Business News
BASF shows strength in global crisis
Thursday 30. April 2009 - High cash flow and reduction of net debt; Very weak demand in industrial business; Strong earnings in Agricultural Solutions; Sales down 23%, EBIT before special items down 58%; Goal of earning cost of capital increasingly difficult to achieve
In an extremely difficult environment, BASFs business declined in the first quarter of 2009. At 12.2 billion, sales were 23% lower than in the first quarter of 2008, primarily due to persistently weak demand. Income from operations (EBIT) before special items fell by 58% to 985 million as a result of a substantial decrease in volumes in many divisions.
BASF responded swiftly to the crisis: The company has tailored production to reflect the decline in demand and reduced inventories. Compared with the first quarter of 2008, cash flow nearly doubled, and net debt has been reduced by around 1.5 billion since the beginning of the year.
Cost reduction and efficiency programs are being implemented rigorously and rapidly. With the excellence program NEXT, BASF intends to further improve productivity and effectiveness in all functions and working areas: The aim is to reduce costs, increase efficiency and speed up all business processes. In conjunction with ongoing cost-cutting activities, the company expects this to progressively increase earnings by more than 1 billion per year as of 2012.
“In times of crisis, swift and decisive action is important. As early as the fourth quarter of 2008, we were one of the first companies in our industry to adapt our capacities to the dramatic slump in demand and reduce costs on all levels in order to ensure profits and liquidity in the short term. At the same time, we are focusing far ahead and are taking action today to be well equipped for the next upturn. Our goal is to emerge from this crisis even stronger and to increase our leading position,” said BASF Chairman Dr. Jürgen Hambrecht in his presentation of figures for 2008 and the first quarter of 2009 at the Annual Meeting of BASF SE on April 30, 2009 in Mannheim.
Very successful start to year in Agricultural Solutions
In the first quarter of 2009, sales decreased significantly in all divisions of the Chemicals segment due to lower volumes and prices. Earnings fell sharply as a result of the continued low level of product demand but were positive in all divisions. The fact that competition was tougher than in the same quarter of 2008 had a particularly detrimental effect on margins in the Petrochemicals division. Production was tailored to reflect this fall in demand and inventories have been reduced.
A drastic decline in sales was also recorded in the Plastics segment, mainly due to substantially lower volumes compared with the same quarter of the previous year. Earnings declined considerably and were slightly negative – in particular, as a result of low margins and high costs of idle capacity in the Performance Polymers division.
Sales in the Performance Products segment fell in all three divisions. With prices remaining stable, there was a sizeable reduction in demand. The Care Chemicals division improved earnings thanks to reduced fixed costs, whereas earnings in the segment as a whole fell sharply as a result of lower volumes.
As a result of very weak demand from the construction and automotive industries and a decline in prices for precious metals, sales dropped dramatically in the Functional Solutions segment. The Catalysts and Coatings divisions were affected particularly badly. In contrast, sales in the Construction Chemicals division were at the same level as in the first quarter of 2008. Profitability in this segment was negatively impacted by the extremely weak business with the automotive industry and earnings were negative.
In the Agricultural Solutions segment, higher volumes and price increases led to strong sales growth. The nonagricultural pest control business of the Sorex Group acquired at the end of 2008 also contributed to the increase in sales. The new growing season got off to a particularly successful start in Europe and North America. Earnings improved significantly compared with the same quarter of the previous year as a result of higher sales volumes, increased margins and positive currency effects.
The Oil & Gas segment also posted slightly higher sales. The drastic fall in oil prices was more than compensated by the increased prices in the Natural Gas Trading business sector. Earnings in the Exploration & Production business sector decreased substantially due to lower prices, whereas earnings in Natural Gas Trading increased greatly due to higher margins. However, this increase in earnings in Natural Gas Trading was not enough to offset the decline in earnings overall.
Sales in Other decreased significantly, primarily due to lower sales in Styrenics. Volumes of fertilizers also decreased considerably as a result of an unusually late and therefore also poor fertilizer season. Earnings in Other were negatively impacted by currency losses from the hedging of forecasted sales not allocated to the segments.
Special items of minus 57 million (first quarter of 2008: minus 51 million) were related in particular to expenses for restructuring.
Compared with the first quarter of 2008, EBIT dropped 60% to 928 million, while EBITDA decreased by 46% to 1.6 billion.
At minus 202 million, the financial result was 80 million lower than in the first quarter of 2008. The main reason for this was a 52 million decline in earnings from investments consolidated using the equity method.
Income before taxes and minority interests fell 67% in the first quarter to 726 million. At 37.1%, the tax rate was lower than in the first quarter of 2008. Income taxes for oil production that are non-compensable with German corporate income tax declined significantly.
Net income decreased by 68% to 375 million. Earnings per share were 0.41 in the first quarter compared with 1.24 in the same period of 2008.
Sales and earnings decline in all regions
In Europe, sales by location of company fell by 21%. EBIT before special items also decreased substantially by 989 million to 797 million. The Chemicals and Plastics segments were particularly affected by the drop in demand in key customer industries and posted significantly lower sales and earnings. Despite the lower oil price, the Oil & Gas segment made a substantial contribution to earnings.
Sales by location of company in North America dropped by 35% in dollar terms and by 26% in euro terms. EBIT before special items declined by 197 million to 71 million. Almost all segments were affected by the fall in earnings. Only the Agricultural Solutions segment achieved significantly higher sales and earnings. The positive business development in this segment was mainly due to higher volumes and improved margins for fungicides and herbicides.
In Asia Pacific, sales decreased by 42% in local currency terms and by 34% in euro terms. EBIT before special items fell substantially by 171 million to 53 million. The considerable decline in sales and earnings affected almost all segments and was due in particular to the sharp fall in the export business of customer industries. In contrast, sales and earnings increased in the Agricultural Solutions segment as a result of the high demand in Japan, China and India.
Sales in South America, Africa, Middle East decreased by 13% in local currency terms and by 14% in euro terms. EBIT before special items declined by 12 million to 64 million. In the Functional Solutions segment, weak demand from the automotive industry in particular led to a decline in earnings. In contrast, positive currency effects resulted in higher earnings in the Agricultural Solutions segment.
Hambrecht: “No sign of a turnaround”
BASF is facing enormous challenges in 2009. The demand for chemical products has declined further since the beginning of the year, which has had a substantial negative effect on business worldwide in the first quarter. “There is currently no sign of a reversal of this trend and we do not consider temporary topping up of inventories in some regions and industries to be signs of a sustainable upturn,” said Hambrecht. Higher sales and earnings in Agricultural Solutions and in the Natural Gas Trading business sector bolstered business in the first quarter. This positive effect can be expected to recede in the subsequent quarters.
BASF will maintain strict cost and spending discipline and will continue to reduce current assets rigorously. In this way, the company aims to secure its strong cash flow and solid financing structure.
BASF will restructure and, where necessary, close or sell plants and sites that cannot ensure the companys long-term competitiveness. The company will cut at least 2,000 positions by the end of 2009.
BASF is reducing capital expenditures in view of the changed market conditions. However, research and development expenditures for fast-growing and future-oriented businesses remain high.
Following the acquisition of Ciba Holding AG, integration teams have started to investigate the acquired businesses in detail. They will develop an extensive integration plan by mid-2009. Substantial restructuring measures are urgently needed to ensure the profitable growth of the combined businesses. BASF aims to achieve synergies of 10% of Cibas sales.
In 2009, despite the acquisitions of Ciba Holding AG and Revus Energy ASA, BASF expects a decline in sales compared with 2008 and an even greater decline in income from operations, which will be negatively impacted by integration costs. “Our goal of earning our cost of capital is thus becoming increasingly difficult to achieve,” said Hambrecht.