Business News

BASF improves earnings after weak start to the year

Thursday 30. July 2009 - Sales and earnings from operations (EBIT) before special items slightly higher than in previous quarter; First half 2009: sales down 23.3%, EBIT before special items down 55.4% compared with same period of 2008; Industrial business stabilizes at low level; trough seems to be reached in North America, China again growing faster; Global measures to increase efficiency and reduce costs make an impact; Special charges related to Ciba; expected annual synergies of at least €400 million; Overall, no lasting upturn in business in sight: cost of capital unlikely to be earned in 2009

BASF’s sales and earnings were again negatively impacted by the ongoing global economic crisis in the second quarter of 2009. The effects on business were especially pronounced in the segments Chemicals, Plastics and Functional Solutions, in particular because of the situation in the automotive and construction industries. Sales in the oil and gas business also declined as a result of lower sales volumes of gas and a considerably lower oil price. The company’s strong agricultural products business posted higher sales and earnings.

At a conference call to present BASF’s figures for the first half and second quarter of 2009, Chief Financial Officer Dr. Kurt Bock explained: “Thanks to our success in reducing current assets and our measures to improve efficiency and reduce costs, we were able to increase cash provided by operating activities by a total of €1 billion in the first half of 2009 to €3.6 billion despite the significant decline in earnings. This financial stability provides BASF with a competitive advantage.”

Sales in the first half of 2009 amounted to €24.7 billion, or 23 percent less than in the same period of 2008. Income from operations (EBIT) before special items fell by 55 percent in the first half to approximately €2.1 billion.

Second-quarter sales dropped 23 percent to €12.5 billion. Lower volumes and prices contributed 18 percent and 13 percent, respectively, to the sales decline. Currency effects were positive and contributed 3 percent to sales. The Ciba businesses, which were acquired on April 9, boosted sales by 5 percent. EBIT before special items fell 53 percent to €1.1 billion. However, both sales and EBIT before special items improved compared with the first quarter.

“Overall, we think that the downturn seems to have bottomed out and there seems to be stabilization at a low level. The trough appears to have been reached in North America, and China is again growing faster. But we see no signs of a sustained upturn. There is still the danger of another painful setback due to overcapacities, bankruptcies and growing unemployment,” said Bock.

Outlook for full year 2009

BASF has updated its forecast with regard to the underlying economic conditions worldwide in 2009:
Decline in gross domestic product (minus 3 percent)
Decline in industrial production (minus 10 percent)
Decline in chemical production, excluding pharmaceuticals
(minus 8 percent)
Average euro/dollar exchange rate of $1.35 per euro
Average oil price of $55 per barrel in 2009
In view of this economic environment and the expenses resulting from the Ciba integration, BASF expects a significant decline in sales and earnings in 2009. “We are therefore unlikely to achieve our goal of earning our cost of capital in 2009,” said Bock.

Ciba integration: expected synergies of at least €400 million per year

Board member Dr. Hans-Ulrich Engel explained the current status of the Ciba integration. BASF will complete all major integration measures by the end of the first quarter of 2010. The latest analyses have fully confirmed the strategic rationale for the Ciba acquisition. BASF is now a leading supplier in several areas of specialty chemicals.

Extensive restructuring measures are necessary to fully exploit the potential of the combined businesses. This will include a reduction of approximately 3,700 positions worldwide by 2013. BASF expects the restructuring to bring synergies of at least €400 million per year, which corresponds to at least 10 percent of Ciba’s 2008 sales. This target is to be reached by the end of 2012, with three-quarters of the amount, i.e., €300 million per year, already being achieved by the end of 2010.

The synergies are associated with corresponding integration costs: BASF expects total cash costs of approximately €550 million. The major portion thereof is severance costs. In addition to cash costs, BASF expects non-cash costs of about €500 million. The final amount will depend on the extent of the measures necessary, in particular the number of sites to be closed.

Agricultural Solutions posts higher sales and earnings

In the Chemicals segment, BASF posted a drop in sales of 41 percent due to lower volumes and prices. Although EBIT before special items was 32 percent lower than in the second quarter of 2008, all divisions improved significantly compared with the first quarter of 2009.

Sales in the Plastics segment fell by 30 percent due to weak demand from almost all customer industries. EBIT before special items was halved. In contrast to the first quarter of 2009, both divisions posted positive earnings thanks to a slight improvement in capacity utilization and strict cost management.

In the Performance Products segment, sales increased by 17 percent as a result of the acquisition of Ciba. Despite lower fixed costs and higher margins, EBIT before special items dropped by 64 percent. This was mainly due to the fact that the acquired Ciba businesses posted a significant loss due to the tough business environment and integration costs.

As a result of the continued weak demand in the automotive industry, sales in the Functional Solutions segment declined by 30 percent. This particularly affected the Catalysts division, which was additionally impacted by a significant decline in precious metal prices. EBIT before special items in this segment fell by 57 percent compared with the same quarter of the previous year, but was again positive following a loss in the first quarter of 2009.

After a lightning start in terms of sales and earnings in the first quarter, second-quarter sales in the Agricultural Solutions segment were only slightly higher than in the same period of 2008. This was the result of delayed planting in North America and parts of Europe, as well as the drought in Argentina. EBIT before special items rose by 1 percent, mainly due to higher prices in North America and Europe, as well as positive currency effects.

The sharp decline in oil prices and lower natural gas volumes led to a 23 percent decline in sales in the Oil & Gas segment compared with the second quarter of 2008. EBIT before special items fell by 51 percent. This was due to the fact that the oil price was 50 percent lower than in the same period of the previous year, as well as lower volumes in natural gas trading.

Sales in Other decreased due to lower demand in the styrenics and fertilizers businesses. Overall, EBIT before special items fell considerably and was negatively impacted by unrealized losses from currency hedging as well as expenses from the BASF option program as a result of the higher share price. By contrast, a high level of unrealized earnings from raw materials hedging was recorded in the same quarter of the previous year.

Sales decline in all regions – demand rises in Asia

In Europe, sales fell by 26 percent in the second quarter. EBIT before special items dropped massively by €1.2 billion to €696 million. Sales and earnings in BASF’s industrial business and in Oil & Gas declined substantially due to weak demand. Sales in Performance Products rose considerably as a result of the inclusion of the Ciba businesses. Agricultural Solutions made a major contribution to earnings.

In the second quarter, sales in North America decreased by 33 percent in dollar terms and by 24 percent in euro terms. In a difficult business environment, almost all segments were affected by the significant sales decline. At €184 million, EBIT before special items, however, was at the same level as in the second quarter of 2008. This was due above all to strong business in Agricultural Solutions.

In Asia Pacific, sales decreased by 23 percent in local currency terms and by 15 percent in euro terms. EBIT before special items declined by €38 million to €193 million. In particular, the decline in earnings affected the segments Chemicals, Plastics and Performance Products. Overall, demand in this region rose significantly in the second quarter compared with the first quarter thanks to renewed growth in China.

Sales in South America, Africa, Middle East decreased by 10 percent in local currency terms and by 8 percent in euro terms. EBIT before special items declined only slightly by €5 million to €67 million. Together with Oil & Gas, the Performance Products segment was also affected by the decline in earnings due to the weak textile and leather chemicals business. Business in Agricultural Solutions was negatively impacted by the drought in Argentina.