BASF raises 2017 outlook on strong Q3 results

At its most basic, chemicals profitability is a function of supply and demand. There is a bit more to it, of course, but in the current environment, producers of upstream petrochemicals and intermediates find themselves in a good place. Take BASF’s 25% increase in Chemicals 
segment sales in the third quarter – and its 88% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to €1.4bn from the same group of businesses.

That is set against a strong third quarter last year and reflects continued supply/demand tightness in Europe as well as underlying volume growth in Asia.

The company operates petrochemicals, monomers and intermediates businesses which it groups together in the segment for reporting purposes. The chemicals and intermediates are sold but also are feedstocks for the much broader BASF verbund, or network of downstream and specialty chemicals production.

BASF said on 24 October that its Chemicals segment sales volumes were up 6% and prices up 22% for the quarter.

The petrochemicals business clearly benefited from the relative health of steam cracker products in Europe. The profits increase from this division was also helped by a decrease in fixed costs after an insurance payout of €60m which more than covered the ongoing costs associated with the tragic North Harbour explosion and fire at the Ludwigshafen, Germany production complex on 17 October last year.

Margins improved worldwide for acrylic products, BASF said. This business has been something of a headache for players with overcapacity plaguing the principal monomer, acrylic acid.

ISOCYANATES DRIVE SALES

Sales in BASF’s monomers division were much higher on strong isocyanate price increases and margins improved markedly.

The company has had problems with its new toluene diisocycanate (TDI) plant in Ludwigshafen but says it has maintained supplies to customers with the help of a facility at Schwarzheide, also in Germany. It is, meanwhile ramping up production from a new MDI (methyl di p phenylene) plant in China.

The company is benefiting from new production facilities across Asia, BASF CEO, Kurt Bock said on 24 October, and particularly on growth outside China. “We also see good, continuous development n Europe,” he added. North America was described at “flattish”. BASF was not badly hit by the hurricanes that hit the Houston area in the quarter and later the Caribbean, including Puerto Rico where it has a herbicide plant.

The chemicals giant passed some of the upstream price increases on to customers of products made in the Intermediates division, particularly in butanediol and derivatives.

It is clear from the latest set of financial results that downstream businesses such as construction chemicals, coatings and catalysts faced headwinds, however, as raw material price increases of 60% on average were passed on down the verbund network.

POSITIVE SENTIMENT

This sort of cyclicality can be managed – that is what the verbund is designed to do. What is telling is the positive sentiment behind the latest financial report.

BASF is growing – the latest announced acquisitions being the €1.6bn adiponitrile based nylon 6,6 business of Solvay and the €5.9bn purchase of seeds and non-selective herbicide businesses from Bayer.

“In addition to organic growth, acquisitions are a key strategic lever to achieve our targets,” said BASF CEO Kurt Bock on the third quarter earnings conference call.

“We want to acquire businesses which generate profitable growth above the industry average, are innovation-driven, offer a special value proposition to our customers, and reduce the earnings cyclicality of BASF,” he added.

Cash flow currently is significant. The third quarter was “a very exciting one” for BASF, according to Bock. The Chemicals segment businesses performed better than expected and, in addition to the significant supply/demand driven price increases, volume growth was very healthy. Bock added that he was encouraged by the robust volume growth of the third quarter. He added that there were no signs of a “summer lull” this year.

In the third quarter, cash provided by BASF operating activities rose by 52% year on year to €3.8bn. Free cash flow was €2.8bn. The increase in net income after nine months has helped lift cash from operating activities by €1.8bn to €7.6bn. Free cash flow is up from €2.9bn to €5bn.

Laurence Alexander, analyst at investment research firm Jefferies, noted that “strong volumes (6% in both Chemicals and Performance Chemicals), robust demand in China, and raised demand forecasts were key positives in Q3 overshadowed by a lopsided earnings beat (all upstream and taxes)”. BASF’s earnings per share of €1.40 bear consensus estimates by €0.09.

And even with recently announced acquisitions of Solvay’s nylon 6,6 business for €1.6bn and the seeds and herbicides business of Bayer for €5.9bn, the analyst estimates that BASF has over €12bn of potential balance sheet flexibility through 2020.

For all of 2017, BASF has a very positive outlook for its operations. It expects a “considerable increase” in sales, earnings before interest and tax (including before special items), and EBIT after the cost of capital.

“We strive to once again earn a significant premium on our cost of capital in 2017. Deviating from our forecast at the end of July, we expect EBIT after cost of capital to increase considerably and not only slightly,” said Bock.

RAISING MACRO ASSUMPTIONS

And underpinning the slightly upgraded full year outlook are the company’s revised expectations for global economic and industrial growth.

BASF is working on global GDP growth in 2017 of 2.8% – up from its estimate of 2.5% at the half year. It expects industrial production to advance at a firmer pace – 3.1% (against 2.5% at the half year). Its euro/dollar exchange rate projection remains unchanged at $1.10 per euro and as does its average Brent oil price at $50/bbl.

Additional reporting by Joseph Chang