BASF Earnings: Management Slashes 2023 Guidance in Anticipation of Suppressed Demand

BASF’s BAS second-quarter results reflected depressed demand across end markets with total revenue declining 25% year over year and 13% sequentially. The firmwide adjusted EBITDA margin contracted to 6% due to reduced product pricing and lower fixed cost absorption, which we expect will continue to weigh on profitability through year-end. Management indicated customer inventories of commodity chemicals have depleted enough to spur modest demand recovery in the second half, but demand for more specialized products (such as consumer goods) will likely remain depressed through year-end. We’ll incorporate the firm’s full financial and operating results shortly, but after this first look, we maintain our narrow moat rating and EUR 65 ($18) fair value estimate.

Revenue was down across all end markets and geographies, with particularly large sequential declines in Europe and North America, which together make up over half of BASF’s annual revenue. Material recovery in the second half is unlikely, and management reduced its full-year revenue outlook by roughly 13%, now guiding to EUR 75 billion at the midpoint, which implies a year-over-year revenue decline of 13% (versus an estimated 2% decline previously). Operating margin guidance took a less substantial hit, with midpoint guidance contracting just 30 basis points to 5.6%.

We note that the worsened outlook reflects slower-than-expected end market recovery rather than further (significant) demand contraction. BASF’s highly diversified product portfolio tends to perform in line with GDP, and we expect performance will rebound as the global economy recovers. In North America (roughly 25% to 30% of annual revenue), we anticipate subdued GDP growth through 2024, followed by a robust expansion through 2027.