also recorded a decline in EBITDA before special items. In Agricultural Solutions, this was mainly due to lower volumes. The decline in earnings in the Surface Technologies segment was due to lower precious metal prices in the Catalysts division.

This was partially offset by the increase in earnings in the Coatings division. All other segments, Nutrition & Care, Materials, Industrial Solutions and Chemicals, increased EBITDA before special items, in some cases, significantly mainly due to fixed cost reductions and higher contribution margins predominantly driven by higher volumes. For a detailed explanation of the earnings development by segment, please refer to BASF’s quarterly statement Q1 2024 published this morning. I will now continue with more detail on our cash flow development. In the first quarter of 2024, cash flows from operating activities improved by EUR 502 million to minus EUR 530 million. Changes in net working capital led to a cash outflow of EUR 3.2 billion compared with a cash outflow of EUR 3.6 billion in the prior year quarter.

This positive development was due to lower payments from declining accounts payable. Change in inventories were almost stable. Overall, this, once again, demonstrates our strong focus on inventory management and cash generation. Compared with the prior year quarter, payments made for property, plant and equipment and intangible assets rose by 9% to EUR 943 million. This increase was mainly attributable to the construction of our new Verbund site in South China. In Q1 2024, the free cash flow improved by EUR 426 million to minus EUR 1.5 billion. Typically, BASF’s free cash flow is negative in Q1 and recovered in the course of the year. This is mainly due to the seasonality of the cash flows from operating activities in our Agricultural Solutions business.

Let’s now turn to our balance sheet at the end of March 2024 compared with year-end 2023. Total assets amounted to EUR 81.7 billion. This is an increase of EUR 4.3 billion, mostly on account of higher current assets, which increased by EUR 3.4 billion. This increase is mainly attributable to the previously mentioned seasonality of our businesses particularly in the Agricultural Solutions segment, which resulted in higher trade accounts receivable compared with year-end 2023. Higher additions to property, plant and equipment were the main driver for the slight increase in noncurrent assets compared with year-end 2023. Net debt increased to EUR 18.2 billion at the end of March 2024 compared with EUR 16.6 billion at the end of December 2023. At 47.2%, our equity ratio at the end of March ’24 was at the same level as our year-end 2023.

And with that, back to you, Martin.

Martin Brudermuller: Thank you, Dirk. Now I will conclude with the outlook. BASF outlook for 2024 and the underlying assumptions remain unchanged. As published in the BASF report 2023, we expect BASF Group’s EBITDA before special items to rise to between EUR 8.0 billion and EUR 8.6 billion in 2024. Our forecast for BASF Group’s free cash flow is between EUR 0.1 billion and EUR 0.6 billion. This is based on expected cash flows from operating activities of between EUR 6.6 billion and EUR 7.1 billion minus expected payments made for tangible assets and property plant and equipment in the amount of EUR 6.5 billion. CO2 emissions are expected to be between 16.7 million — billion — million tonnes and 17.7 million metric tons in 2024.

We anticipate additional emissions compared with the previous year from higher production volumes based on rising demand. We will counteract this increase with targeted emission reduction measures. Thank you. And now I’m glad to your questions.

A – Stefanie Wettberg: Yes, ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions]. The first question will be from Sam Perry, UBS. We will then have Christian Faitz and then Matthew Yates. Sam, UBS, please go ahead.

Samuel Perry: Two, please. Firstly, on Upstream volumes clearly recovering from low levels. Where are utilization rates currently? And how far away from the point at which you think you might be able to drive some pricing? And then secondly, on ag, can you talk through the moving parts on the margin improvement year-over-year here? Just quite surprised to see stepping up year-over-year when volumes are down significantly and only low single-digit pricing. Is there any sort of cost phasing or something else in there? And if so, any implications for Q2?

Martin Brudermuller: Yes, Sam, I can take your questions. First on the upstream. Utilization rates are recovering for now. And we came from a low level in 2023. We are now, again, crossing the 70s. There is still obviously further room for improvement, but allowed by the fact that we had our crackers in Europe all running, you can already infer that there is higher demand certainly than we had in 2022. On your next question, the volume development certainly as expected. Let’s remind us, we have the second best first quarter of the ag. It is lower compared to the strongest first quarter that we had last year, but it is still the second best. So volumes down as predicted. And the better margins predominantly come from the mix.

As we have less sales in the chemicals part, so the herbicides and fungicides, but this is a — pricing-wise, then compensated by higher sales in seed, which, you know, in our case, are predominantly canola, soy and also cotton. So product mix makes a difference.

Stefanie Wettberg: We move on to Christian Faitz, Kepler Cheuvreux.

Christian Faitz: First of all, Martin, all the best for your last day in an operating function like BASF, and obviously, all the best for the future post BASF. Many thanks for all the good interactions we had throughout these years. And all of you, I wish a successful and in particular, short AGM. My one question is you saw a decline in emission catalyst volumes. How the volumes in automotive OEM paints? I assume they were likewise negative. Would you see volumes in your automotive OEM activities normalizing at some point this year? And also, was there a particular reason why you saw a considerable increase in automotive refinish?

Martin Brudermuller: So Chris, first of all, thank you very much for the nice words and particularly the vision of a short AGM. We are looking forward to that one. I think when we look on the Automotive business, we have also to take really into account the best in the ICE development. So we have really seen particularly in China, where the best development is quite impressive, that our volumes for the catalysts have been significantly down. That was the major impact which we actually had was the Chinese market. Overall, we had a much better development in the Coatings division. It was only slightly down. The volume side was more or less a rollover from the business before. So it is basically the change between the best in the ICE, which, however, I have to say that is developing slowly slower all over the world than expected. But Coatings business is much more robust in this situation.

Stefanie Wettberg: So the next one is Matthew Yates. We will then have Jaideep Pandya and then Chris Counihan. So now Matthew Yates, Bank of America, please go ahead.

Matthew Yates: Sorry to ask such a short-term question. But you noted in the release that there was some benefit from the Red Sea disruption in Q1. Should we think of this as just a onetime benefit and the environment so far in Q2 is not as good? Or are you seeing a continued positive development of the order book in recent weeks? And if I can just squeeze in a second one maybe for Dirk. On Wintershall, why is the disposal price of the weaker infrastructure assets not been disclosed?

Martin Brudermuller: Martin, I think this is the opportunity maybe to give it a little bit a summary again. So let me really say we have been happy with the development in the first quarter, particularly also on the volume side, but you saw also that we are a little bit cautious yet to see whether this is a solid foundation that is things really improved because I think there are some effects that actually helped in Q1. And that is for sure that the inventory level was extremely high on years change. So I think people get a little bit more confident and with that, also starting to order a little bit more. They want to be prepared that, let’s say, the inventory situation is more normal. And there is indeed this effect, which we see in some of the businesses that they reconsider their supply chain strategies because there have been interruptions from the long sea journey of materials, and they have to go around the longer journey.

So they are worried about that. And I think they ordered higher volumes also of some of the suppliers from Europe, and we clearly benefited from that. So with that, also, I would be cautious to take this in the baseline because I would expect that this is a problem that is not over tomorrow, but I would also not expect that this is a long-term problem because I think somehow, the world is arranging with this. For that reason, we are also a little bit cautious. We are very positive, I have to say, but we are very cautious still to say whether this development with all these special effects will continue in Q2 and Q3. So disposal for Dirk.

Dirk Elvermann: Yes. Matthew, the disposal price for — is not as closed for the simple reason that confidentiality has been agreed. So — but what I can say is that we are very happy with this second year now after the Harbour deal now that the deal with safer, which is actually the German government. And as I cannot disclose the trial, let me at least guide you a little bit by saying the book value of WIGA transport is at EUR 1.05 billion, and we would certainly rather say higher than lower than the book value.

Stefanie Wettberg: Okay. So now we have Jaideep Pandya, On Field Research.

Jaideep Pandya: The first question really on Nutrition & Care. Could you just tell us like what are the main moving parts here in terms of sort of volume dynamic, pricing dynamic that you see in both the subsectors? And what is the BASF-driven cost realignments that you have done maybe on the capacity or on the product mix? And then the second question/comment is, first of all, thank you to Martin for all the good times and all the comments. And also well done on being so bold as a CEO of the largest industrial/chemical company in Germany. And the question to you really is, what is the one thing that you would tell Marcus as he comes in to replace you?

Dirk Elvermann: I’ll start with a small question on Nutrition & Care. So the — first of all, we are happy with the result in the first quarter for Nutrition & Care, which turns very positive. It’s biggest EBITDA improvement contributor in Q1. This is carried, I have to say, by a volume increase in all section. So it is aroma, it’s pharma, and it’ also the nutrition part. The results very much carried by the highly improved aroma business. What we are still seeing in the nutrition part is low price levels. But as you know, we have addressed those — in regard of vitamin A, now with a new highly scaled plant that moves up quality wise, but also in terms of cost competition to the right point here. And so in a nutshell, Aroma, high contributor; pharma, very much okay; nutrition, still suffering from prices, but we’re getting our [indiscernible].

Martin Brudermuller: Jaideep, thanks for your — I mean, first of all, let me really say that BASF is in the very best hands with Marcus and the Board team. Marcus was 25 years with the company. He exactly knows all the details of the company. So my one recommendation to him would be don’t get distracted from the outside by politics and media, but go along with what needs to be done to develop the group, and to stay firm because I think there’s a very clear path forward what needs to be done, and really do what needs to be done and not get distracted. That would be my advice.

Jaideep Pandya: Great. Good luck for everything in the future.

Martin Brudermuller: Thanks, Jaideep.