Business News

BASF: Stabilization in the third quarter

Friday 30. October 2009 - Sales up 2%, EBIT before special items up 9% compared with second quarter - sales down 19%, EBIT before special items down 20% compared with third quarter 2008; Operational strength: All divisions contribute positive earnings Strong cash flow reduces net debt; Coming out of the trough, upturn especially in Asia - recovery slow and uneven; Faster integration of Ciba negatively impacts 2009 earnings; Outlook for full year: cost of capital unlikely to be earned in 2009

BASF’s figures for the third quarter of 2009 demonstrate the company’s operational strength in the global economic crisis. Third-quarter sales increased by 2% compared with the second quarter but fell 19% compared with the same period of 2008. Income from operations (EBIT) before special items was 9% higher than in the second quarter and 20% lower than in the third quarter of 2008. All operating divisions contributed positive earnings. BASF’s strong cash flow increases the company’s financial strength and has enabled it to reduce debt.

“In this unprecedented downturn, we have demonstrated decisive action in the form of strict crisis management, tailoring production to demand, idling plants and introducing flexible working time arrangements,” said BASF Chairman Dr. Jürgen Hambrecht during his presentation of the company’s third-quarter results. “In the past three months our business has stabilized at a low level. Positive impulses are coming from Asia, especially from China, and from parts of South America. Europe and North America remain weak.”

BASF believes that destocking by its customers worldwide appears to be over for the time being. This has caused a slight upturn in demand. However, customers are still placing smaller orders at increasingly short notice, especially closer to the end of the year .

“Overall, t here is much to suggest that the worst is behind us. After a steep plunge, we are now climbing gradually out of the trough. The recovery will be slow and uneven,” said Hambrecht.

Worldwide BASF is pursuing a “value over volume” pricing strategy just as rigorously as it is implementing measures to reduce costs and improve efficiency. While capital expenditures are being adjusted to reflect changing markets, at the same time the company is continuing to seize the opportunities offered by growth markets worldwide. Research and development expenditures are being maintained at the high level of the previous years.

Ciba integration proceeds faster than planned

The Ciba integration is making rapid progress, and is faster than planned in some areas. By the end of the year, the closure of 33 of Ciba’s non-production-relevant sites will have been completed out of a total of 56 planned closures. Three of the seven conditions for divestitures imposed by the merger control authorities have been fulfilled, and the goal is to complete the remaining divestitures by December 2009.

The fact that the integration is faster also means that a larger proportion of the related costs will be incurred in 2009. For the full year, BASF therefore now expects the Ciba integration to result in a negative impact on earnings of more than €800 million, of which approximately €150 million will be cash costs. Approximately €700 million of the €800 million is likely to be recorded as special items. Overall, the integration will result in the reduction of 3,800 positions, the majority of which will be eliminated by the end of 2010.

Outlook for full year 2009

The company has updated its expectations with regard to the underlying economic conditions worldwide for the full year 2009 and now expects:
Decline in gross domestic product (minus 2.5%)
Decline in industrial production (minus 9.1%)
Decline in chemical production, excluding pharmaceuticals
(minus 6.1%)
Average euro/dollar exchange rate of $1.40 per euro
Average oil price of $60 per barrel in 2009

Despite stabilization of the economic environment in the third quarter, BASF anticipates a significant decline in sales and earnings for full year 2009. Fourth-quarter income from operations before special items is likely to be higher than in the weak fourth quarter of 2008, but lower than in the third quarter of this year.

“Higher costs for the Ciba integration will additionally negatively impact earnings. BASF is therefore unlikely to reach its goal of earning its cost of capital this year,” said Hambrecht.

Plastics and Performance Products improve earnings

In the Chemicals segment, sales fell in all divisions compared with the same quarter of 2008 due to significantly lower prices and a decline in volumes. The overall decline was 34%. Earnings, however, were almost at the previous year’s level and improved compared with the second quarter of 2009. Earnings in Petrochemicals and Intermediates increased compared with the third quarter of 2008.

In the Plastics segment, sales decreased by 20% due to lower volumes and prices. Demand for plastics increased compared with the second quarter of 2009, in particular in Asia. Despite the decrease in sales, earnings were higher than in the same quarter of 2008. This was mainly due to improved margins in the Performance Polymers division as a result of restructuring and cost reduction measures.

Thanks to the inclusion of the Ciba businesses, sales in the Performance Products segment rose by 25% compared with the same quarter of 2008 despite a decline in demand. Furthermore, earnings increased in all divisions due to price discipline and cost reductions.

In the Functional Solutions segment, lower sales volumes and a decline in prices for precious metals led to a 24% drop in sales. Thanks to successful cost reduction measures and higher margins in the Construction Chemicals division, earnings declined only slightly. Compared with the second quarter of 2009, sales and earnings increased in all divisions.

Due to a decline in the use of fungicides and herbicides, sales in the Agricultural Solutions segment were 2% lower than in the third quarter of 2008. Lower sales volumes and higher spending on research and development negatively affected earnings, which were slightly lower than in the third quarter of 2008. Business started successfully in the new growing season in South America. For full year 2009, BASF expects an EBITDA margin of more than 25%.

In the Oil & Gas segment, sales declined by 25% mainly due to the decline in the price of crude oil. In Exploration & Production, natural gas production was significantly expanded as the Yuzhno Russkoye natural gas field reached plateau production. Volumes increased in the Natural Gas Trading sector. Overall, earnings declined significantly compared with the strong third quarter of 2008 due to the drop in sales in Exploration & Production.

Sales in Other fell by 31% due to lower demand and falling prices for styrenics. Earnings in the Styrenics division rose thanks to lower fixed costs and an overall improvement in margins.