BASF throws out 2020 guidance as pandemic demand impact continues to bite

LONDON (ICIS)–BASF has abandoned its financial guidance for 2020 and cannot rule out a second-quarter operating loss as the coronavirus pandemic continues to hit end market demand, particularly from the key automotive sector, CEO Martin Brudermueller said.

Net income fell in the first quarter of year on the back of weaker Asia demand in the early months of 2020 and the spread of the virus to Europe and North America in March.

Despite the 37% drop in net income, the results were substantially better than expected, despite some shifts in accounting to move some assets earmarked for spin-out, such as Wintershall and the water treatment assets it has combined with sector specialist Solenis.

The oil and gas arm, expected to be floated in Frankfurt at some point, was reclassified alongside some other operations into “net income from shareholdings”, which saw a €168m loss compared to a €40m loss in the first quarter of 2019.

Despite the accounting shift, BASF’s first-quarter performance defied market expectations, according to analysts, with even Wintershall’s losses less pronounced than forecast.

“Q1 is clearly better than expected, even if the accounting change of BASF is taken into account as all operating activities were better than expected by consensus,” said Baader Bank analysts Markus Mayer.

The impact on performance is expected to worsen significantly in April-June, with Brudermueller noting that low triple-digit earnings before interest, taxes (EBIT) and special items as the best-case scenario for the quarter and declining to rule out a loss.

“I don’t have to stress that this was not a normal quarter, and the same will be true for the second quarter and the rest of the year,” said BASF CEO Martin Brudermueller on an earnings call. #

“The coronavirus has turned the world upside down.”

The company’s full-year 2020 targets will not be met, according to a company announcement on 30 April, with no fresh outlook given to replace it in light of the difficulty in estimating the duration and spread of the outbreak.

“Due to the current severe effects of the coronavirus pandemic, we have now revised our forecasts for the development of the macroeconomic environment and dramatically reduced our growth expectations,” said Brudermueller, adding that he was declining to disclose those projections publicly for the first  time due to the continuing levels of uncertainty.

So far, the company has committed over €100m globally to fighting the pandemic, including the free distribution of 175,000 litres per week of hand sanitizer to public healthcare facilities, Brudermueller said.

Group sales volumes rose 4% year on year during the first quarter with all divisions contributing and increases most pronounced for surface technologies and agricultural solutions.

Catalysts results also improved despite automotive sector weakness as a result of the precious metals trading operation which makes up around half the division’s sales, due to skyrocketing prices for rare earths such as palladium and rhodium

Demand has fallen across most sectors as a result of the pandemic, but average capacity utilisation remains at over 60% despite some shutdowns, according to Brudermueller.

The number of shutdowns has been limited despite widespread restrictions on what businesses can operate during the lockdowns across much of the globe, due to 70% of BASF’s products being counted as essential, he added.

The production shutdowns have largely been based around the automotive sector, BASF’s key market and the worst-hit by the economic rout so far.

“We manage the capacity utilisation of our plants in the global BASF production network in close coordination between the downstream and upstream businesses,” he said.

“This is because we must ensure continuous supplies even if there are differing levels of demand along the value chain. Thanks to our integrated approach, we can quickly respond to fluctuations in demand,” he added.

With many firms drawing down debt facilities to increase liquidity reserves to better weather the deepest part of the downturn, BASF has expanded its financing options, according to CFO Klaus-Ulrich Engel.

The company has increased its cash and marketable securities levels to €4.2b, and taken out a €600m loan from the European Investment Bank (EIB), as well as securing a new one-year €3bn credit line in April, he said.

The company has also held for several decades an untapped €6bn credit facility which serves as the backstop for the commercial paper programme it uses to underpin short-term financing.

Focus article by Tom Brown