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BASF’s earnings in tough market environment significantly below strong prior-year quarter

28.07.2023 18:55 "Agro Perspectiva" (Kyiv) — BASF Group 2nd quarter 2023:

Sales decline by 24.7 percent to ˆ17.3 billion

EBIT before special items down by ˆ1.3 billion to ˆ1.0 billion

Adjusted outlook 2023:

Sales of between ˆ73 billion and ˆ76 billion expected

EBIT before special items of between ˆ4.0 billion and ˆ4.4 billion expected

In a tough market environment, BASF Group sales in the second quarter of 2023 declined by 24.7 percent compared with the prior-year period to ˆ17.3 billion. «We faced low demand from our key customer industries, except for automotive,» said Dr. Martin Brudermüller, Chairman of the Board of Executive Directors of BASF, when presenting the results together with Chief Financial Officer Dr. Dirk Elvermann.

BASF had already adjusted its outlook for 2023 and released preliminary figures on July 12. The decline in sales was mainly driven by lower prices, primarily in the Chemicals, Surface Technologies and Materials segments. The Agricultural Solutions segment was able to implement price increases. Lower sales volumes as a result of weaker demand weighed down the sales performance in all segments. In addition, currency effects dampened sales.

Income from operations (EBIT) before special items of ˆ1.0 billion in the second quarter of 2023 was ˆ1.3 billion below the figure of the prior-year period. Almost all segments contributed to this with significant declines in earnings, in particular the Chemicals and Materials segments. EBIT before special items of the Agricultural Solutions segment decreased slightly. Surface Technologies achieved slight earnings growth. EBIT before special items attributable to Other improved considerably. EBIT decreased by ˆ1.4 billion to ˆ974 million. This figure includes income from integral companies accounted for using the equity method amounting to ˆ22 million (prior-year period: ˆ101 million).

Income from operations before depreciation, amortization and special items (EBITDA before special items) declined by ˆ1.3 billion to ˆ1.9 billion and EBITDA by ˆ1.5 billion to ˆ1.9 billion in the second quarter of 2023. Net income amounted to ˆ499 million, compared with ˆ2.1 billion in the prior-year quarter.

Development of cash flows in the second quarter of 2023

Cash flows from operating activities amounted to around ˆ2.2 billion in the second quarter of 2023, ˆ950 million above the figure of the prior-year period. Payments made for intangible assets and property, plant and equipment increased by ˆ381 million compared with the prior-year quarter to reach ˆ1.3 billion. Free cash flow thus amounted to ˆ905 million in the second quarter of 2023, an improvement of ˆ569 million compared with the second quarter of 2022.

Development of BASF’s segments in the second quarter of 2023

Sales in the Chemicals segment in the second quarter of 2023 decreased by 38.4 percent compared with the prior-year period and amounted to ˆ2.7 billion. Lower raw materials prices, combined with a massive excess of supply and weaker demand, led to lower prices in both operating divisions. Compared with the prior-year quarter, EBIT before special items declined by 76.3 percent to reach ˆ202 million.

At ˆ3.6 billion, sales in the Materials segment were 25.8 percent lower than in the strong prior-year quarter. The decline in sales resulted mainly from significantly lower prices in all regions due to decreased raw materials prices. Sales performance was additionally weighed down in the second quarter of 2023 by a further deterioration in demand. EBIT before special items declined by 60.4 percent compared with the prior-year quarter and amounted to ˆ265 million.

Sales in the Industrial Solutions segment declined by 22.5 percent compared with the prior-year quarter and amounted to ˆ2.1 billion. This development was mainly attributable to a sharp decline in volumes resulting from weaker demand. EBIT before special items fell by 61.6 percent to reach ˆ124 million in the second quarter of 2023.

At ˆ4.2 billion, sales in the Surface Technologies segment were 22.4 percent lower than in the second quarter of 2022. The sales performance of the segment was primarily attributable to significantly lower precious metal prices in the Catalysts division. The segment increased EBIT before special items by 1.5 percent compared with the prior-year quarter to ˆ230 million. A considerable earnings growth in the Coatings division more than compensated for the decline in EBIT before special items in the Catalysts division.

Sales of ˆ1.7 billion in the Nutrition & Care segment were 17.4 percent lower than in the prior-year quarter. The sales performance was attributable to a sharp decline in volumes in all business areas as a result of lower demand. The segment’s EBIT before special items decreased by 84.8 percent to ˆ33 million.

In the Agricultural Solutions segment, sales of ˆ2.2 billion were 9.3 percent below the level of the prior-year quarter. The main reason for this was the decline in volumes due to higher channel inventories in individual core markets as well as lower agricultural commodity prices. At ˆ213 million, EBIT before special items was 4.3 percent below the prior-year quarter, especially due to lower volumes.

Sales in Other declined by 30.0 percent compared with the prior-year quarter and amounted to ˆ799 million. This was primarily due to lower sales in commodity trading. Compared with the prior-year quarter, Other recorded a 64.1 percent improvement in EBIT before special items to minus ˆ60 million. This was mainly attributable to an improved contribution from insurance companies.

Measures to increase competitiveness

BASF is implementing a number of measures to improve competitiveness. As announced at the end of February, the company is executing a cost savings program with a focus on Europe and is adapting its Verbund structures in Ludwigshafen, Germany. «Together with the initiatives that were already underway in our global service units, we will reduce fixed costs by the end of 2026 so that they will then be around ˆ1 billion lower annually,» said Elvermann. By the end of 2023, BASF expects to achieve annual savings of more than ˆ300 million from the cost savings program. «In addition, we continuously and strictly control our fixed costs and avoid discretionary costs wherever possible. We have a sharper focus on cash management to optimize our free cash flow. Over the course of the year, we will continue to reduce our inventory levels,» Elvermann added.

BASF Group outlook 2023

«We do not expect a further weakening in demand at the global level for the second half of 2023, as the inventories of chemical raw materials in most customer industries have already been greatly reduced,» Brudermüller said. «However, we are assuming only a tentative recovery because we expect that global demand for consumer goods will grow slower than previously assumed. Margins are therefore expected to remain under pressure.»

The assumptions for the global economic environment in 2023 were adjusted due to the changed economic developments as follows (previous assumptions from the BASF Report 2022 in parentheses; current growth assumptions are rounded):

Growth in gross domestic product: 2.0 percent (1.6 percent)

Growth in industrial production: 1.0 percent (1.8 percent)

Growth in chemical production: 0.0 percent (2.0 percent)

Average euro/dollar exchange rate of $1.10 per euro ($1.05 per euro)

Average annual oil price (Brent crude) of $80 per barrel ($90 per barrel)

Based on the adjusted expectations for further development in the second half of the year, the forecast for the BASF Group for the 2023 business year was adjusted as follows (previous forecast from the BASF Report 2022 in parentheses):

Sales of between ˆ73 billion and ˆ76 billion

(between ˆ84 billion and ˆ87 billion)

EBIT before special items of between ˆ4.0 billion and ˆ4.4 billion

(between ˆ4.8 billion and ˆ5.4 billion)

Return on capital employed (ROCE) of between 6.5 percent and 7.1 percent

(between 7.2 percent and 8.0 percent)

CO2 emissions of between 17.0 million metric tons and 17.6 million metric tons

(between 18.1 million metric tons and 19.1 million metric tons)

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