Lower Contributions from the Chemicals Segment
BASF 2018: Sales Increase and Decline in Earnings
BASF SE, Ludwigshafen, Germany, generated sales of EUR 62.7 billion last year. This represents an increase of 2% compared with the previous year. Income from operations (EBIT) before special items declined to EUR 6.4 billion, compared with EUR 7.6 billion in the previous year. This was mainly attributable to the Chemicals segment, which accounted for around two-thirds of the total decline in earnings. Isocyanate margins fell sharply in the second half of the year. Furthermore, cracker margins were lower than expected in all regions in 2018.
Overall, 2018 was a year characterized by difficult global economic and geopolitical developments and trade conflicts. In the second half of the year, BASF felt an economic slowdown in key markets, especially in the automotive industry, BASF’s largest customer sector. In particular, demand from Chinese customers declined significantly. The trade conflict between the United States and China contributed to this. Around the world, uncertainties grew. Many market participants therefore acted very cautiously.
Price Increases in all Segments
BASF implemented price increases in all segments and divisions in 2018. Volumes rose slightly compared with the previous year: Higher volumes in the Functional Materials & Solutions and Agricultural Solutions segments were partially offset by lower volumes in the Performance Products and Chemicals segments. The main reason for the lower volumes in the Performance Products segment was the outage at the citral plant in Ludwigshafen, which started production again in the second quarter. Sales volumes in the Chemicals segment were negatively influenced by the low water levels on the Rhine River. Currency effects were minus 4% overall, while portfolio effects were plus 1%.
Lower earnings in the Functional Materials & Solutions, Agricultural Solutions and Performance Products segments also contributed to the decline in EBIT before special items. In the Agricultural Solutions segment, negative currency effects in all regions dampened earnings. In addition, there was a strongly negative contribution from the businesses acquired from Bayer, which BASF only took over in August. This timing was a disadvantage because of the seasonality of the seeds business, which primarily generates income in the first half of the year. Moreover, there were costs for integrating the acquired activities.
As well, the unusually long period of low water levels on the Rhine River posed a challenge for BASF. At the Ludwigshafen site, for much of the third and fourth quarter, it was nearly impossible to receive deliveries of raw materials via ship. Consequently, BASF was forced to reduce plant capacity utilization rates in Ludwigshafen. This lowered 2018 earnings by around EUR 250 million.
Special items amounted to minus EUR 320 million, primarily due to acquisitions. This compares with minus EUR 58 million in the previous year. EBIT declined by 20% to EUR 6 billion. At EUR 9.5 billion, EBITDA before special items was 12% below the prior-year level. EBITDA amounted to EUR 9.2 billion, compared with EUR 10.8 billion in 2017.
Earnings per share fell from EUR 6.62 to EUR 5.12 in 2018. Adjusted for special items and amortization of intangible assets, earnings per share amounted to EUR 5.87, down by EUR 0.57 from the previous year.
Group Earnings Development in the Fourth Quarter 2018
BASF Group’s sales rose by 2% in the fourth quarter of 2018 to EUR 15.6 billion. Supported by the segments Performance Products, Functional Materials & Solutions and Agricultural Solutions, prices could be raised by 2%. Volumes declined by 3%. This was primarily attributable to the prolonged low water levels on the Rhine River, which severely limited shipments of key raw materials to the Ludwigshafen site and thus forced us to reduce capacity utilization. Portfolio effects amounted to plus 3% due to the acquisition of Bayer businesses in the Agricultural Solutions segment.
EBIT before special items in the fourth quarter was EUR 630 million, down 59% on the prior-year figure. This decline was due to significantly lower earnings in the Chemicals and Agricultural Solutions segments. In the Chemicals segment, the main reason for this was lower margins in the isocyanate and cracker business. Fourth-quarter earnings development in the Agricultural Solutions segment was hampered by acquisition-related expenses. BASF was able to improve earnings in the Performance Products and Functional Materials & Solutions segments. The supply bottlenecks resulting from the low water levels on the Rhine River had a negative impact of around EUR 200 million on earnings in the fourth quarter.
Implementation of the New Strategy
BASF has further developed its strategy, which the company is systematically implementing with numerous measures. As a first step, as of January 1, BASF changed the organizational allocation of around 14,000 employees who previously worked in central units. This transfer into the operating divisions went very smoothly.
According to Dr. Martin Brudermüller, Chairman of the Board of Executive Directors, the entire process will be completed by the end of the third quarter 2019 and around 20,000 colleagues will then be working closer to the customers. The changes to the organization affect areas such as research and development, engineering, supply chain, purchasing, human resources, information services and environment, health and safety. The company also changed its reporting structure and has six segments instead of four as of January 1, 2019: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition & Care and Agricultural Solutions.
On January 18, 2019, the European Commission gave BASF conditional clearance to acquire Solvay’s polyamide business. To address the European Commission’s competition concerns, BASF must divest parts of the original transaction scope to a third-party buyer, namely manufacturing assets and innovation capabilities of Solvay’s polyamide business in Europe. Brudermüller commented: “With this acquisition, BASF can still achieve its strategic goals and considerably strengthen the business with polyamide 66.”
As part of BASF’s active portfolio management, the company continuously examines whether businesses can even better fulfill their potential in a different constellation, for example, in a joint venture or outside of BASF. In this context, the company announced in October 2018 that it was evaluating strategic options, such as a merger with a strong partner or a divestiture, for its construction chemicals business. BASF’s Chairman of the Board of Executive Directors commented: “We aim to reach agreement on a transaction during the course of 2019. We are currently preparing a structured process.”
Investments in Organic Growth in Asia
China is now already the key market in Asia and worldwide. For example, at the end of October 2018, BASF signed an agreement with Sinopec to expand their partnership at the Verbund site in Nanjing, China. The joint venture BASF-YPC will invest in a 50% stake to build another steam cracker with a capacity of 1 million t of ethylene per year. Sinopec Yangtzi Petrochemical will invest the other 50%. Furthermore, the companies will jointly explore new business opportunities in the fast-growing Chinese market for battery materials.
India is another market where BASF wants to invest. The company recently signed a memorandum of understanding with Adani to investigate a major joint investment in the acrylics value chain. The designated site would be located at Mundra port in the Indian state of Gujarat. This would be BASF’s largest investment in India to date and its first CO2-neutral production facility.
A framework agreement signed in January 2019 with the government of Guangdong Province in southern China sets out further details of BASF’s plan to establish a new Verbund site in the city of Zhanjiang. More than 9 km2 of land are available to realize this project. In BASF’s view, the new site is ideal because it benefits from Zhanjiang’s natural resources, a deep-water port and excellent transportation links to Guangdong’s industrial centers.
Outlook for the Year 2019
In the current year, BASF expects the global economy to grow by 2.8%, considerably slower than in 2018 (3.2%). In the European Union, the company anticipates weaker growth in both domestic demand and export demand from third countries. On the other hand, BASF presumes the United States will deliver solid growth, although the stimulus effect of the tax reform should be less pronounced than in 2018. Growth in China will likely continue to cool but remain high compared with the advanced economies. By contrast, the economic recovery in Brazil is expected to hold up.
“We also expect growth in our customer industries to continue. For the automotive industry, we anticipate a slight recovery after lower production in the previous year,” said Brudermüller. BASF’s outlook also assumes that the trade conflicts between the United States and its trading partners will ease over the course of the year, and that Brexit will occur without wider economic repercussions. “Even though the environment is challenging and characterized by a high level of uncertainty, we aim to grow profitably. We expect slight sales growth, mainly from higher sales volumes and portfolio effects. We want to slightly increase EBIT before special items. Furthermore, we anticipate return on capital employed (ROCE) will be slightly higher than the cost of capital percentage, but will decline slightly compared with the 2018 level,” said BASF’s Chairman of the Board of Executive Directors.
Brudermüller stressed that the first two quarters of 2019 will be relatively weak quarters: “Firstly, in the first half of 2018 we still benefited from high margins for isocyanates, so the basis of comparison is very high. Secondly, costs associated with the implementation of our strategy will have an impact on earnings, as will a higher number of scheduled plant turnarounds than in the previous year. The decisive factors for reaching our targets for 2019 are an improved business performance, solid customer demand as well as the first contributions from our strategic excellence program in the second half of the year. The structural changes we have initiated at BASF will also lead to noticeably higher negative special items in 2019.”
Would you like to subscribe to our Newsletters on plastics technology and profit from the latest information?
Looking for a new challenge? Check out our jobs market!
Patents encourage innovation: Stay on the ball with the latest innovations in the plastics industry in our patents section.