Good afternoon, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our second quarter 2011 conference call. As you all have probably seen, BASF's businesses continued to develop successfully in the second quarter thanks to ongoing strong demand for our products. Higher raw material costs could largely be passed on to the market. Adjusted for Libya, EBIT before special items increased by 16% to EUR 2.2 billion. With me on the call today to explain the results are Kurt Bock, our CEO, and Hans-Ulrich Engel, our Chief Financial Officer. Kurt will briefly elaborate on business performance and important milestones reached in the second quarter. He will then discuss with you the outlook for the year 2011. Subsequently, Hans will review the segment results and cash flow in detail. Afterwards, both gentlemen will be happy to take your questions.
As always, we have posted the numbers and charts which will be discussed during this call, as well as all the press documents on our website, basf.com/share. With this, I would like to hand the call over to Kurt.
Yeah, thanks, Maggie, and also welcome from my side, ladies and gentlemen. After a powerful start into the year, we had another good and very solid quarter. Sales grew by 14% to EUR 18.5 billion compared to 2010. More importantly, we succeeded to grow volumes in our chemical business by 5%. For the first time in 2011, the weakening of the US dollar led to a negative sales effect of 6%, which however, was largely compensated by the excellent performance of the acquired former Cognis business. In oil and gas, growth was purely driven due to the shutdown of our operations in Libya. The missing sales and earnings from Libya, and we do not see our operations being restarted in 2011, also affected the year-over-year earnings comparison.
Adjusted for Libya, EBIT before special items increased by 16% to EUR 2.2 billion. Adjusted earnings per share grew by 17% to EUR 1.75. What we saw in Q2 was a continued upward trend in raw material costs. Our sales prices rose by 13% in total and 12% in the chemicals business. However, we were able to pass on the cost increase to a very large degree. We also had planned and unplanned plant outages which affected earnings negatively, most notably the turnaround of a cracker, as well as the disruption of our acetylene plant in Ludwigshafen, which impacted our butanediol value chain. At the end of the second quarter, we saw some inventory destocking at our customers, above all in Asia.
We interpret this as a sign that the exceptionally high growth rate of the last couple of quarters are going to normalize as expected. We therefore reiterate our guidance for full-year sales and earnings. In the second quarter, we also achieved important milestones. As you all know, BASF and INEOS plan to combine major parts of their global styrene monomer, polymer, and copolymer business activities into a new joint venture called Styrolution. In the second quarter, we took important steps towards the establishment of the joint venture Styrolution. In May, the companies signed the joint venture contract. Meanwhile, the new joint venture has already been approved by the U.S. Federal Trade Commission and the European Commission. We are still awaiting approval from antitrust authorities in a few countries and expect closing in the fourth quarter.
In May, we announced our plan to build the world's largest single train TDI plant in Europe. TDI, as you all know, is a key component for the polyurethanes industry. It is widely used in the automotive industry, for example, in seating cushions and interior applications, as well as in the furniture industry, for example, in flexible foams for mattresses and cushions. We expect the global TDI market to grow faster than GDP in the coming years, with strong contributions from Central and Eastern Europe, Middle East and Africa. Our excellent technology and unique Verbund concept will ensure an industry-leading cost structure. We aim to start this fully integrated plant in 2014. This investment supports our growth strategy and underlines our leading position as the largest TDI producer. We are further intensifying our efforts in the field of electromobility and will bring BASF's innovation strengths to fruition here.
Energy-efficient electric cars are becoming key to the climate-friendly transformation of individual mobility. Improved batteries as well as innovative solutions for weight reduction and heat management are major challenges that electromobility faces today. We see new chemical solutions as a major contributor to overcoming these challenges. BASF is therefore committed to leveraging its research and business platforms on this future market. In battery materials, for example, BASF will be investing a three-digit million EUR sum in research, development, and production over the next five years. Part of the investment is being channeled into the construction of a production plant for advanced cathode materials in Elyria, Ohio. This new facility is scheduled to supply the market with innovative cathode materials for the production of high-performance lithium-ion batteries from mid-2012 onwards.
In addition, we are expanding our activities in the field of high-quality tailored electrolytes to position ourselves as a future system supplier in this market. Furthermore, in order to reduce the energy consumption of electric vehicles, we are working on resin-based solutions for fiber-reinforced composites to reduce vehicle weight as well as heat management solutions. Now let's come to the outlook for 2011. To put it in a nutshell, we confirm our strong outlook for this year. We will continue to focus our attention on protecting our margins and optimizing our fixed costs, as well as keeping working capital at a minimum level. With the further weakening of the U.S. dollar, the high oil price volatility, we see the need to adjust the assumptions for our full-year outlook.
We are increasing our Brent oil price forecast from $100 per barrel to $110 per barrel, and we are expecting a dollar-euro exchange rate of 1.40 on average, up from 1.35. Importantly, our assumptions for the growth of GDP and global chemical production remain unchanged. We are still assuming that oil production in Libya will not resume during 2011. For the full year, we expect to generate significantly higher sales than in 2010. As already explained during our first quarter conference call, EBIT before special items excluding non-compensable oil taxes provides a much more meaningful guide for 2011.
We therefore confirm that we aim to significantly exceed the 2010 EBIT before special items, excluding those non-compensable oil taxes which amounted to EUR 7.2 billion in 2010. Finally, we remain committed to our target of achieving a high premium on our cost of capital in 2011. With that, I will hand over to Hans.
Thank you, Kurt, and good afternoon, ladies and gentlemen. I will highlight the financial performance of each segment in more detail and focus on the respective business developments in comparison to the second quarter of 2010. Ongoing solid demand in the Chemicals segment drove up sales significantly. We successfully increased prices in many product lines in order to offset higher raw material costs. Planned and unplanned shutdowns negatively impacted our EBIT. Nevertheless, earnings remained almost on the strong level of the previous year's quarter. In petrochemicals, the strong demand for our products led to significant sales growth in all regions. We witnessed a declining momentum in Asia, specifically in China, towards the end of the quarter. The performance in the acrylics business was excellent as a result of ongoing tight markets.
Plasticizers, on the other hand, were weaker as demand from the construction and housing industries remained subdued, especially in North America. Earnings came in at a very high level, albeit below the extremely high previous year's quarter. This was due to the turnaround at our larger cracker in Ludwigshafen. In inorganics, continued strong demand, particularly for inorganic chemicals, glues, and impregnating resins, led to an increase in sales. Lower margins in ammonia and methanol, as well as higher costs triggered by major plant turnarounds of our ammonia and sulfuric acid plants resulted in lower earnings. Higher sales in intermediates were driven particularly by customers from the plastics, coatings, and textile fiber industries. The strong demand for our products could not be fully met in all product lines. The unplanned shutdown of the acetylene plant in Ludwigshafen due to a fire significantly impacted our butanediol value chain.
As a consequence, we had to declare force majeure for butanediol and several downstream products in Europe. Nevertheless, earnings were up overall, given higher volumes and improved margins. In plastics, we experienced strong demand in all product lines, and we increased sales and earnings compared to the previous year's quarter in both divisions. In performance polymers, positive pricing momentum drove sales growth. Demand for polyamides and intermediates remained at a high level. The engineering plastics business benefited from strong demand from the automotive industry, especially in Europe and North America. Fierce competition from Asia adversely affected demand for expandable polystyrene from the construction industry in Asia and Europe. Sales of our biodegradable plastics were temporarily impacted by limited raw material availability, but still increased substantially. EBIT before special items rose significantly as a result of higher volumes and improved margins, especially in the polyamide and intermediates businesses.
In polyurethanes, sales were driven by higher volumes and prices in all regions, most pronounced in Europe. Demand from the automotive and construction industries increased compared with the previous year's quarter. We were able to increase prices for MDI, polyurethane systems, and polyols, while TDI prices were slightly lower. Despite several turnarounds, earnings were up mainly because of higher volumes. Sales and EBIT before special items in the Performance Products segment increased due to the acquired Cognis business, higher volumes, as well as the successful repositioning of the combined business following the Ciba integration. In Dispersions and Pigments, we could increase sales in all product lines and regions except for North America, where we faced negative currency effects. Margin levels could be largely maintained since successful price increases helped to offset higher raw material costs.
Thanks to higher volumes and the successful repositioning of the combined businesses following the Cognis integration, we were able to improve earnings. In Care Chemicals, sales doubled and earnings were up significantly due to Cognis. Volumes went up despite the limited availability of precursors for hygiene and cosmetics. We experienced strong demand, especially for detergents and formulators. We successfully maintained our margins despite significantly higher input costs. As a result, earnings were up substantially. In Nutrition and Health, net sales grew strongly mainly due to the inclusion of Cognis. Demand was very good in all regions and in all businesses. In vitamins, we continue to face some price pressure, but we see prices stabilizing at present. Earnings could not be maintained at the previous year's level as a result of higher raw material costs, lower vitamin margins, and a weaker U.S. dollar.
In an ongoing challenging business environment, sales in paper chemicals decreased slightly. Sales were impacted by divestments and portfolio optimizations as well as our value-over-volume strategy. Earnings were below the previous year's quarter as we were not able to fully pass on higher raw material costs. In Performance Chemicals, sales increased substantially thanks to price increases and the inclusion of the Cognis businesses. Weaker order volumes from Japan could not be compensated by the overall strong demand from the automotive and refinery industries. EBIT before special items decreased slightly, mainly due to lower volumes and higher raw material costs, which could only partially be compensated by price increases. Volumes in the Functional Solutions segment were significantly higher, reflecting the strong global demand for mobile emissions catalysts and OEM coatings from the automotive industry. Demand from the construction industry rose slightly in Northern, Central, and Eastern Europe.
EBIT before special items improved slightly thanks to strong volume growth in catalysts. Catalyst sales rose sharply. Mobile emission catalysts showed strong growth in Europe, Asia, and North America. Moreover, we realized higher volumes in refinery and chemical catalysts. As a result, EBIT before special items came in far above the level of the prior year. Sales in Construction Chemicals were at the previous year's level, reflecting a volume improvement at stable prices as well as negative currency effects. Volumes increased in all major regions except for Southern Europe. Volumes in North America improved despite the ongoing challenging market environment. EBIT before special items did not match the previous year's level due to higher raw material costs, which we could not pass on to our customers. In Coatings, the positive trend in demand continued for all product lines, especially in automotive OEM coatings and decorative paints.
However, raw material prices could not be fully passed on. As a result, EBIT before special items was below the very good level of the previous year. In Agricultural Solutions, high global demand for agricultural products drove volume growth, especially in fungicides. This development, however, was offset by negative currency effects from the devaluation of the U.S. dollar, resulting in sales at the previous year's level. EBIT before special items was slightly above the prior year level despite significantly negative currency effects. In Europe, we increased sales thanks to high demand for our products in Eastern Europe, which could more than offset the impact of dry weather conditions in Western Europe. In North America, sales declined as a result of a weaker U.S. dollar as well as weather-related acreage reductions and a compressed season, which led to a re-reduced number of herbicide applications. Our plant health business performed strongly.
We improved sales in South America, mainly based on high demand for Clearfield, our herbicide tolerance technology. Further sales growth came from insecticides for sugarcane and seed treatment products. In Asia, sales were significantly above the previous year's quarter, driven by our herbicide business. Despite the production stoppage in Libya, sales in Oil and Gas increased slightly as a result of higher oil and gas prices. Consequently, EBIT before special items adjusted for non-comparable income taxes on oil increased. In Exploration and Production, sales decreased considerably due to the discontinuation of our oil production in Libya. Nevertheless, earnings adjusted for non-comparable oil taxes increased substantially due to the higher oil and gas prices. Sales in Natural Gas Trading were up significantly, reflecting higher gas prices. Earnings, on the other hand, decreased as a result of slightly lower volumes and negative time lag effects.
A look at the income statement shows that net income rose by an impressive 74% to EUR 257 million. This was related to significantly higher oil and gas prices, as well as a substantially lower tax rate because of the production stoppage in Libya. In Other, sales grew in styrenics, fertilizers, and other businesses. EBIT before special items improved by EUR 138 million to -EUR 163 million, mainly due to better operating results as well as favorable currency and valuation effects. Special items in Other amounted to +EUR 27 million. They contained EUR 68 million of income resulting from the repeal of the fine imposed by the EU on Ciba in 2009 in relation to heat stabilizers. Let me now briefly conclude with our cash flow.
Cash provided by operating activities at around EUR 3 billion in the first half of 2011 was EUR 317 million higher than in the same period of the previous year. This can be primarily attributed to increased earnings. Working capital rose between January and June 2011, reflecting the growth in our business, higher raw material costs, as well as higher natural gas injection in our storage facilities.
Cash provided by investing activities amounted to EUR 81 million. In March, the sale of shares in K+S resulted in a cash inflow of EUR 972 million with a net gain of EUR 887 million. CapEx amounted to EUR 1.3 billion, including the investments in the OPAL pipeline, the capacity expansions of ecoflex and ecovio, and the ongoing extension of our Verbund site in Nanjing. Financing activities led to a cash outflow of EUR 2.8 billion, mainly due to a EUR 486 million reduction in financial liabilities and EUR 2.3 billion of dividend payments to shareholders of BASF SE and minority shareholders in group companies. Since the end of 2010, we reduced net debt by EUR 1.3 billion to EUR 12.3 billion. With that, I thank you for your attention, and we are now happy to take your questions.
Now, ladies and gentlemen, we would now like to open the call for questions, and we would ask you to please limit your questions to one at a time so that we can take as many questions as possible. To ensure the best sound quality, I would also kindly ask you to use your handsets. You are always certainly welcome to rejoin the queue for follow-up questions. Let's proceed, and the first question comes from Neil Tyler, JP Morgan.
Good afternoon. Okay. The question is really on the volume softness that you've seen in or that you're referring to in a number of areas. I wonder if qualitatively you could give us your opinion on those businesses where you think this is just an inventory management issue and then those businesses where you see perhaps more fundamental weaknesses, things that are, you know, concerns that are actually increasing in your mind over the actual growth prospects, whether you can sort of perhaps distinguish between those two with regard to the components of volume softness that you refer to. Thank you.
Yeah. I think, Neil, that question certainly goes directly to the core of the issue with regard to our further development. As I said before, what we saw in Q2 was a little bit of softening towards the end of the quarter, which essentially is inventory readjustments, a little bit of destocking. When we look across our businesses, we could not see a single business where we could identify a fundamental shift of demand pattern. What we saw is really what we believe temporary adjustments. One example, Asia, China, people are simply buying a little bit less and placing less orders because they have financing issues. For that simple reason, they adjust the inventory levels. They will come back, and we already saw that happening.
We see this essentially as a positive development because the last thing we need is that our customers pile up inventories over the course of the quarters and then all of a sudden find out that they have to adjust their order pattern. I think this was positive what has happened over the last couple of weeks, and it goes across all of our businesses, and we cannot identify any special business where we see a fundamental shift in demand. The one thing I would like to add, however, is when you look at volume growth in Q1, we had volume growth in the chemical business of roughly 9%-10%. In Q2, this is something like 5%, which includes, as we all know, some turnaround situations, also some unplanned shutdowns.
We see this as a normalization of growth, and I don't think that we ever expected that the growth rate of Q1 could be extrapolated throughout the year 2011.
We move on to the next question from Jeremy Redenius from Sanford C. Bernstein. Good afternoon.
Hi, this is Jeremy Redenius from Sanford C. Bernstein. Thanks for taking my question. I'm wondering if you could just give us an order of magnitude in EBIT terms of the planned, unplanned outages and then also on the FX. Thanks.
Oh, FX. Okay, fine. Shutdown effect, EUR 50 million plus. FX, actually, you can do the math almost yourself because we provide you with this guideline. One cent translates into something like EUR 35, 33 million of EBIT effect. If you take the currency difference between Q2 this year and last year, that translates into something like EUR 200 million bottom line effect for BASF, and that is pretty much the number we actually saw in our accounts.
Just to be clear, the EUR 50 million was plus the planned and unplanned?
Yeah.
Can you comment on how much persists into the third quarter?
Pardon me?
How much of that would persist into the third quarter of the unplanned?
A very, very small amount. We are not yet fully back in with our acetylene plant, because we're waiting for one critical equipment, which we have to put into the plant. We are at something like 80%, utilization rates currently. It translates or transfers a little bit into Q3, but it's not really a tangible number.
Okay. Thank you very much.
You're welcome.
Now we take our third question from Mutlu Güngören from Royal Bank of Scotland.
Yes, hello everyone. Question on your regional results. The EBIT before specialized was sequentially lower in Germany, and I understand that some of that is related to the maintenance shutdown. Can you explain what the rest of the driver is, why that is so much lower than the other regions? Thank you.
This is Hans-Ulrich Engel. Word of explanation on that. In our results in Germany, we actually show because the activities in Libya are held by a German subsidiary, we actually show the results of Libya in there. If you compare quarter over quarter, we had roughly EUR 280 million positive results in Q2 of the year 2010, and we don't have any positive results coming from Libya in the year, in the second quarter of this year. That explains the swing that you see in the results there in Germany. If you add the EUR 280 million back in, you see that there is significantly higher earnings also in Germany.
That's very clear. Thank you. Just as a quick follow-up, Asia Pacific also shows a sequential decline. Is there something similar related there?
There it's the currency effect.
Okay. Thank you very much.
The next question, now from Ryan Tucker, Credit Suisse.
Can you hear me?
Ryan, we can't hear you. Can you speak up, or maybe use the handset?
I think this is on there. Can you hear me? Hi, Maggie. I have a question on the associates line. It was down quite sharply this quarter, and you say in your notes that it's due to partly the Gazprom and partly some effects in Catalysts. Can you tell us how much of that is ongoing and how much is just limited to this quarter?
Yeah, Ryan, this is Hans. What we actually have there in our financial results, there's two effects. The first effect is the one that you are addressing, which is overall lower earnings in Severneftegazprom, which is a company operating the Yuzhno- Russkoye field, which then sells on its product based on a lower cost plus price to a trading company that's majority-owned by BASF. The disadvantage that we have there in our at-equity earnings turn into a positive when you look at our gas business, oil and gas business there in E&P.
That's the first thing that will continue throughout the year in the financial result because that cost plus price is based on the cost of the prior year, so that will continue throughout the year. Second effect that we have is an effect of acquiring 1% in a company, Heesung, where we had a 49% participation. We upped this now to 50%. As a result of that, where we're now going from at equity to a proportional consolidation, we had to move the translational losses, which were in OCI, into income, and that then were the two effects that you see reflected in our financial results.
Okay. Both of those are ongoing for the rest of this year, and in fact, one of them is ongoing forever.
No further effects from Heesung and the SNGP effect that will continue throughout the year. As I said, our EBIT will in the end benefit from that.
Okay, thank you.
Welcome.
Next question now comes from Peter Clark, Société Générale. Good afternoon, Peter.
Yes, good afternoon. Quick question on the cash flow. Obviously, CapEx is going up, no surprise there. Big working capital outflow, EUR 800 million was inventory. Just wondering if you're expecting some pullback in the second half and whether an element of that was seasonal. I don't expect it was in the second quarter. You mentioned the pricing effects as well. Because obviously it meant your free cash flow at EUR 65 million was a much lower number than we've seen in the recent past. Thank you.
On our cash flow, I think, you mentioned all the elements that had an impact on Q2 cash flow. I think looking at cash flow on a quarter-over-quarter basis may be a little bit short-sighted. Let's look at the first half and the strong cash flow that we generated there. We expect BASF to generate a strong cash flow also in the second half of the year.
Would I be right in thinking working capital has run out a little bit more and you'd expect some pullback?
I mean, what you've seen in Q2 on working capital is a strong impact, one from our gas trading business, where we're using the months in the second quarter and then also going a little bit still into the third quarter to refill our gas storage facilities. You will not see the same impact during the third quarter, number one. Number two, our raw material prices pretty much follow the development of oil. You've seen a strong increase there in the oil price in the second quarter. It looks like the oil price may have found some stability at this point in time, so we don't expect raw material prices and oil prices to further increase significantly in the quarters to come.
Now our next question comes from Tony Jones from Redburn.
Oh, good afternoon. Tony Jones from Redburn in London. I just wanted to look at your remaining fixed cost saving program. I thought there was around EUR half a billion of cost savings left, which became a positive over 2011. Could you provide an update whether that's still happening or whether it has happened already and this is already reflected in underlying margins? Thank you.
Tony, as you know, what we call the NEXT program, the goal is to achieve cost savings of about EUR 1 billion until the end of 2012. What I can tell you, we are right on track to achieving that number. We are currently at EUR 800 million. So we certainly will be probably a little bit early in achieving the EUR 1 billion number. As I also said in my speech, our cost containment efforts have continued through the last couple of quarters, so we are quite pleased with the cost development. We are working on our margins, as you saw, but fixed cost is, I think, pretty well managed certainly at this point in time.
Okay, thanks. I just thought, actually, as a quick follow-up, are you seeing any significant inflation coming through from salaries and especially in non-European regions?
I didn't get it. Could you repeat this please, Tony?
Yes. Are you seeing any significant inflation in core SG&A or employee costs?
Okay. Salary, no, we don't see this, no.
Okay, thank you very much.
You're welcome.
Our next question comes from Richard Logan from Goldman Sachs.
Good afternoon, and thanks for taking my question. Yeah, I just wondered in terms of July, whether you've seen any change in order patterns or performance so far, and linked in with that, do you expect a normal summer slowdown? I remember, I think last year, you said that you weren't seeing the summer slowdown. I'm assuming that was still almost like a restocking effect going on. What are your expectations for this summer?
Richard, order intake during July is kind of normal. Orders are above last year's level, which I think is important from your point of view as well. There is always this kind of seasonal normal summer slowdown, and we see a little bit of that happening right now. Some industries, like automotive, are going at full speed, as you know. We will probably have some kind of seasonal summer lull, but it's not very pronounced.
Okay, that's great. Thank you.
You're welcome.
Next question comes from Andrew Benson from Citi. Good afternoon.
Yeah, thanks. Andrew Benson here. Could you explain the agricultural solutions? Obviously, the absolute profit margins look pretty good, but the development of business was quite flat relative to your peers. Can you just explain, I didn't write it down properly, the question you've already answered on the maintenance and the costs in the second and third quarters as well. Sorry about asking you to repeat. Thanks.
It's Andrew, first the question on maintenance and planned, unplanned shutdowns. That was the +EUR 50 million number, which I mentioned before, the cost of those shutdowns. Coming to our ag business, we think the development was actually quite good. In nominal terms, we had virtually no growth, sales-wise, but you have to keep in mind that we have an exchange effect. If you take that out, we had growth of about 6%. We maintained our EBITDA margin, which was at about 31%. We had a good regional development as well, with one exception, which is essentially in North America, where you see two effects. One is currency weakness, and the other one certainly is a weakness in the market.
We are all aware of the, let's say, very wet weather conditions. We also had some price adjustments in North America in the smaller part of our portfolio simply to fend off competition, which was more a, let's say, local issue in Canada. Apart from that, I think the regional development was actually quite healthy. When you look at indications, our fungicide business had excellent growth in constant exchange rates above 10%. The herbicide, due to the situation I described before in North America, slightly below last year's number. I'm always talking about Q2 here. Insecticides also in currency-adjusted above last year's number. Again, this is Q2.
I think it's worthwhile to look at the entire first half of 2011, then we have to wait a little bit to see how the season comes to a close around the Northern Hemisphere, how much in-field inventory is still around, and then we can basically do the final booking and explain how we did competitively. For the time being, I think we are well underway to achieve our targets.
Okay, thanks.
You're welcome.
Our next question now comes from Ronald Köhler, MainFirst. Holknight?
Yes, hello.
Oh, here you are. Good.
Okay.
Please go ahead.
Good. My question is on the guidance, just a clarification here. You guide obviously on the basis of clean EBIT or income from operations before special items, before non-compensable oil tax of EUR 7.2 billion as a basis. If I now assume significant means double digits, you add something, let's say, like EUR 700-800 million additionally. Just to make clear, we also have to add the EUR 280 million non-compensable oil taxes you earned in the first year to that figure. Is that the right understanding?
I think your math is pretty good, actually, yeah.
Okay, good. Perhaps, if I may, another one with volume growth. You're guiding for 5%-6% volume growth on a global chemical production basis, and this is reiterated, which means you want to surpass it by two percentage points always, which means you still expect for the chemicals area 7%-8% volume growth for the full year. That's right?
As you know, we have this target of beating the market average growth rate of the market by 2%. This is a target which we can achieve quarter by quarter. It's a long-term, medium-term target. Essentially, that is what we are striving for in 2011 as well. You're right, we have what we see, a growth in our industry globally of 5%-6%. If you add another 2 percentage points, makes it 7%-8%. We are at roughly 7% during the first half on average, so I think we are pretty well on track.
Okay, thank you.
Welcome.
Now, our next question is from Christian Jutzi from Macquarie. Hello, Christian? Christian is no longer in the question queue. He is no longer in the line. Okay, we move on. Next question from Andreas Heine from UniCredit.
Good afternoon. I'd like to understand a little bit more what's going on in Performance Products. You mentioned, I think, in the wording, worse than in the quarter before the Performance Products and Performance Chemicals, Paper Chemicals, and Health and Nutrition. Is that the first quarter in 2011 was just too good, and that now the second quarter is a better basis? Or was it exactly the other way around, that the second quarter was somewhat weak, and the first quarter was a better basis?
Also, to understand a little bit more, what the seasonality of this business is, which I would perceive is not seasonal, but looking on the last year, it was very much down in the third quarter by EUR 100 million and another EUR 80 million down in the first quarter, so substantially weak in the second half than in the first half. If you could give me some more ideas how I should model this sector, that would be very helpful.
I will try my best. Actually, as you know, this is pretty much a mixed bag of activities. There is some seasonality involved. I'll give you one example, which is sun care products. Those ship essentially during Q4 and Q1, and then the season pretty much for our shipments come to a closure. Apart from that, what we saw, if I go through the business which we have here, is pretty much a continuation of what we saw in Q1. We had in Dispersions and Pigments, we are essentially in sales 10% above Q1. We are certainly coping with raising our sales prices. These business are all further downstream, as you know.
It takes a little bit of time, but I think overall, we are quite successful. We had some effects in vitamin pricing, which has come down a little bit in our Nutrition and Health business. If I compare sequentially now, Q2 to Q1, volumes were up in that Nutrition and Health business as well. Prices overall also remained pretty stable or slightly up since we tried to push them up further on. In the Care Chemicals, which for instance includes cosmetics, but also major parts of the former Cognis business, the development actually was quite strong. We have to stress that the Cognis business has been doing very well.
We are very satisfied with the development as well as the integration efforts and the progress which we have achieved so far. Which leads us to paper, and paper, as we all know, paper industry is an interesting one. We had higher volumes in Q2 than in Q1. That is essentially a positive development. We have to fight for better pricing and better margins, and that is an ongoing effort in that business. I think we were all aware when we acquired Ciba that the paper chemical business would be a challenging one, which proves to be true, but we are working very hard to make it a success story for BASF. Finally, there's performance chemicals, which in itself is a quite diverse division.
We had, again, stable development compared Q2 to Q1. We are in that business also trying to increase prices, which in major part we have achieved so far. That business has been hit quite a bit by the disaster in Japan, which we haven't really stressed for BASF Group overall, but in that particular business, so also within that segment, you saw some effects, and we still have two plants actually in Japan down, which haven't yet restarted and are not producing. I hope this helps a little bit to better understand that segment. You asked about seasonality. Those business also normally see a little bit of a summer lull going into the third quarter. Apart from what I said before, our sun protection products, there is no real pronounced seasonality in that segment.
Mm-hmm. Thanks.
Was that okay, Andreas?
Yeah, a little bit to understand still what's going on in the second half. It was in the last year substantially down, and you referred only to the Sun Care chemicals and the summer lull as an impact we have to be aware of in the third quarter. Does it mean that looking forward, the Q2 results should not be particularly weaker in the second half, so in Q3 and Q4, or what do we have to expect here?
As you know, we don't guide individual
Yeah.
segments, and we don't guide individual quarters, so I refrain here from giving you
Mm-hmm.
A more specific answer. What you will see, however, in the second half is the inclusion of the former Cognis business. Just as side information, on July fourth, we fully integrated almost all of the Cognis business into our processes and systems, which means it will be kind of difficult. We also merged the companies then. Makes it kind of difficult to then further differentiate between what is the legacy Cognis, what is the legacy BASF business. When we report Q3 and Q4, we will try to give you some explanations about how we are doing with Cognis. Obviously, that business will have quite some impact on the segment development. Again, Cognis, you have followed this in the past, it doesn't really have a very high seasonality at all.
Mm-hmm. Thanks.
Now we're moving on to Joe Dewhurst from UBS.
Hi. Good afternoon. Just a question on-
Oh, Joe, you have to speak up a little bit or please.
Yes.
Thank you.
Sure. Can you hear me now?
Yes.
That's better, yeah. Just on your growth outlook, saying obviously that the pace is certainly gonna be a little bit less certainly than what we saw in Q1, a little bit less dynamic. Are there any particular segments that you see as maybe potentially more vulnerable than others going forward? Or will it be similar to what you saw in the second quarter, where it was across the board with some of the inventory destocking impacts? Thanks.
Yeah, I think we had a similar question earlier on. We don't see any particular. I'm not aware of any particular area where we see a, let's say, fundamental shift in market sentiment. There is, again, kind of a normalization of volume growth, which we had expected. As we all know, we were not that naïve to believe that we can just extrapolate the Q1 growth rates. At the same time, you have to take into account the baseline effect, because obviously, the third and fourth quarter of 2010, we already operate at much higher levels than during Q1 and Q2 of 2010.
Yeah. Thank you.
Now our next question comes from Jaideep Pandya from Berenberg Bank. Jaideep Pandya.
Question is predominantly on China.
It's impossible to hear.
Yes. Can you hear me now?
Yeah. Now better.
Yeah. Good afternoon. Hello. My question is really on the China destocking comment of yours. Do you see this in any other emerging markets in particular? One of your competitors has mentioned that in polyurethanes, for instance, customers are expecting lower prices because of building of huge capacities. Do you also see that in your businesses? Thank you.
I mean, obviously, this is the name of the game, that some customers might see an opportunity to see lower prices in the future, which actually we do not see based on our capacity utilization rates and our feedstock cost. We saw a little bit of easing in PU, that's correct, especially in TDI in Asia. But again, that is very much a local and regional effect. What I mentioned with regard to China, I think, we didn't see in other countries in Asia. No. It's very much a China or Chinese-
Neither in Brazil?
No.
Okay. Thank you.
Now we are moving on to Mr. De Vree from ING. Mr. De Vree? Okay. I can't hear you, so then we're moving on to Anett Weber from BHF- Bank.
Yes. Good afternoon. I've got two little questions. The first one relates again to the shutdowns, the unplanned as well as the maintenance shutdowns. Given that you posted a 2% year-on-year volume growth in Q2, what would that number have been like if you had not had these maintenance shutdowns? I.e., what was the impact on the revenue, the line, roughly? The second question relates to the Performance Products division, again, on Cognis. How much of integration costs did you book in the Q2 results that were not shown as special item? Thanks.
The second question is roughly EUR 20 million, which is not a special item for the Cognis integration.
Q2.
Which also affects the result of Performance Products.
Mm-hmm.
The first question I cannot really answer. I mean, I don't have it at the tip of my fingers. We gave you the earnings effect.
Mm.
In terms of overall volume effect, I can't really tell you.
Okay, thanks.
I'm sorry. Yeah.
Our next question comes from Laurent Favre from Merrill Lynch.
Yes, can you hear me?
Hardly, Laurent, can you pick up the handset?
Yeah, I'm on the handset.
Okay.
Good. The question actually.
You have to speak up a little more. Okay.
The question is on performance products. Coming back to the question from Andreas. On my math, as margins in dispersions and pigments and care chemicals were more or less flat year-on-year, and that's more than 50% of the division. For the margin to be down 240 basis points year-on-year, the margins in the three remaining segments had to be down around 5%, 500 basis points. I think, Dr. Bock already mentioned some of the reasons, but could you basically tell us a bit more, especially on nutrition and health, where you talked about vitamins pricing being under pressure.
Also maybe tell us if there is some kind of issue around the time lag of raw materials versus price increases or I mean basically yeah what happened in nutrition and health, paper chemicals and performance chemicals for the margin to be down 500 basis points?
I have to push ahead for you. I cannot talk really to your math in more detail. What we saw in nutrition and health is that we had now compared with last year, because you referred to last year, we had good volume growth, actually, across all our businesses. I mentioned the vitamin E price softness, so to say. We had good margins. We had higher fixed structural costs due to the integration of Cognis, and that is the number I just mentioned, which is a pre-exceptional. We have special items, but we also have non-special items when we talk about the integration of the Cognis business. That has to be taken into account when you do your models. I hope that helps.
What about paper chemicals and performance chemicals, please?
Could you repeat one more time? Sorry.
I was saying, so that would explain the difference in Nutrition and Health. I was just wondering about the two other segments, Paper Chemicals and Performance Chemicals.
Okay. Paper Chemicals were below last year. I think I mentioned this. Care Chemicals, we had.
Performance.
Performance chemicals, I have to look for my notes here because it's so detailed what you're asking. We had good growth. We had price increases. We had negative currency effects, not surprisingly. We had volumes at about last year's level. Certainly also here in that business, we had quite a strong effect from the integration of Cognis.
Okay, thank you.
You're welcome.
Now there's a follow-up question from Richard Logan from Goldman Sachs.
Okay, thanks for taking my follow-up question. Yeah, it was just on inventory levels. You commented on some destocking of customers. I just wanted to get a sense as to how do you see inventory levels with customers? Do you see them as significantly below normal levels or at normal levels? I mean, how do you view that situation?
Richard, that is a question which is very difficult for us to answer. We frankly don't get full transparency with regard to the inventory levels of our customers. Sometimes they don't want to tell us, or we get information which is not completely accurate. What we saw is that there was a little bit of destocking going on. We see this as a positive development happening because maybe people were building up inventories a little bit too fast simply awaiting further price increases, which would obviously be a logical consequence. We think that what we have seen over the last couple of weeks is a positive market development because again, underlying fundamental growth we stick to what we saw a couple of months ago.
Certainly a couple of other question marks can look at overall economic situation and debt situation, euro, et cetera. What we see in our markets, we haven't really changed our assumptions for our outlook. Having less inventory at our customer level, I think is a good and positive development. If you ask me, is this now below normal? That is most probably not the case, so I don't think they are understocked right now.
Okay. All right. Thanks.
You're welcome.
Now we are moving towards the finish line, so to speak. We have four more questions. First one is, Mutlu Güngören from Royal Bank of Scotland.
Price increases. For some time now, raw material inflation has been an issue for several of your downstream businesses. Do you believe that you can restore your margins via price increases? And if yes, how long should that take? Thank you.
Yes. The answer is yes. We are working very hard on this. Actually, we have, during Q2, almost completely succeeded in passing on higher feedstock, because we have a couple of specials, as you know. If you look at specific margins, we are not yet completely where we want to be, but we made very good progress. It all depends certainly on one underlying assumption, that is that we have continuing economic demand growth, which we see from today's point of view. If, and the other if is, certainly, if all of a sudden our feedstock costs go through the roof, that would change the picture, but we don't really see that happening right now.
Hans already said before, looking at the oil price, it looks like it will now be lingering around that level which we have achieved recently.
Do I understand it correctly that assuming that raw materials do not move significantly, price increases are underway and should restore the margin somewhat in the coming quarters?
Price increases are underway as we speak, yeah, certainly.
Okay. Thank you very much.
You're welcome.
Now we have a question from Christian-Matthias Jutzi, whom we didn't get on the line before. Christian, are you here?
Yes. Can you hear me now?
Oh, super. Now we hear you.
All right.
Perfect. Go ahead.
Maybe check with your operator. I don't know what happened. Anyway, regarding agro, can you give us an assessment of channel inventories in agrochemicals post the drought in Europe, and do you buy back any stock from the wholesalers by any chance? Thank you.
No, we didn't buy back any stock during Q2. I can't really answer that question. I really don't know what the inventory levels at our customer levels are right now. We have to wait a little bit. The season has come to pretty much a closure. As I said before, we do the final bookkeeping and see where we are. I'm also not aware of any special situation that we have, let's say, surplus inventory sitting in some warehouses somewhere. That's not the case.
Okay, great. Thanks. Maybe staying with agro, can you give us an update on the selling process of the fertilizer businesses?
Sorry, I didn't get it. Which? Oh, the sale process? That's underway. We are negotiating with a couple of parties, and I think we will be able to bring this to a good conclusion within the next couple of months. Yes, we are confident that we will be able to sell it at attractive conditions for our shareholders.
Great. Thank you.
You're welcome.
Now the next question, and I'm jumping around a little bit because we have so many still, but I would like to take Martin Rüdiger from Cheuvreux.
Yes. Question is on agro. One of your competitors already stated to raise selling prices by 5% next season, and another competitor said today they are optimistic for price increases into 2012. Do you intend to raise selling prices, too? And how do you see the price discipline in the respective regions for price hikes and crop protection?
We had prices essentially flat during Q2 for one very specific reason. That was North America, which I mentioned earlier on, where we had price adjustment just to fend off some competition and maintain our market position, which is, again, a very special situation in a very specific market. Apart from that, we have brought to the market a couple of excellent new active ingredients, which have been received very, very well by the marketplace. Apparently for new actives, you do have pricing power because you create value for our customers.
For the rest of the portfolio?
You're talking about the ag portfolio or?
Yes. For the ag portfolio, that means not for the new active ingredients you bring on the market.
This is a constant game in that business, that you try to provide additional value for our customers by having new formulations, for instance, which we are doing quite extensively. Whenever you can deliver new additional value, we will also be able to raise prices, and we have achieved that quite consistently over the last couple of years, and we are still doing that.
Okay, thank you.
You're welcome.
We're now moving on with the next question from Jenny Barker from Nomura.
Thank you very much. Gas distribution volumes were down. As we look ahead to the Nord Stream system coming on, how do you see the volumes that you will consolidate? How will they evolve? Will this be a matter of gaining market share because of this new network, or will you just be waiting, you know, to see the way that the general market grows?
Yeah, Jenny, this is Hans. Volumes were slightly down in Q2. Remember how warm the beginning of Q2 was in Western Europe and in Germany compared to relatively cold conditions that we had in Q2 of the prior year. That's actually the driver there. With Nord Stream, there will be additional quantities. They will not be there from the first day on. There will be a ramp-up of these additional quantities that we have secured for WINGAS, whether or not that will lead to additional market share in the end will depend on the question on gas consumption in Western Europe and in Germany.
I think you're well familiar with the situation and the energy politics that we have in Germany, as a result of which there will be less nuclear power in the years to come. From my point of view, gas will play a major role to fill that gap, and we will be there with additional quantities.
Just, can you just remind me, when will material additional quantities be available to you?
It will start in October of this year when the first pipeline of Nord Stream will be commissioned. There will be a ramp up over a roughly two-year period of time.
Thank you.
Okay. We are moving on to the next question from Ronald Köhler, MainFirst.
Yes. Thank you. It's on oil and gas. I struggle a little bit to understand your results. If I look at Q2 results versus Q1, excluding non-compensable oil tax, it was actually down by more than 20%, despite that oil prices were higher. I would assume gas prices are up. I'm just talking about exploration & production and the comparison Q2 versus Q1. What happened there?
I haven't followed the math that quickly, but what happened between Q1 and Q2 in E&P is obviously the shutdown of our Libyan activities, which still
Obviously excluding that. Actually, I calculated it excluding non-compensable taxes, and therefore, also almost excluding all earnings of Libya, I guess.
Let's quickly look at this here. We are in Q1.
626 minus the
Excluding oil and gas taxes, it was EUR 346 million in Q1, and it was EUR 269 million in Q2, meaning minus EUR 77 million, and I guess that cannot be all the remaining Libyan business. I guess there must be something else. Plus, that I would have expected some earnings contributions on the higher oil and gas prices.
Yeah. In Q1, I don't have the Q1. I gotta look quickly what the Q1 number is.
346 excluding non-compensable taxes. 346.
Yeah.
Just give me a second, please.
Mm-hmm.
Maybe, Ronald, we check this in the meantime, and we move on to the next question, and then come back to you. Is that okay?
Yeah. Fine. Thanks.
Okay. We come to Anett Weber.
Yeah. I've got one follow-up question. Given that you see significant price increases, 13% across the group, 12% across the chemicals businesses, are you seeing any demand destruction from the current price level that has been achieved in the, say, July-August timeframe?
No, we don't see that. Coming back again to what I said earlier.
Mm-hmm.
We don't see a fundamental shift in the market development.
Mm-hmm.
What we saw is a little bit more cautious ordering pattern and somewhat what we see as destocking.
Mm.
at our customer levels. Again, we stick to our full-year guidance.
Mm.
the volume, market growth, which we have as assumption for that full-year guidance.
Yeah. It's not related to the pricing side or something that's.
No.
Okay.
What we do see or what
Mm-hmm.
You normally see in these cases is that there's substitution going on.
Mm.
People try to, let's say, move from paper to plastic or vice versa, or they move from polypropylene to polystyrene. These kinds of substitutions you have to a certain degree, frankly. That is very often almost entirely price-driven, but this is kind of, say, a normal pattern which you see.
Okay, thanks.
Welcome.
We had a final question from Neil Tyler, JP Morgan.
Go on.
Neil?
Okay.
Ronald Köhler, we're still checking and doing some math here. If you allow me, we will get back to you after this call and give you the explanation.
As we all know Ronald very well, and he probably is correct with his assessment, but we try to give you our view. What I can say, you really have to look at the after-tax earnings of oil and gas to get a better understanding for the earning dynamics, and that is certainly true in Q2, when we had this strange development with the Libyan earnings, which we are missing. EBIT coming down at the same time, earnings after taxes coming up, and for that reason, we provide you with this different information.
With this, ladies and gentlemen, we come to the end of our conference call. Before we close, however, I would like to post a reminder here. You all have been invited to our roundtable on Agricultural Solutions. This roundtable, and this is something very important and significant, will take place on August eighth in the United States. We will have all the top management from BASF, Markus Heldt with us to discuss the Crop Protection as well as biotechnology business. On top, Mr. Fraley from Monsanto will join us to talk about the collaboration we have with Monsanto. Then we have the opportunity to also see some testing fields in Monmouth, Illinois.
With this, whoever hasn't signed up yet and sees a good opportunity to join us, this is on August 8 in the U.S., so please call us and we can set this up for you. We will next report on our third quarter results on October 27. With this, the management and we would like to thank you very much that you have joined us today. Should you have any further questions, please contact any member of the investor relations team, and we'll be very happy to help you on with any questions you may have. Thank you for joining us, and we hope to see you soon. Bye-bye.