BASF SE (BASFY) Management on Q1 2020 Results – Earnings Call Transcript

BASF SE (OTCQX:BASFY) Q1 2020 Earnings Conference Call April 30, 2020 5:00 AM ET

Company Participants

Stefanie Wettberg – Senior Vice President Investor Relations

Martin Brudermüller – Chairman and Chief Technology Officer

Hans-Ulrich Engel – Chief Financial Officer

Conference Call Participants

Andrew Stott – UBS

Thomas Wrigglesworth – Citi

Christian Faitz – Kepler Cheuvreux

Matthew Yates – Bank of America

Tony Jones – Redburn

Chetan Udeshi – JPMorgan

Andreas Heine – MainFirst

Peter Clark – Societe General

Laurence Alexander – Jefferies

Markus Mayer – Baader-Helvea

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 2020 results in extraordinary times.

[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 accurate. Such risk factors include those discussed in opportunities and risks in the BASF report 2019.

BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans Engel, Chief Financial Officer. Please be aware that we already posted the speech on our website at basf.com/q12020.

With this, I would like to hand things over to Martin.

Martin Brudermüller

Good morning, ladies and gentlemen, and thank you for joining us. I hope you and your families are doing well in this extraordinary time. Currently, there is only one topic in the center of everything and that puts the world upside down: the coronavirus. We already addressed major concerns during our end of February conference call. However, we did not foresee a global pandemic with such huge impact on the global economy. And there is a large impact on societies and individuals as well. All countries around the world are confronted with the same challenges at almost the same time. Countermeasures from governments and companies all over the world are focusing on people’s health and safety. The health of our employees is also our highest priority.

Beyond that, it is about solidarity. We have bundled our contributions in the “Helping Hands” initiative. That is our way to demonstrate social responsibility. Apart from many local initiatives, BASF has donated more than 100 million protective masks to the Federal Republic of Germany and the State of Rhineland-Palatinate, and we currently globally provide around 175,000 liters of hand sanitizers per week free of charge. Overall, BASF has donated a total of approximately €100 million in kind to fight the pandemic.

At all the BASF sites, we implemented a wide range of dedicated measures to ensure the safe and reliable operation of our global production network. This allows us to maintain production in most of our plants. The entire BASF team is doing a remarkable job and demonstrates a very high level of prudence, responsibility and flexibility.

Before talking about the BASF business, I would like to confirm our dividend proposal. We will propose a dividend of €3.30 per share for the business year 2019 at the Annual Shareholders’ Meeting on June 18.

I also would like to address a potential issue related to dividend payments directly. A controversial discussion in German media frequently equates short-time work and government loans. Short-time work is an established and proven insurance system and an instrument of labor market policy in Germany. As an employer, BASF paid unemployment insurance contributions of about €400 million over the last 10 years in Germany, and our German employees paid the same amount.

To put this in perspective, payments for short-time work of BASF employees paid by the German government agencies since 2008 sum up to less than 1% of the amount paid by BASF. We have currently introduced short-time work at some of our sites in units that are primarily supplying the automotive industry. At the moment, there are around 3,700 employees at 11 sites in short-time work in Germany and in Europe about 3,000 employees. At the larger site in Ludwigshafen, the number is significantly less than 100.

In the current situation, loans of the German development bank, KfW, are granted to companies that have run into financial difficulties because of the coronavirus crisis and cannot obtain financing on the capital market. If such emergency loans are taken up, dividend should be suspended according to German government. BASF has not made use of such emergency loans and does not plan to do so.

Now let me turn to our businesses and the macroeconomic environment. The current macroeconomic environment is characterized by extreme uncertainty. As the slide undoubtedly shows, growth expectations for 2020 deteriorated, first in small steps, during recent months, but then abruptly in March. The indicators for Q1 2020 are still estimates as most of the countries have not yet published the preliminary figures for the quarter. The severity becomes even clearer bearing in mind that outside of China, January and February 2020 were significantly less affected by the coronavirus than March.

According to the preliminary data available, global GDP decreased by 1.7% compared to the prior year quarter. Declines were most pronounced in China and Europe due to the timing of the spread of the virus and the related lockdowns. Severe impacts in other countries, such as the U.S., will become visible in the second quarter of 2020.

The decline in the industrial production was even more pronounced than in GDP. Global chemical production growth also decreased sharply by 5.2% compared to Q1 2019. From a regional perspective, the decline in chemical production was most pronounced in Asia. The automotive industry was hit hardest by the demand collapse, production stoppages and supply chain disruptions. In Q1 2020, global automotive production declined by 24% compared to Q1 2019 after a decline of 5.6% already in 2019 compared to 2018.

Particularly in these difficult times, our diversified portfolio shows resilience, even though demand development in relevant customer industries varies greatly. Some industries are resilient, such as pharma, cleaning and nutrition. They are even experiencing additional demand due to the measures to address the coronavirus. Think about disinfectants or home – or basic home and personal Care Products. This is clearly reflected in sales and order entry of the Nutrition & Care segment. Also, the agricultural industry is not directly impacted.

Other customer industries are, however, more negatively impacted by the pandemic. The main drivers are the lower final customer demand due to the global lockdowns, the enforced closures of production and supply chain interruptions. Transportation, including the automotive industry, is affected most as production stands still almost all over the world and car sales collapse. We show our segments on this slide as well to give you a first indication how and where BASF will likely be impacted.

The BASF team performs with vigor and dedication in this difficult environment. We delivered on volume growth despite the currently strong economic headwinds. In Q1 2020, we increased BASF Group’s sales volumes by 4%. All downstream segments contributed to this increase. The volume increase was most pronounced in Surface Technologies and Agricultural Solutions.

With the increase in Surface Technologies is – while the increase of Service Technologies is a bit counterintuitive and primarily related to higher precious metals, the volume development in Agricultural Solutions, Nutrition & Care and Industrial Solutions results from sales to industries that are not or less negatively affected by the corona pandemic.

Let me now touch on the measures we have implemented to operate safely in the COVID-19 environment. We activated BASF global crisis management team very early on. All our operating divisions, regions and production sites have activated contingency plans, which are constantly adjusted to the evolving situation. All production-related measures are coordinated from a site perspective to ensure adherence to local regulation.

To minimize the infection risk, we divided production shifts into smaller teams to reduce personal contact during daily operations. This is also supported by the switch to different shift schedules. We have implemented strict hygiene regulations and consistently track infection chains if they occur. Wherever possible, colleagues work remotely. Globally, more than 40,000 colleagues are currently working from home.

Due to our comprehensive set of measures, we have been able to keep the number of infected people comparably low and to maintain all business-critical processes. With the implementation of our corporate strategy starting at the end of 2018, we are already working on the right levers to address the current crisis. Customer focus, reduction of complexity, the formation of a more agile and lean organization and significant cost reductions are key. We have our Excellence Program in place, which we accelerate wherever possible. The BASF team has the right mindset to react on the spot.

Our customers are the center of all our activities. Supply reliability is key to them right now. During this very dynamic situation, we are closely interacting to immediately react to changes in their demand patterns. This is crucial to optimize and to adjust our production networks and inventories quickly. Our proprietary Verbund simulator and comparable tools support us in Ludwigshafen and at our other integrated sites.

Based on the overall lower demand, we are adapting capacity utilization rates continuously. They are steered by a cross-divisional coordination team of BASF’s global production network. At our Verbund sites around the world, the strong alignment between downstream and upstream businesses leads to an optimized results for BASF Group while ensuring continuity of supply along the value chain.

At the end of April, the average utilization rate of our plants was still more than 60%. This rather high number is supported by the fact that in most countries, most of the products we manufacture are regarded as system critical. For example, more than 70% of BASF SE’s sales can be classified as system critical. As a result, there have only been a few shutdowns ordered by the authorities in the countries where we operate.

To mitigate the impact of possible supply chain interruptions, we take extra efforts regarding the supply of key raw materials and the distribution of our products to our customers. Let me give you practical examples from our logistics Verbund in Ludwigshafen. By installing strict hygiene measures and renting additional mobile sanitary facilities, we considerably enlarged the available space for truck drivers and other service providers. In addition, we have divided our crucial logistic units into separate teams with strict rules regarding personal contact. These examples demonstrate what we do to reduce the risk of infections while ensuring our supply reliability.

Last but not least, safeguarding cash is of utmost importance in these times. Strict working capital management is applied throughout the company and will be further strengthened during the coming months. This is supported by an elevated level of cost awareness and the consistent implementation of our Excellence Program. Depending on the specific area of activity, short-time work is also considered.

In addition, we are reviewing our investment projects and will reduce capital expenditures to around €2.8 billion in 2020. Initially, we had budgeted €3.4 billion for this year. However, I clearly want to emphasize that we are fully committed to our long-term growth projects in Asia and our expansion in battery materials. The new BASF Verbund site in Guangdong, China and the intention to establish a chemical complex in Mundra, India together with ADNOC, Adani and Borealis, will be key for our future profitable growth in Asia. Both projects are currently in the feasibilities phase. We are also committed to support the buildup of a European electric vehicle value chain and continue to further strengthen our leading position in battery materials with our investments in Harjavalta, Finland and Schwarzheide, Germany.

On the financing side, our solid financial position is a particular strength now. We implemented a series of measures to increase access to liquidity. Hans will provide further details on this. Through all these measures, we are maintaining a very solid level of liquidity, and we are well prepared to lead BASF through the COVID-19 crisis.

Now Hans will give you more details regarding our business development in Q1 and the financing of BASF Group.

Hans-Ulrich Engel

Yes. Thank you, Martin. Good morning, ladies and gentlemen. Let me first explain relevant changes regarding BASF Group’s reporting effective as of January 1, 2020, with the prior year figures restated.

To increase the transparency of our reporting, we are introducing a differentiation of equity investments that are operationally integrated into the business of the BASF Group, for example, our participation in BASF-YPC and those that are running rather independently from the BASF Group. The most relevant of these non-integral participations are Wintershall Dea and Solenis, which are also expected to be disposed of in the near to midterm.

The equity results of non-integral investments are no longer reported in EBIT and EBIT before special items of the BASF Group. As you know, we reported them under Other, but in net income from shareholdings. The net income from shareholdings is a new subtotal within income before income taxes. Consequently, the financial result now only consists of the interest result and the other financial results. Similarly, a distinction is made in the balance sheet between integral and non-integral investments.

With this change, our EBIT and EBIT before special items better reflect the result of our business and are not impacted by non-core businesses, which we consider as financial investments.

Let’s now look at our performance in Q1 2020 compared to prior year quarter. I will start with our sales development. Sales increased by 7% to €16.8 billion. As Martin already explained, higher volumes of plus 4%, mainly in our downstream segments, were the driver for this increase. Sales volumes by location of customer increased in all regions worldwide.

Prices increased by 1% on account of significantly higher prices for precious metals in our Catalysts division. Apart from Surface Technologies, all segments recorded lower sales prices. Portfolio effects contributed plus 1% and were mainly related to the acquisition of Solvay’s polyamide business. Currency effects amounted to plus 1%. The appreciation of the U.S. dollar against the euro was the main reason here.

Let’s move on to the earnings development. EBIT before special items came in at €1.64 billion, 6% below Q1 2019. If we had not adjusted our reporting of non-integral shareholdings, EBIT before special items would have amounted to €1.474 billion, 14% below Q1 2019 and fully in line with analyst estimates for the first 3 months of the year. The decline was driven by the considerably lower contributions of the Chemicals and the Materials segments as well as of Other.

Compared to Q1 2019, earnings of the two upstream segments declined by €246 million to a total of €383 million. The year-on-year margin decline in the ethylene and propylene value chains and in isocyanates and polyamide precursors as well as higher fixed cost mainly due to the start-up of new plants, such as the acetylene plant in Ludwigshafen as well as price-related impairment losses on inventories, considerably weighed on earnings in these segments.

In the Materials segment, considerably higher earnings in Performance Materials could only partially compensate for the decline in Monomers. Despite the difficult market environment, we again saw a considerable improvement in our downstream segments. EBIT before special items of the four segments increased by 13% to €1.6 billion in Q1 2020. In absolute terms, the earnings increase was most pronounced in Agricultural Solutions and Surface Technologies.

In Industrial Solutions, EBIT before special items increased slightly. Considerably higher earnings in Dispersions & Pigments mainly due to lower fixed costs more than compensated to slightly lower earnings in Performance Chemicals. The transfer of BASF’s paper and water chemicals business to Solenis on January 31, 2019, was the main reason for lower earnings in Performance Chemicals.

In Surface Technologies, EBIT before special items rose considerably. Earnings in Catalysts increased strongly, particularly due to valuation effects from precious metals trading. In Coatings, earnings declined considerably on account of lower demand from the automotive industry. Lower raw materials prices and fixed costs partially offset the earnings decline in the division.

In Nutrition & Care, EBIT before special items increased considerably, mainly due to significantly higher earnings in Nutrition & Health. This division is catering to customer industries that are partly recording higher demand, which we could serve due to higher product availability compared to the prior year quarter. Earnings in the Care Chemicals division increased slightly on account of lower fixed costs.

In Agricultural Solutions, EBIT before special items rose slightly mainly as a result of higher sales and lower fixed cost. Due to the corona pandemic, we recorded earlier demand in our business.

In Other, EBIT before special items decreased considerably. Overall, the earnings development by segment shows clearly how we benefit from our diversified portfolio, supplying many customer industries impacted very differently by the pandemic.

I will now focus on the earnings development of BASF Group in Q1 2020 compared to the prior year quarter. EBITDA before special items decreased by 2% to €2.6 billion. EBITDA amounted to €2.4 billion compared to €2.8 billion in Q1 2019. As already explained, EBIT before special items came in at €1.6 billion, 6% lower than in Q1 2019.

Special items in EBIT amounted to minus €184 million compared to plus €29 million in Q1 2019. Special charges were mainly related to the integration of the acquired polyamide business. Further special charges resulted from various structural measures. In the prior year quarter, income from divestitures had led to overall positive special items. EBIT thus decreased by 18% to €1.5 billion in Q1 2020. The tax rate was 26.6% compared to 25.3% in Q1 2019.

Net income amounted to €885 million compared to €1.4 billion in Q1 2019. Therefore, reported earnings per share decreased from €1.53 to €0.96 in Q1 2020. Adjusted EPS amounted to €1.36, this compares to €1.70 in the prior year quarter.

Let’s now move on to our cash flow in the first quarter of 2020. Cash flows from operating activities amounted to minus €1 billion compared to €373 million in the prior year quarter. This was primarily due to the lower net income and the considerably higher level of cash tied up in net working capital.

Net working capital increased by €1.2 billion, mainly as a result of higher trade accounts receivable following the strong business development of Agricultural Solutions. In addition, higher prices for precious metals contributed to the increase in net working capital as did a decrease in accounts payable trade.

Cash flows from investing activities amounted to minus €1.8 billion in the first quarter of 2020 compared with minus €837 million in the prior year quarter. The increase in cash outflows was mainly due to the purchase price payment for Solvay’s polyamide business. Payments made for intangible assets and property, plant and equipment decreased by 23% or €172 million to €569 million.

Cash flows from financing activities amounted to €4.3 billion in the first quarter of 2020 after €620 million in the prior year quarter. The year-on-year increase was primarily due to higher usage of our commercial paper program and higher bank loans. Free cash flow declined from minus €368 million in the prior year quarter to minus €1.6 billion, mainly due to the lower cash flows from operating activities.

Turning to our balance sheet at the end of March 2020 compared to year-end 2019. Total assets increased by €5.4 billion to €92.4 billion on account of higher current assets. Compared to the end of Q1 2019, total assets remained at the same level.

Current assets rose due to higher trade accounts receivable, increased cash and cash equivalents as well as higher other receivables. The increase in accounts receivable was mainly driven by the seasonality of the Agricultural Solutions business. The increase in cash and cash equivalents reflects our measures to increase liquidity.

Non-current assets were almost stable at €56.3 billion. Net debt increased by €3.3 billion to €18.8 billion, partially as a result of the acquisition of Solvay’s polyamide business in the first quarter. At the end of March 2020, the equity ratio amounted to 47%.

Let me provide you with some further information on BASF’s financing strategy and the instruments we are using to ensure a solid level of liquidity also during these challenging times. BASF’s financing policy aims to ensure its solvency at all times, limiting the risks associated with financing and optimizing the cost of capital. We normally run our business with a level of cash and cash equivalents of around €2 billion. In times like these, it is obvious that we must operate with an elevated level of liquidity.

On March 31, 2020, cash and cash equivalents, including marketable securities, amounted to €4.2 billion compared to €2.3 billion at the end of March 2019 and €2.9 billion at the end of December 2019.

For short-term financing, we use BASF’s commercial paper program, which has an issuing volume of up to US$12.5 billion. As of March 31, 2020, commercial paper with a nominal value of US$5.1 billion was outstanding under this program. If we needed to further increase our liquidity position, we would use this instrument as a first step.

We have been active in the U.S. commercial paper market for more than 20 years. In 2020, we also started to issue on the European commercial paper market as this market became attractive for issuers like BASF.

In recent weeks, we have taken out additional bank loans in a total amount of more than €600 million, as an example, from the European Investment Bank. At the beginning of April 2020, BASF entered a one-year committed credit facility with several banks, summing up to a total of €3 billion.

Corporate bonds from the basis of our medium-to long-term debt financing. These are issued in euros and other currencies with different maturities as part of our €20 billion debt issuance program. The goal is to create a balanced maturity profile, diversify our creditor base, and optimize our debt capital financing conditions. The average maturity of our bond portfolio as of March 31, 2020, was 6.6 years.

Finally, a firmly committed syndicated credit line of €6 billion maturing in 2025 is in place to cover the repayment of outstanding commercial paper. It can also be used for general corporate purposes. Such backup credit facility is in place for about 20 years and has never been utilized. With the described instruments, BASF has a solid financing and access to additional liquidity, if needed.

And now back to you, Martin, for the outlook.

Martin Brudermüller

Ladies and gentlemen, any outlook for the global economy is currently highly uncertain, if not impossible. External forecasts are falling drastically day by day. Because of the severe impact of corona pandemic, the expectation in macroeconomic development is significantly reduced. The downward correction is ongoing as the pandemic develops, and it is unclear at that time when and how the global economy will get out of the lockdown and when and how the situation will begin to stabilize. Thus, we feel unable to provide you with a meaningful forecast for 2020, and that is why we will give you only qualitative information today.

The second quarter of 2020 will be much more heavily hit by the drop in economic activities than Q1 2020. Sales and volume development in April clearly indicate this. Order entry for May and June exhibit further deterioration. From today’s perspective, we can expect at best an EBIT before special items in a low triple-digit million euro range in Q2. However, at present, I cannot rule out the possibility that BASF Group’s EBIT before special items will drop to 0 or even below in Q2. A main reason for this is the global shutdown in the automotive industry. The most relevant question in this regard is: how long will it take to really restart the whole automotive value chain? For 2020, we expect at least a decline of 20% in automotive production globally compared to the year 2019.

You are aware that several of our segments are supplying the automotive industry, particularly Surface Technologies, Materials and Industrial Solutions. Apart from automotive, some other customer industries are highly impacted by the pandemic as well. Favorable business development in Nutrition & Care and Agricultural Solutions cannot compensate for that.

Under these circumstances, the Supervisory Board members have decided to voluntarily waive 20% of their fixed compensation from April 1 to the end of 2020. The members of the Board of Executive Directors will waive 20% of their fixed salaries for the second quarter of 2020. We will consider further steps depending on the further development in the course of the year.

In Q3 and Q4, we currently expect a gradual improvement based on the indications we are getting from our customers. However, many influencing factors, most importantly, the development of customer demand and the functionality of supply chain of important customer industries are still intransparent and questionable at this time. By the end of July, we expect to have a better grasp on the overall economic development and hope to be in a position to provide you with meaningful, quantitative guidance again.

I would like to close with assuring you that the BASF team is consistently, with dedication and confidence, working hands-on together with our customers through these unprecedented challenges. Our diversified portfolio and our solid financials are strong assets in these times. We at BASF remain optimistic about the future, and we will emerge stronger from this situation.

And now we are glad to take your questions.

Question-and-Answer Session

A – Stefanie Wettberg

Ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions] The first question will be from Andrew Stott. We then will have Thomas Wrigglesworth and Christian Faitz. So now, Andrew Stott, UBS. Please go ahead.

Andrew Stott

A couple of questions, one is a long-term viewpoint. So Martin, you mentioned you’re not going to change the course in the CapEx in China nor indeed in battery materials. So two questions around that. One, could you flex it? So if you obviously remain fully committed, could you actually push some of those projects out?

And then a second question is more around what you’re seeing yourselves in China with regards to competitor behavior, especially upstream, if you’re seeing any evidence of cancellations at some of the higher-cost producers. So that’s the first question.

The second question is a short-term one. The oil and gas business, Dea Wintershall, has €1.7 billion of liquidity according to their own Investor Relations website. I guess they’ll burn through that reasonably quickly given the current energy price environment. So the question is an obvious one, but does BASF have to inject cash into the vehicle considering the €5.7 billion of net debt?

Martin Brudermüller

So Andrew, I’ll take the first two and then Hans the second two. I mean, it is important to really mention that we – even if we are in a difficult situation, we cannot cut off our legs for the time after corona. And this is why we really prioritize and emphasize again that battery materials and China, we still believe, in the new world post corona are the major pillars of profitable growth for BASF.

We can not very much adapt in the CapEx now for the first step of battery materials in Europe because these are two projects you have to execute. What we very well do is then the next steps, which are in the midterm plan. So if electric vehicles would develop slower, we would also adapt the next steps.

This is a little bit different for the China project because you know that China is US$10 billion until 2030 and we divide this anyway in phases. So we are currently shaping the final scope. We have also some different scenarios, what would – could come in which phase. So we have a certain opportunity to flex that out a little bit and to design the phases a little bit different, which gives us some flexibility in the spending. It could – however, the major part is certainly clear because in the first step, which is the most heavy one, you have to invest in infrastructure and cracker and major downstreams, which is anyway the capital-intensive part. So I hope that answers this question.

China capacity behavior, a little bit too early to say. I mean, before the crisis started, and you know most of these numbers, for most of the downstreams, there was also, at least in the longer run, let’s say, a certain fit to the overall demand development. There are in some areas then a temporary oversupply. If you look on the number of crackers they have planned, there is still an import need for certain chemicals.

So I think it is too early now to say how the chemical market in China will proceed. We still think it will be a very attractive market because there’s still so much potential also on the domestic demand. But I think it is also fair to say we have to see how the overall chemical – the overall industrial output in terms of exports in China will develop. I would expect that there will be the – one or the other policy change in countries to bring back certain parts of the value chain, which then also will see or will make a shift in the pattern of who contributes which kind of material. So that could be – so a certain slowdown. On the other hand, you know, stimulus and the vast potential still of the domestic demand.

So overall, I think it’s a little bit too early to talk about the long-term projects. But overall, I don’t see so much changing. This might change the pattern in one or the other value chain, but the overall pattern, we think, still is viable. And this is also why we hold our project in China because I think this is, no question, the largest market and also one of the fastest-growing markets even in the future.

So with this, we are to oil and gas and the other question.

Hans-Ulrich Engel

Yes. This is Hans. In your Wintershall Dea question. So first of all, Wintershall Dea is taking the necessary measures to improve its liquidity position in March and in April. It’s standing financially on their own feet. There are no shareholder loans, and there is also no obligation with respect to any type of financing coming from the shareholders.

Andrew Stott

Sorry, Hans, just to follow up. So is the liquidity no longer €1.7 billion? Has that actually improved? Because that’s the last number I saw.

Hans-Ulrich Engel

I think compared to that, there is improvement. I don’t have the Wintershall Dea liquidity figures handy. But I think when they do their earnings call in May, you will see that compared to the €1.7 billion, there is a higher number, a higher liquidity number.

Andrew Stott

Okay. And just – sorry, just finally. So the way to think about this on your base case by the sound of it is no dividend income. And from a cash flow standpoint, that’s the only thing to think about.

Hans-Ulrich Engel

There is no dividend income. To be very specific, there is no common dividend income. And other than that, from a cash flow perspective, there is nothing else really to think about.

Stefanie Wettberg

The next question is from Thomas Wrigglesworth, Citi.

Thomas Wrigglesworth

Martin, you talked about utilization rate above 60% for the group at the end of April. Could I ask for some – is that – could you give us the regional color: Asia, U.S., Europe? Are you hoping that the Asian utilization rate is actually coming back up?

And then, secondly, again a bit of a clarification. You talked, Hans, about ramp-up costs and inventory write-downs impacting the upstream Chemicals business. Could you just – any color or quantification of that would be helpful to understand the underlying level of profitability.

Martin Brudermüller

Well, Thomas, I’d take the first one. We don’t have really a breakdown now into regional patterns, but maybe a little bit qualitatively. I mean I mentioned in the speech that the demand pattern is very unequal. For example, ethylene oxide for the alkoxylation products in – for the care and detergents industry is still very high in demand. This is, for example, why you see the CAGR rates relatively high still, also in Europe, I have to say and in Nanjing in the ‘90s even before we now start to shut down the site for the tar. So it is a little bit a mixed picture. But overall, I would say this is where it is.

I mean, if you look on April, we see now in April a significantly lower level of sales. It’s about, I would say, 20% lower than the average before level. And we have also from the order entry coming in a little bit less, so somehow like 30% less from the order entry. And that will certainly have also an impact on the utilization rates, which in average, will go down, and this is also part of the projection of this Q2 picture, which we have.

Hans-Ulrich Engel

Thomas, I’m afraid I can’t give you all the specifics that you would like to have. There are three drivers for fixed cost increases in the upstream segments in Chemicals and in Materials. As you mentioned, there’s the new acetylene plant. There is also now the fixed cost that came in as a result of the acquisition of Solvay, which we closed on March 31. And there is the inventory impairment, the inventory impairment figure I have readily available, order of magnitude, €30 million there. The others, we’re happy to provide you with after the call as one aggregate figure.

Stefanie Wettberg

Now it’s Christian Faitz, Kepler Cheuvreux.

Christian Faitz

Two questions, please. For your traditional chemical activities, can you comment the oil price moves over the past several weeks? I understand the short-term economics, which also helped your Chemicals segment results a bit. But how difficult is it at this point in time to go into pricing discussions with some of your key customers who obviously also read the newspaper and know about the low and highly volatile oil price.

And then my second question on agriculture. Do you see any logistical challenges in your Agri business, particularly in seeds? And how do the inventory channels look like in agrochemicals in Europe?

Hans-Ulrich Engel

Christian, this is Hans. I’ll start with your question on Ag. Very nice results in Q1, as we said. Maybe there’s a little bit of pre-buying, but as always, you need to have the full six months to actually assess then the business on the Northern Hemisphere.

Are we facing any type of supply chain issues that have an impact on the business? No, we don’t. We are watching the situation there very closely. There is here and there a little bit of firefighting that needs to happen, but that’s true for the other businesses, too. So actually, no major concerns there at this point in time.

Could this change? Yes, this could. I mean there are precursors coming out of India. As an example, you know that India is pretty much under lockdown since I think it was March 20. There was enough in inventory. There’s also still precursors, which are on the water right now, but there could be an issue there. There could also be an issue with packaging material coming out of India, give you an idea.

India is the biggest producer of big bags, which are an important packaging material in the chemical industry. More than 80% of the world’s big bags are produced in India. So that could cause an issue, but hasn’t caused an issue so far.

Sales channels, channel inventories. Actually, I’ll start with South America because that’s end of the season there. And based on everything that we can see, ending inventories there in the channels at a comparatively low level, which should be a good basis for a solid business than in the second half of the year in the season in South America.

Sales or distribution channels in North America, you may recall that we said last year around this time that we’re getting basically a double whammy because two things were happening: one, awful, dreadful weather conditions, which had a significant impact on our business as also on the businesses of our competitors.

But then also something that we saw was that distributors were cleaning up their inventory significantly, which led to an overall good situation now in Q1. And it doesn’t look to us like channels are being filled and the inventory situation in Europe based on what the guys in Ag Solutions told me yesterday looks relatively normal, but we’re in the midst of the season here.

There’s always the concern about drought. Today, it’s raining in Ludwigshafen and not only in Ludwigshafen. So let’s see how all of that develops. I want to say, other than currency in South America, with the decrease of the Brazilian real and the Argentinian peso, at this point in time, no major watchouts that we see.

Stefanie Wettberg

Now the following questions will be from Matthew Yates, then Tony Jones and then Chetan Udeshi.

But now, first, Matthew Yates, Bank of America.

Matthew Yates

I noticed today is the first time since the Second World War that Royal Dutch Shell has cut its dividend. So I wanted to ask under what sort of circumstances with the BASF Board consider a cut to its dividend next year?

I saw you’ve recently been put on negative credit outlook by the agencies, and you’re obviously reducing your profit forecast today. So from a strategic perspective, how are you balancing the dividend obligation versus your debt capacity?

And it’s just the current strategy of sticking to a progressive dividend, almost irrespective of market conditions, preventing you from creating longer-term shareholder value from investing CapEx in the business?

Martin Brudermüller

Matthew, I mean, we implemented the dividend strategy, the progressive dividend strategy, as part of our corporate strategy at the end of 2018. And that was certainly a consideration for a long – for a midterm part and for also the earnings opportunities and strength of BASF. So we are not going away from that strategy now because of that crisis without any look in how the world will look after the crisis.

And this is, I think, also for that reason, very clear, we have different scenarios about liquidity and all these scenarios show that we have the strength to pay the dividend. It’s a dividend that is connected with the performance of 2019 and this is why we go for that.

I think now to make any statement about what the dividend will be in the future without knowing how the future looks, I think, is exactly what we don’t want to do. And let’s just wait how the half year two will be and then how fast the recovery will be, whether this will be a rather short one in 2021 coming back to where we have been before the crisis or whether this takes two, three years. And deriving from that, we will look what the growth perspective is, what the earnings perspective midterm of the company is and then we will see. That we have not come out with a progressive dividend strategy and a strategy where we basically are rolling back just when the first obstacle comes is also very clear. And I think this is also what the Board stands for.

So I leave it with this. We look when we get out of the fog and when we have a clear idea how the development of chemical markets will be, what that means for BASF. Let me really say, I mean, you saw in the first quarter a positive volume development. I can also tell you now in this crisis situation, we have customers who come to BASF because they now realize that this is really a reliable company.

In particular, the Care segment, we have partially double-digit volume demand in addition to what our sales level is. And surprise, surprise, there are quite a few suppliers who are unable to deliver because they have lockdown and production problems, and the one who can actually deliver is BASF. So we also take this opportunity to strengthen some of the strategic relationships with the partners and drive this into a midterm, long-term growth strategy with them. So let’s collect all this together and then we will see what that means, but we will not give up that progressive dividend policy so easily.

Matthew Yates

And just to follow up. As you rightly said, I don’t think any of us know what the second half of the year holds. How is your commitment towards protecting that strong A credit rating? Are you willing to take the downgrade? Or will you be looking for raising capital from other disposals, for example?

Hans-Ulrich Engel

Matthew, the short answer to that is we’re certainly not interested in a downgrade. We have a clear target. That target is a solid A and that is a target, which we are actually trying to make the right moves to also support that.

Stefanie Wettberg

The next question or questions are from Tony Jones, Redburn.

Tony Jones

I’ve got two. Firstly, a shorter-term question, with the lockdown and a lot of employees at home, I would have expected that we might have started to see OpEx falling. But in the income statement for this quarter just reported, SG&A costs were actually slightly up year-on-year. Is that the sort of dynamic we should expect in Q2, Q3? Or is it a temporary effect and we should see expenses starting to decline?

And then, secondly, a slightly more strategic question. So we’ve got Brent below $30. And if we look at the global cost curve for upstream petrochemicals, it’s collapsed and really flat. What does that mean for BASF margins maybe regionally? And is that going to start to impact some of your investment decisions?

Martin Brudermüller

Hans can add for you of these numbers. Let me make you one comment about this home officing. I mean it’s very remarkable. 40,000 people in BASF are in home offices. And I would say, from my perspective, BASF is functioning quite well.

So if you look on that, I think people now really focus on what they have to do. They leave all the inefficiency side. And I think the learning out of that is looking forward and is actually catering to our – the topics we have addressed in the strategy to a leaner and more agile organization. I think that clearly shows there’s further potential also to slim even further down, and that is what we also will drive long term.

I cannot imagine that we come back to old traveling schedules. There’s much more you can do via more digitalization. I think it encourage digitalization. So I just want to mention that this is all further potential, I think, to bring costs down in the years to come. And so it’s a positive aspect, and I think it convinces also people by experiencing it that you can organize certain things differently in BASF.

So Hans, you want to add on some numbers?

Hans-Ulrich Engel

Yes. Tony, with respect to SG&A, I’m not 100% sure that we’re looking at the same numbers there. Mine show me a decline. So suggestion is that after this call, we’ll set up a quick review and then take a look at what you have and what we have.

Your question on the margin side is also a difficult one to answer. We’ve seen in – towards the end of Q1 as a result of the steep decline in oil prices, naphtha following – I mean, naphtha spot prices at $85, it’s something that’s very surprising. But I think, on average, we are now in the range of $140, $150 in for naphtha.

It’s not only us seeing that. It’s also our customers seeing that. In this kind of low-demand environment, it is very difficult to hold on to any type of raw material price advantages. You have to pass them on almost immediately because demand is so low. Under normal circumstances, we tend to think in a way where, in our upstream segments, which are heavily pricing raw materials in their formulas – not heavily pricing it, it is an important part in the price formulas, we pass that on with 30 to 60 days. In the current environment, it’s almost immediate.

Stefanie Wettberg

Now it’s Chetan Udeshi, JPMorgan.

Chetan Udeshi

A few questions. Firstly, just going back to the previous question around Wintershall Dea. Are you ruling out any sort of bailout of Wintershall Dea through shareholder loan or shareholder equity contribution to Wintershall Dea?

Second question was just a clarification on the numbers that I wasn’t sure I heard correctly or clearly. It was just around what you’ve seen so far in terms of order development and sales development in April. I mean, if you have any regional or just group numbers would be useful.

And just last question on pricing in the downstream businesses. Like you said to the previous question, it’s difficult to hold on to any price raw material benefit. Is that something, which was visible already in your Q1 numbers? Or is that something you think will be visible more to the rest of the quarter because one place where I did see some deterioration in pricing is already in the Coatings business where you had flat, but most of your competitors have been reporting still solid pricing.

Martin Brudermüller

Chetan, I can repeat the numbers I said. It’s about in April 20% lower on sales and it’s about an order entry, which is about 30% lower than the average of the previous month. So this gives you an idea. And it reflects also very much, I think, the lockdown situation very much transported or most of the part transported actually by the automotive industry.

Hans-Ulrich Engel

On your bailout question, Chetan, as I said earlier, financially, Wintershall Dea is standing on its own feet. It’s taking the necessary measures to improve its liquidity. So I don’t see a situation in which we would have to bail out Wintershall Dea, which is very solidly financed.

Stefanie Wettberg

Okay. We have five more analysts in the line, so please condense your questions. It is, first, Andreas Heine then Peter Clark, Laurence Alexander, Gunther Zechmann, Markus Mayer. So now we start with Andreas Heine, MainFirst.

Andreas Heine

The first is on cash flow. So net working capital had a strong outflow in the first quarter and you elucidated that, that is not least due to the seasonality in the Agro business. Going into the second quarter, is it fair to assume that you have a massive inflow from net working capital helping your liquidity, first, by collecting the sales from the Agro business; the second, by lower business activity, which means lower inventories; and thirdly, by lower raw materials. So would it be fair to assume that at the end of the second quarter, net working capital will be below last year?

And related to the cash flow – CapEx you outlined on the big projects mid to long term, how do you see on – do you look on the CapEx on 2020 where you have probably also some smaller projects where you have certain flexibility?

And then maybe some more clarification on the Others line, which has seen an increase and see then the miscellaneous line, you have minus €249 million, much higher than in the year before. Could you explain this a little bit because I would have assumed, with the lower share price, a relief of long-term incentive programs basically resulting into a better outcome than in the year before? And what do we have to assume on these lines in the coming quarters, please?

Martin Brudermüller

Andreas, just quickly from my side. From CapEx, I mean you saw from €3.4 billion to €2.8 billion. What we actually do is we look through each and every project. Certainly, you know that some are running. You can partly also stretch them a little bit. You can also postpone. If you just think about that level more or less with each month you spread the whole spending, you have a kind of €200 million to €250 million coming in. I think there will be also quite some things anyway happening because some of the suppliers will have lockdown, will have problems to deliver in time, which automatically will delay the one or the other investment project and this is also the spending pattern.

What we don’t do is anything stupid. We don’t cut off the legs where we depend also on future growth because, otherwise, you will tell us after – post corona why you have actually not done the right measures to ensure that you can grow.

So on the other hand, I mean, with this, the demand pattern, there’s also for many of the product lines not the necessity now to start capacity expansions. That doesn’t mean that we give them up, but we adapt them from the timing perspective. So it is a bunch of things. Everyone has to contribute. This is also bottom-up developed, so – and this is, I think, a very consistent approach throughout BASF Group.

And last, not least, I have also said we have taken OpEx down a little bit because we have some OpEx projects, which clearly address smart debottlenecking. This is the last thing we need in the moment when you still have enough capacities to grow. So we focus more on those projects that immediately contribute to cost reduction. So it is a mix of smaller and larger contribution and postponements and time adaptions.

Hans-Ulrich Engel

Yes, Andreas, this is Hans. On your question with respect to the net working capital, what do we expect? We expect a shrinking business to generate cash for us. That’s a bit counterintuitive, but that’s what’s happening. When the business shrinks, your accounts receivable come down. You also, as you rightfully mentioned, you’re collecting – or starting to collect in Q2 on the accounts receivable from the Ag business, to a large extent, also in Q3. But there will be significant cash generation as a result of lower inventories and lower accounts receivable.

What has driven the cash consumption up in Q1 of this year, so Q1 is the quarter as a result of peak ag season that generates the highest accounts receivable. We have a second development, our overdue quota has gone up a little bit, to be specific, by about four percentage points. And you look at a base there of €11 billion in accounts receivable, you know what that does, it drives your net working capital also up or the cash that you need in there. We have lower payables. And last but not least, there is a book effect coming out of our precious metals and that explains then what’s going on and what’s consuming the cash.

But your assumption is – I can only support. During Q2, we should see a significant decline in net working capital, and as a result of that, a significant amount of cash generation. Your second question – or third question is what’s going on in Other. In Other, we have a decline in EBIT before special items by roughly €40 million. When you look at our quarterly report, what you see is this is almost exclusively coming out of the miscellaneous line or miscellaneous income in expenses or in other words, other in Other, that makes it always difficult. What’s happening there is it’s really a hodgepodge of things that lead to the decline there. Among other things, personnel-related measures, which we have not yet allocated to the operating divisions.

And then also something, as you know, we have a captive insurance company. That captive insurance company has investments, which – on which it has to do a mark-to-market, and that mark-to-market on these investments also leads to – or leads to a loss and all of that is reflected in this other of Other line. I hope that helps a bit.

Stefanie Wettberg

Next question is coming from Peter Clark, Societe General.

Peter Clark

It’s just one an extended question actually about the hit you’re seeing. So to remind you, I think you alluded to the fact that the order entry is indicating sort of 30% down worse than April. On the auto side, though, you made it clear, that’s the big stump. And I think the consultants are looking at the build somewhere down 45%, 50% for Q2. And obviously, the refinish is very weak as well with less miles driven.

So if I look at a business like Coatings, just wondering where you see the volumes there. Obviously, one of your peers with a lot more than just auto in their mix is indicating volumes down 30%, 35% in Q2. Yes, you can be worse than that on Coatings and how that is through into businesses like Catalysts and Performance Materials as well? Just an indicator of where you see your auto exposure, meaning, Q2.

Martin Brudermüller

Well, I think automotive, you heard now that all the OEMs say they start up again. If you look more in detail, this is, in many cases, not really the full production of cars, but it is partly engines and pieces of that. So I think we are far away from having fully loaded and fully functioning car production.

I think we have a very big question mark also on the demand side because the current crisis is a trust crisis and a demand crisis and a supply crisis in the same moment. I mean who is now really going out over the next weeks to order a car in times of economic uncertainty? You have friends getting unemployed so you keep your money together, you have still a car working. So is that the time to buy a new one? I think that’s a big question mark.

If we look on China where definitely car production is ramping up, but if you listen also to those reports, then you see they are not where they have been before in the crisis. They are still significantly below the numbers before. So I think there is just a huge amount of question marks.

What we, however, can see in China is certainly that the orders go up again. We see that in Coatings, also in other areas that actually the OEMs start to order materials in all the divisions again. But – so that shows you that China, which is ahead of these lockdowns and the first one coming out and normalizing, is giving kind of an example. Whether this is being replicable to all the other countries in the regions, culturally, I am not so sure.

So I really leave it with that because I think beyond that, we can really not see. And I mentioned that a lot of the, actually, lower sales and the lower order entry has to do with the automotive industry. And I’ll leave it here because we don’t see more than I just said.

Stefanie Wettberg

Now Laurence Alexander from Jefferies.

Laurence, can you hear us?

Laurence Alexander

Sorry about that. I was trying to – I have you on mute so you wouldn’t have the cats in the background. So two quick questions. First, on the mobile emission catalysts, can you peel back a little bit what’s going on there? And were there any timing effects that pulled forward results from Q2 into Q1?

And then, secondly, as you think through kind of the degree of disruption here and the impact of the low oil environment, how does this affect your innovation cycles and customer adoption of new products in the sales – the selling cycle? Are you going to see sort of a little bit of a lingering effect in 2021 and 2022 as people adjust to new value propositions and don’t put as much of a premium on what they valued last year?

Martin Brudermüller

Laurence, let me start with the second part. It’s much too early to say this. What I hear from a lot of customers, and it also includes the statement of BASF, we are not going to change our sustainability approach, CO2 emissions, but also our commitment to accelerate our products to work with our customers to bring carbon footprint down. And actually, the customers, they have not changed anything in the innovation projects yet. Whether this might happen if they have worse projections and their growth rate goes down and they can afford less, I cannot exclude that with the one or the other customers. But overall, I would say this is much too early to say.

The innovation projects basically are running and also our own carbon management projects where we have some hard nuts to crack in terms of developing new low-emission technologies, we just don’t change anything in that now because of the crisis. So I think we have to just give it a little bit more time to wait for that.

But if a company gets in trouble financially and has to reengineer and restructure and to shrink, I would expect that it has also the one or the other effect on innovation. But that is not coming now. We might talk about that in three, six or nine months.

Hans-Ulrich Engel

Laurence, your question on automotive catalyst. We have not experienced any type of pre-buying in that business in Q1. What we have experienced though is strong demand for our China six catalyst, new standard in China introduced beginning of the year. Apparently, we are there with the right product at the right point in time and enjoying the demand that we have there for the product.

Stefanie Wettberg

So now the final participant on the list, Markus Mayer, Baader-Helvea.

Markus Mayer

With two questions left, one for Hans and one for Martin. First one for Hans, on this effect from the change in reporting, have I understood you rightly that the majority of the effect was in the Others line? Could you also maybe elucidate how the effect was for the other divisions as well or for the divisions as such? And the second question is on the efficiency projects. Has the current crisis affected the projects, either delayed or accelerated it?

Hans-Ulrich Engel

Yes, Markus, thanks for the question. No impact on any of the other businesses. We’re moving what was reported in at equity in Other, the non-integral ones we’re moving out of Other and moving that into the financial participations that doesn’t affect any of the other segments.

Martin Brudermüller

So I would say the efficiency project is on track. Wherever we can, we accelerate certain things. I would say also the composition may be changed a little bit because one part is coming from production, from OpEx, which is also then the contribution margin coming from additional volumes we generate. But we have to sell the volume. So if we don’t sell them, we can also not generate that part.

But on the other hand, I mentioned that earlier, I think confidence in digitalization goes up. We clearly go also for the maximum in cost reduction even maybe beyond what we have on the list. We have also very clear plans and can only reiterate that we reduce the 6,000 people as much as we can until the end of the year and wherever possible go also beyond that. So I would say the efficiency project changes a little bit in the composition, but the overall achievements in where we want to go to, I would say, are still valid. And we bring home as much as we can in this environment.

Stefanie Wettberg

Ladies and gentlemen, this brings us to the end of our conference call on the first quarter results. As announced earlier, we will hold BASF’s Annual Shareholders’ Meeting on June 18. It will be an entirely virtual shareholders’ meeting, which has been made possible for this year by German legislation. We intend to publish the invitation to BASF’s Annual Shareholders’ Meeting on May 22. On July 29, we will present our second quarter results. Should you have any further questions at this time, please do not hesitate to connect a member of the BASF IR team. Thank you for joining us today, and goodbye for now.

Martin Brudermüller

Thanks, all, and stay healthy.

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