BASF SE (PNK:BASFY) Q4 2023 Earnings Call Transcript

BASF SE (PNK:BASFY) Q4 2023 Earnings Call Transcript February 23, 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. Welcome to BASF’s Conference Call on the Fourth Quarter and Full Year 2023 Results. Today’s presentation is being recorded. [Operator Instructions] Today’s 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 accurate. Such risk factors include those – particularly those discussed in opportunities and risks of the BASF report 2023.

BASF does not assume any obligation to update the forward-looking statements above and beyond the legal requirements. With this, let us move on. With me on the call today are Martin Brudermuller, Chairman of the Board of Executive Directors; and Dirk Elvermann, Chief Financial Officer. Please be aware that we have just posted the speech on our website at basf.com/fullyear2023. And now, I would like to hand over to Martin Brudermuller.

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.

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Q&A Session

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. Now let’s return to our reporting and take a look at BASF Group’s CO2 emissions. In 2023, Scope 1 and Scope 2 declined by 5 million metric tons to 16.9 million metric tons compared with the baseline of 2018. Compared with 2022, the decline amounted to 1.5 million metric tons. A large part of the reduction is due to an ongoing weak demand and the fact that we have shut down some energy-intensive plants in Ludwigshafen as announced last year.

Further measures will be introduced to counterbalance a rise in Scope 1 and Scope 2 emissions, which is likely when demand recovers and when we start up further plants at our new found site in Shenzhen as of 2025. The share of electricity from renewable sources increased slightly compared with 2022 and amounted to 20% in 2023. In addition, our operational excellence measures to increase energy and process efficiency contributed to an overall decline in CO2 emissions. Specific Scope 3.1 emissions amounted to 1.61 kilograms of CO2 per kilogram of raw material purchased in 2023 compared with 1.58 kilograms in 2022. This increase was due to the decline in production and associated reduction in the use of raw materials produced in Europe. With that, I hand over to Dirk for more financial information.

Dirk Elvermann: Thank you, Martin, and good morning, ladies and gentlemen. I will now provide you with further financial details for the full year 2023 compared with 2022. EBITDA before special items decreased by 29% and amounted to €7.7 billion. EBIT before special items declined by 45% to €3.8 billion. I will touch on the development at segment level on the next slide. Net income improved by €852 million to €225 million in 2023. The prior year figure included non-cash-effective impairments on Russia-related assets at Wintershall Dea in the amount of €6.5 billion. BASF cash flows from operating activities increased by 5% and amounted to €8.1 billion in 2023. This increase mainly resulted from changes in net working capital, which led to a cash inflow of €1.8 billion compared with a cash outflow of €1.3 billion in 2022.

Reduced inventories alone resulted in a cash release of €1.9 billion, while in the prior year, inventory buildup of €2 billion had tied up cash. This reflects our strict discipline in inventory management in 2023. Free cash flow decreased by €680 million to €2.7 billion. This was achieved despite the fact that payments for property, plant and equipment and intangible assets were around €1 billion higher. At year end 2023, the equity ratio of 47.3% almost matched the figure of 48.4% as of year-end 2022. The very solid equity ratio and strong cash performance are proof of BASF’s continued financial strength even in challenging times. This slide illustrates the development of EBIT before special items in the segments in the fourth quarter as well as in the full year.

For detailed explanation of the full year 2023 earnings development by segment, please refer to the BASF Report 2023 published this morning. For details about the segment development in the fourth quarter, please refer to the fact sheet published on the IR website this morning. Let me provide additional information on the major impairments in EBIT in the following. In 2023, special items amounted to minus €1.6 billion. Of this amount, around €400 million resulted from restructuring measures, in particular, in connection with the cost savings program focusing on Europe, the adjustments to production structures at the Verbund site in Ludwigshafen and the carve-out of the BASF Environmental Catalyst and Metal Solutions unit. However, the largest part amounting to €1.1 billion was attributable to non-cash effective impairments.

These mainly related to the Surface Technologies, Agricultural Solutions and Materials segment. In the Surface Technologies segment, the impairment charges were primarily related to our precursor production plant for cathode active materials in Harjavalta, Finland. The lengthy permit objection process and the uncertainty regarding its outcome resulted in an asset impairment. In the Agricultural Solutions segment, impairments were incurred in conjunction with production facilities in Europe. In the Materials segment, we recognized impairments related to an intangible asset acquired from Solvay that provides access to a production technology for a precursor in polyamide value chain. Due to recent market developments, this asset is no longer perceived as economically superior.

I will now continue with our cash flow development, focusing on our performance in the fourth quarter of 2023. Cash flows from operating activities decreased by 5% to €4.3 billion. Changes in net working capital led to a cash inflow of €3.2 billion compared with a cash inflow of €2.5 billion in the prior year quarter. Lower inventories resulted in a cash release of €990 million compared with a cash release of €461 million in Q4 2022. Our focus on inventory management, therefore, paid off. Compared with the prior year quarter, payments made for property, plant and equipment and intangible assets rose by €160 million to €2 billion. The increase was mainly attributable to the construction of our new Verbund site in South China. That is why our free cash flow decreased by €368 million compared with Q4 2022, but still reached €2.2 billion.

Let’s now turn to our balance sheet at the end of December 2023 compared with year end 2022. Total assets declined by €7.1 billion and amounted to €77.4 billion, mainly due to our strong focus on cash management and working capital management, in particular. The decline was driven by lower current assets, largely on account of reduced inventories, lower other receivables and miscellaneous assets and lower trade accounts receivables. Overall, current assets were reduced by €6 billion. Non-current assets declined by €1.1 billion. As of December 31, 2023, net debt was almost stable and amounted to €16.6 billion compared with €16.3 billion at year end 2022. I will now give you further insights into capital expenditures. BASF’s corporate strategy is based on organic growth.

Therefore, CapEx and R&D expenses are the foundation for our future business. However, we are responding flexibly to the changes in the market environment. We continue to be confronted with a significant imbalance in supply and demand in several value chains, structurally higher energy prices in Europe, and overall subdued market demand. We will therefore further strengthen our focus on capital discipline across the entire portfolio. For the BASF Group, we planned capital expenditures of €19.5 billion between 2024 and 2027, of which €6.8 billion related to our growth projects, the new Verbund site in Zhanjiang, China and the expansion of the battery materials business. The total CapEx for this current planning period compares with €24.5 billion for the prior planning period from ‘23 to ‘26.

You will have noticed that we shortened our CapEx planning period from 5 to 4 years, mainly because focused accuracy is higher in the slightly shorter timeframe. In 2024, we planned total capital expenditures of €6.2 billion compared with €5.2 billion in ‘23. Thereof, spending of €3.3 billion on property, plant and equipment is related to our growth projects in 2024. The CapEx peak for these growth projects is expected this year, so investments will decrease again in the following years. As communicated during our investor update in December ‘23, we will postpone non-critical projects in line with market demand. We are also tightening our belts somewhat with regard to our growth projects. At our Verbund site in China, we will further leverage the favorable procurement environment.

In our Battery Materials business, we will use flexibility in the scheduling and sequence of the investments and will also evaluate partnerships to optimize CapEx. Between 2024 and 2027, we are planning investments totaling around €900 million in our transformation towards net zero. In BASF’s net zero transformation we will maintain the overall investment scope with a clear focus on CO2 reduction, renewables and recycling. We will fund certain events, such as wind farms via project financing, which will require significantly less CapEx. In addition, we will strike the right balance between power purchase agreements and own investments in the production of green electricity. Now I would like to provide our view on the transaction between Harbour Energy plc and Wintershall Dea.

As you know, on December 21, 2023, BASF, LetterOne and Harbour signed a business combination agreement to transfer most of Wintershall Dea’s E&P business to Harbour, namely the entire non-Russia-related E&P business. In exchange, at closing, BASF will receive a cash consideration of $1.56 billion and the share in the enlarged Harbour of 39.6% of the entire shares. Following the completion of the transaction and the 6-month lockout period, BASF will have the opportunity to gradually monetize its stake in Harbour as the company is listed on the London Stock Exchange. The agreed enterprise value for the Wintershall Dea assets amounts to $11.2 billion. This amount includes the outstanding bonds of Wintershall Dea with a nominal value of around $4.9 billion that will be transferred to Harbour at closing.

There is an upside potential through a higher market valuation of the enlarged Harbour after closing. The transaction provides an attractive stepwise exit from the oil and gas business in-line with BASF’s financial and strategic requirements. However, we are not setting ourselves a specific deadline or selling all of our shares in Harbour. Let me also explain in some more detail what will happen with the assets that are not part of the transaction. Wintershall Dea, as the remaining company, will hold all Russia-related assets. The purpose of the company will be to divest or liquidate the various Russia-related participations to manage the claims associated with the Russia-related activities of Wintershall Dea, to rightsized its organization following the completion of the transaction with Harbour and to provide transitional services to Harbour, if requested.

Furthermore, Wintershall Dea is continuing its preparations for a separate sale of its 50.02% stake in WIGA Transport Beteiligungs-GmbH & Co. KG, which is not part of the transaction with Harbour. The federal – German federal government, which already holds the remaining shares in this company, WIGA via SAFR, is our first point of contact here. Since there has been quite some speculation in the German media, let me comment on four main topics that have been voiced as a concern. First, regulatory approvals. The review of the transaction by the relevant governmental bodies is in-line with standard procedure that the contracting parties initiate submitting the corresponding applications. As stated in the BASF news release on December 21, 2023, the transaction with Harbour is subject to various regulatory approvals in several countries.

In Germany, approval for foreign direct investments will also be required in accordance with the foreign trade and payments ordinance. We are confident that we will receive clearances in all cases. Completion of the transaction is targeted for the fourth quarter of 2024. Second, Germany’s energy supply security. Wintershall Dea’s oil and gas production in Germany accounts for roughly 1% of German oil and gas consumption. In terms of securing Germany’s energy supply, it is not decisive whether the E&P activities currently managed by Wintershall Dea are operated by a German or British company in the future. Third, CCS technology. The focus of Wintershall Dea is limited to the development of reservoirs for the permanent storage of CO2. The activity is operated by a quite small international team currently out of Norway, the Netherlands and Germany.

The acquired licenses are all outside of Germany, namely in Denmark, Norway and the UK. Wintershall Dea is not involved in CO2 capture and does not consider CO2 transportation as a core business. BASF, on the other hand, is a leader in the technology for capturing CO2 emissions as part of its global gas treatment business, which we are continuously developing. Our OAC technologies are available globally, also in Germany. You might, however, be surprised to learn that geological CO2 storage in Germany, whether onshore or offshore, is still not allowed under the existing German legal framework. And fourth, the closure of the German headquarters of Wintershall Dea. The timing of the announcement was unfortunate, but unavoidable for the legal reasons resulting from the fact that BASF and Habour are both publicly listed companies.

Wintershall Dea has state-of-the-art expertise in the oil and gas business. Therefore, all employees of the operating companies included in the transaction, around 1,200 employees will be taken on by Harbour. Harbour also intends to provide offers to some employees from the current headquarters to join the combined company. The details will be agreed in the currently ongoing review prior to completion of the transaction. I hope this helps to put things into perspective. Until closing, Wintershall Dea and Harbour will continue to operate as independent companies and are preparing closing and the integration to the extent possible under the applicable legal framework conditions. And with that, back to you, Martin.

Martin Brudermuller: Thank you, Dirk. Ladies and gentlemen, as I have frequently mentioned, an attractive dividend is an important target for the BASF Board. This also holds true in challenging times. Therefore, we stick to our practice to increasing the dividend per share each year or keeping it stable. We will thus propose a dividend of €3.40 per share to the Annual Shareholders Meeting based on the year’s end share price. This offers a higher dividend yield of 7%. In total, we will pay out €3.0 billion to our shareholders. This amount is largely covered by the free cash flow of €2.7 billion generated in 2023. Our strong balance sheet, high equity ratio and good credit ratings give us the necessary financial strength with regard to paying an attractive dividend.

Now I will conclude with the outlook. We expect that the global economic momentum from 2023 to continue in 2024. The main reason for this will be the expected persistently high interest rates, which will continue to dampen growth in the U.S. and in Europe. We expect the demand for industrial goods will normalize only gradually and that the share of goods in the private consumptions will rise only slowly. For this reason, we only expect very moderate growth in most of our customer industries. Recovery in China remains uncertain, particularly with regard to the real estate sector and the further development of the labor market. We do not expect any significant growth stimulus in the EU. We anticipate a gradual slowdown in the U.S. due to, among other things, higher interest rates.

The geopolitical situation remains critical against the backdrop of the wars in Ukraine and the Middle East and other geopolitical tensions, particularly between the United States and China. Global chemical production is nevertheless expected to grow faster in 2024 by 2.7% compared with 1.7% in 2023. This will be driven primarily by the expected growth in the Chinese chemical industry. Our planning assumptions on average oil price of $80 per barrel of Brent crude and exchange rate of $1.10 per euro. Based on these assumptions, the BASF Group’s EBITDA before special items is expected to rise to between €8.0 billion and €8.6 billion in 2024. Volume and margin growth in all segments will contribute here. Higher fixed costs due to inflation, but also in connection with the construction of our new Verbund site in China, will burden earnings.