BASF maintains steady outlook despite market challenges

In the second quarter, we will provide details on our business development and highlight notable aspects. The development of EBITDA before special items in Q2 was in line with expectations and the analyst consensus. Volumes across most businesses increased by 2.4% at BASF Group level, excluding precious and base metals. Sales declined to €16.1 billion due to lower prices, but price pressure has eased. EBITDA before special items was €2 billion, matching the prior year’s quarter level. Chemical businesses saw stronger earnings, while Agricultural Solutions struggled due to a difficult market environment. Market dynamics and segment volumes and margins in the second quarter showed strong volume growth in Chemicals, margin improvement in Petrochemicals, and volume growth and margin expansion in Industrial Solutions. Automotive production remained flat, impacting Surface Technologies negatively. Nutrition & Care saw increased EBITDA before special items, while Agricultural Solutions faced challenges with destocking and adverse weather conditions. Despite lower earnings in some segments, overall EBITDA before special items for BASF Group remained at the prior year quarter level. In the Agricultural Solutions segment, EBITDA before special items declined by 18% in the first half of 2024, mainly due to challenges in the herbicides business. BASF will cease production of glufosinate-ammonium to improve competitiveness and profitability. In the second quarter of 2024, EBITDA before special items matched the prior year’s level, with EBIT at €969 million and special items at minus €453 million, mainly related to the PFAS settlement agreement. Net income was €430 million, and cash flows from operating activities decreased to €2 billion. Free cash flow was €471 million. BASF’s equity ratio remains solid at 44.5%. Cash flows from operating activities decreased mainly due to lower dividend payments from equity-accounted companies. In Q2 2024, BASF did not receive dividend payments from entities like Wintershall Dea and BASF-YPC, impacting cash flow. Additionally, a decrease in cash inflows from changes in net working capital contributed to the decrease in cash flows from operating activities. Payments for property, plant, and equipment and intangible assets increased by 16% to €1.5 billion, mainly due to the construction of the new Verbund site in South China. Free cash flow was €471 million in the second quarter, down from €905 million in the previous year. The balance sheet at the end of June 2024 showed an increase in total assets to €82.4 billion, with noncurrent assets rising to €48.7 billion. Current assets also increased to €33.8 billion. Net debt rose to €21.4 billion compared to €16.6 billion at the end of December 2023. BASF’s equity ratio remained healthy at 44.5%. Cost-saving programs are on track to achieve €2.1 billion in annual savings by the end of 2026. In the battery materials sector, BASF is adapting to market changes and focusing on securing longer-term agreements before adding new capacities. The outlook for 2024 remains unchanged, with EBITDA before special items expected to be between €8 billion and €8.6 billion. CO2 emissions are forecasted to be between 16.7 million and 17.7 million metric tons in 2024. BASF’s Capital Markets Day will take place in September, providing an opportunity for investors and analysts to learn more about the company’s strategy and business segments. Now speaking is Matthew Yates from Bank of America. Looking at the macro perspective, the situation in the agriculture sector is not dire, but rather subdued. Stefanie Wettberg introduces the next analyst, Jaideep Pandya from On Field Research, who poses questions about the sales exposure of GA, capacity utilization, plant closures, and the potential impact on results in the coming years. Dirk Elvermann explains the strategic measures being taken to make GA profitable again and secure third-party supply. Markus Kamieth elaborates on the sourcing strategy for new technology in the future. The discussion shifts to the Nutrition & Care segment, with positive developments in Care Chemicals and challenges in animal nutrition. The analysts inquire about the regional footprint of the outsourced supply for GA, to which Markus Kamieth responds cautiously. Chetan Udeshi from JPMorgan seeks clarity on the normal seasonality in Q3 and potential impact on earnings, as well as the current situation in the automotive industry. Or are you observing a more pronounced negative impact in your current numbers due to this?

Dirk Elvermann: Chetan, to address your first question, historically, BASF’s results have been front-loaded in the first half of the year, primarily driven by the Agricultural sector. This year, we saw weaker results in Ag, but we anticipate a more balanced distribution between the first and second half of the year. The future pricing trends will play a significant role in shaping our performance. While volume growth has been positive across our businesses, excluding precious metal effects, price development remains negative compared to the previous year. However, we are seeing signs of easing in pricing pressures, and if this trend continues and turns positive, we could see a stronger second half of the year.

Markus Kamieth: Addressing the question regarding the automotive industry, we have observed a stable level of car builds globally in the first half of the year, with varying regional growth rates. We anticipate a modest decline for the full year, with the second half likely to be slightly lower than the previous year. This decline is mainly attributed to a weaker fourth quarter in China due to high inventory levels. The dynamics in Western Europe and China are key factors influencing our projections for the automotive sector. Overall, we expect to end the year with approximately €89 million, according to our current forecast.

Stefanie Wettberg: Next up is Laurent Favre from BNP Paribas, followed by Andreas Heine and Peter Clark. Laurent, over to you.

Laurent Favre: Regarding your Q3 and Q4 performance, are we to assume that Q3 will be similar to Q2, which was flat year-on-year, and are you expecting an earnings growth in Q4 compared to the previous year? Additionally, could you provide insights on the allocation of the €19.5 billion CapEx budget for the next 4 years, particularly in light of the reduced investments in battery technologies?

Dirk Elvermann: Our full-year forecast remains unchanged, indicating our expectations for Q3 and Q4. The easing of pricing pressures will be crucial in determining our performance in the second half of the year. As of now, our outlook for the full year, including Q3 and Q4, is the most accurate assessment we have.

Markus Kamieth: In the previous CapEx envelope of €19.5 billion, the allocation for battery investments was not significant. We will provide an updated CapEx forecast in September, taking into account the recent market developments and our cautious stance on battery materials. While we are scaling back on battery-related CapEx, it will not lead to a substantial reduction in the overall €19.5 billion budget automatically.

Laurent Favre: Can you elaborate on the expected improvement in pricing and margins across various value chains in the second half, especially considering the projected decline in the automotive sector?

Markus Kamieth: Overall, we are still experiencing pricing pressure across most of our chemical value chains, although the negative effects are starting to diminish. Pricing power is gradually strengthening, indicating a positive trend for the second half. We anticipate a restoration of pricing power across our portfolio, contingent on the stabilization of demand trends, which have been favorable in the first and second quarters. If we look at our Chemicals business, our four chemically driven businesses (Chemicals, Materials, Industrial Solutions, Nutrition & Care) had a positive volume effect of almost 6% and a positive EBITDA of plus 16% in the second quarter, showing positive momentum. However, we remain cautious, especially heading into the third quarter, as the market dynamics were mixed in the second quarter. April was strong, March was average, and June was disappointing, indicating that the overall market robustness for Q3 is not very exciting. We expect volume trends to continue, but pricing power needs to improve, which will largely depend on supply-demand dynamics in the second half of the year. Despite the challenges, we are confident that the situation will gradually improve.

In terms of Nutrition & Care, there was a decline in earnings partly due to a turnaround in the vitamins area, specifically with the restart and reconfiguration of the vitamin A production. The impact from the turnaround was in the low double-digit million area.

Regarding the progress on the announcement made in December about ring-fencing operations by 2026, we will provide an update on this during our upcoming Capital Markets Day in September, where we will outline our strategic priorities and plans for the future, including developments at the Ludwigshafen site. Yes, we have made significant progress with our structural measures as planned. Our non-Verbund businesses are being transitioned into a more independent structure, including separate legal entities and IT systems like SAP instances. These projects are on track and progressing well. Regarding fixed costs, we are confident in achieving our €800 million run rate savings by the end of the year, despite inflation and other factors affecting cost savings. As for pricing pressure from China and the impact of global tariff regimes, China’s overcapacity does have an impact on pricing, especially in export markets. However, we have not seen a widespread response in the form of antidumping tariffs. Our Verbund business model is a key strength for us, providing opportunities for competitiveness and growth, especially in the green transformation of the industry. We believe in the benefits of integrated production setups for our portfolio and are confident in our strategy. In addition, we anticipate that the Verbund setup will continue to be a valuable asset for BASF in the future, especially in terms of reducing the carbon footprint and promoting circularity.

Stefanie Wettberg: We have a follow-up question from Jaideep Pandya. Please go ahead with your question, but let’s try to keep it to just one final question.

Jaideep Pandya: I have just one question. Apologies for asking this before the CMD, Markus. Do you feel that in the Coatings industry, some companies may need partnerships or larger scale to boost growth, or are you increasing strategic flexibility for potential future opportunities to leverage the assets?

Markus Kamieth: We are very pleased with our Coatings business at BASF. It has shown positive development over the years and we have focused on being a strong player in the industry. While we may not be as large as some competitors, we have strong presence in automotive coatings, deco business in Brazil, and acquired Chemetall in 2017. Our goal is to maintain a solid performance, cash flow, and market position in the segments we operate in. Although our growth may be aligned with the automotive industry, we are confident in our business model and its contribution to our overall portfolio.

Stefanie Wettberg: That concludes today’s conference call. If you have any further questions, please reach out to the BASF IR team. We wish you all a wonderful summer break. Our third quarter results will be presented on October 30, and we look forward to our Capital Markets Day on September 26 and 27. Thank you for joining us this morning.