Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the 2nd quarter results. Throughout today's recorded presentation, all participants will be in listen only mode. The presentation will be followed by a question and answer session. This presentation contains forward looking statements.
These Statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward looking Statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in Opportunities and Risks of the BASF Report 2020.
BASF does not assume any obligation to update the forward looking statements contained in this presentation above and beyond the legal requirements. On the call with me today are Martin Budermiller, Chairman of the Board Executive Directors and Hans Engel, Chief Financial Officer. Please be aware that we have already posted the speech on our Web site@brzf.com/q22021. This brings us to the point where Martin begins with the speech.
Good morning, ladies and gentlemen. Thank you for joining us today. On July 9, BASF released preliminary figures for the Q2 of 2021 and increase the outlook for the full year. Today, we will provide you with further Let us begin with the highlights of the Q2 of 2021. The strong growth momentum of the previous two quarters has continued.
We achieved volume growth and price increases across all regions and all segments compared with the prior year quarter. In some businesses, we were able to restore and in some cases increase our margins with the price increases. In others, there's still some way to do. EBIT before special items rose by more than €2,000,000,000 compared with Q2 2020 and reached €2,400,000,000 This is also considerably above the pre pandemic level of roughly €1,000,000,000 in Q2 2019. Considerably higher earnings in our Upstream businesses were the main driver for the strong increase in earnings overall.
Compared with Q1 2021, Margins in some commodity product lines such as isocyanates slightly declined in Q2 2021, but remain On a high level, in our Downstream segments, we managed to increase volumes and prices based on strong demand. However, pressure from increased raw material prices remained high in several downstream businesses. Let us now turn now On to the macroeconomic data. The indicators for the 2nd quarters are estimates as most of the countries have not yet published their figures. According to the currently available data, global chemical production increased by almost 10% in Q2 2021 compared with the previous year quarter.
With an increase in volumes of 28%, BASF Group grew well above global chemical production. All regions recorded strong demand growth. This was most pronounced in Asia, excluding China and in Europe. In the prior year quarter, these regions as well as North America were significantly impacted by the COVID-nineteen related lockdowns. And in comparison, Chemical production in China had already grown in Q2 2020.
This slide shows our volume growth by region. Sales volumes are compared with volumes in the respective prior year quarters. During the past three quarters, we increased volumes in all regions. In Greater China, we recorded double digit volume growth during the past 5 quarters. In Q2 2021, Volume growth in China was less pronounced as the recovery was already in full swing in the Q2 of 2020.
Volume growth, However, remained strong at 10%. In Europe and in North America, volumes grew considerably in Q2 2021 as the prior Year quarter in these regions has heavily been impacted by the lockdowns due to the pandemic. We move now on To the volume development by segment. In Q2 2021, we increased volumes in all our segments. The volume increase was strongest in the Service Technologies and Materials segment.
Volumes also grew considerably in the Industrial Solutions, Chemicals in Agricultural Solutions. Overall, volumes increased by 28% or €3,500,000,000 in absolute terms compared with the prior year quarter. We now look at our sales development compared with the Q2 of 2020. Sales of BASF Group increased by 56 percent to €19,800,000,000 As already alluded to, Considerably higher prices and volumes were the driver for this. In total, organic sales growth amounted to 63% in Q2 2021.
Currency effects of minus 7% were mainly related to the depreciation of the U. S. Dollar. Portfolio measures Had a negligible impact on sales. As I already mentioned, EBIT before special items came in at €2,400,000,000 We achieved considerably higher earnings in the Chemicals, Materials, Surface Technologies and Industrial Solutions segments.
Further details on the earnings development in these segments can be found in our half year financial report published this morning. In the Nutrition, Care and Agricultural Solutions segments, EBIT before special items declined considerably. I will talk about that on the next slide. Earnings in others also declined considerably compared with Q2 2020, and this was mainly due to higher additions to provisions for variable compensation components as a result of the strong earnings development. Let me now provide you with further details about the performance of Nutrition Care and Agricultural Solutions in Q2 2021.
Both segments We're able to increase volumes and prices, but recorded a considerable decline in EBIT before special items. In Nutrition and Care, EBIT before special items declined by 46%. The earnings decline was mainly driven by the Nutrition and Health division, compared With the strong prior year quarter fueled by an exceptional demand during the pandemic, margins declined on account of negative currency effects, Lower prices and higher variable costs, due mainly to higher raw material costs. In Animal Nutrition, The earnings decline was most pronounced. Lower volumes in vitamin A, particularly due to the tie in and start up Of the vitamin A capacity expansion in Ludwigshafen as well as higher costs from several turnarounds in Q2 We're the main drivers.
As announced, we plan to bring our vitamin A plant expansion on stream in the second half of twenty twenty one. The project It's well on track. In the Care Chemicals division, earnings also declined compared with a strong Q2 in 2020. This was mainly driven by higher raw material prices and put pressures on margins. Higher fixed costs, in part Due to higher maintenance activities also had an impact.
During the second half of twenty twenty one, we expect an improvement of our earnings The Nutrition and Care segment compared with the second half of twenty twenty. In Agricultural Solutions, EBIT before special items declined by 38%. This is particularly disappointing because our ag team was very successful in driving volumes Up by 15% and increasing prices by 3%. Due to our regional exposure, the ongoing strong FX headwind, Mainly in the U. S.
And in Latin America, dragged sales down by 7%. Higher fixed costs as well as freight cost Increases due to higher sales volumes burdened earnings. Furthermore, margins developed unfavorably due to product mix effects. And at that point, I will hand things over to Hans.
Thank you, Martin, and good morning, ladies and gentlemen. Let me first give you an update on our recently announced acquisitions. In May 2021, BASF in Changshan, a leading Chinese lithium ion battery material The supplier agreed to form a BASF majority owned joint venture to produce cathode active materials and precursors in China. The purchase price for BASF will be in the mid triple digit €1,000,000 range. Hunan Shanshan Energy operates 4 production sites for CAM and PKAM In Hunan and Ningxia, with an annual capacity of 90 kilotons by 2022.
By forming the intended joint venture, BASF further strengthens its position in Asia, building up an integrated unique Global supply chain for customers in China and worldwide. Through this joint venture, we will increase our annual capacity to 160 kilotons 2022 with further expansions underway, making BASF the first company with production capacities in all major markets. Closing of the transaction is targeted for later this summer following the approval of the relevant authorities. In June 2021, BASF and Wattenfeld signed a contract for the purchase of 49.5% By BASF, the purchase price amounts to €300,000,000 Including BASF's contribution to fund the wind farm construction, BASF's total commitment amounts to around €1,600,000,000 Please consider that following the intended resale of around 50% of our share in this project to a financial co investor, We expect to consolidate our participation at Equity. As a result, the related CapEx will then not be reported as such in the financial statements of BASF Group.
The wind farm is expected to become fully operational in 2023, with first electricity produced already in 2022. It will be the largest offshore wind farm in the world with 140 wind turbines and a total installed capacity of 1.5 gigawatts. It will also be the 1st offshore wind farm without public subsidies for the power produced. BASF is acquiring from the wind farm for its ownership share through a long term power purchase agreement. This will enable us to substitute gray power with green power and thus implement innovative low emission technologies at several of our production sites in Europe, mainly in Antwerp.
Closing of the transaction is expected in the Q4 of 2021, subject to the approval of the relevant authorities. We have also been successfully working on divestitures. On June 30, we closed the divestiture of our Global Pigments business to the fine chemical DIC following the fulfillment of clearance conditions. With DIC, we have found an acquirer whose portfolio is excellently complemented by our pigment business. The purchase price on a cash and debt free basis is €1,150,000,000 Special items in the Industrial Solutions segment include The disposal group in the Dispersions and Pigments division Was derecognized end of the Q2 of 2021.
Since July 1, the name of the division is now Dispersions and Resins. In July BASF and Clayton Duvalier and Rice signed an agreement to sell Solenis to Platinum Equity. With the agreed divestiture of our 49% share in Solenis, we will benefit from the value creation that was achieved through combining the complementary strengths of Solenis and BASF's paper wet end and water chemicals business in 2019. The transaction implies an enterprise value for Solenis of €5,250,000,000 which includes net debt of around €2,500,000,000 We thus expect our share in the disposal proceeds to amount to around €1,000,000,000 From the Q3 of 2021 onward, the non integral equity participation in Solenis will be classified as disposal group. Pending approval by the relevant authorities, closing of the transaction is expected before the end of 2021.
Upon the closing of the transaction, we expect a disposal gain in the mid triple digit €1,000,000 range. This disposal gain will be a special item below EBIT in net income from shareholdings. In June, we announced the postponement This improvement is not yet fully reflected in the forward looking broker consensus assumptions. In addition, market valuations of oil and gas companies have, for various reasons, not yet reached the level the shareholders expect in order to kick off the IPO. Due to its very robust performance, Wintershall Dea is a strong cash contributor to its shareholders.
Strategically, we remain fully committed to divesting our share in Wintershall Dea. Let me now turn to the financial figures of the BASF compared with the prior year quarter in more detail. Martin covered the top line development already. Thus, I'll start with EBITDA before special items, which increased by 162 percent to €3,200,000,000 EBITDA amounted to €3,200,000,000 compared with €1,100,000,000 in Q2 2020. EBIT before special items came in at €2,400,000,000 compared with €226,000,000 in the prior year quarter.
Special items in EBIT amounted to minus €39,000,000 compared with minus €167,000,000 in In the Q2 of 2020, EBIT came in at EUR 2,300,000,000 in Q2 2021 compared with EUR 59,000,000 in Q2 20 At minus €44,000,000 net income from shareholdings improved by €744,000,000 in the Q2 of 2021. In the prior year quarter BASF incurred a non cash effective impairment of its shareholding in Wintershall Dea. Net income amounted to €1,700,000,000 compared with minus €878,000,000 in the prior year quarter. The tax rate was 18%. Reported earnings per share increased from minus $0.96 in the prior year quarter to €1.80 in Q2 2021.
Adjusted EPS increased to €2.03 in the Q2 of 2021. In the prior year quarter, it was at €0.25 I will now move on to our cash flow development in Q2 2021. Cash flows from operating activities increased by €295,000,000 to €2,500,000,000 in Q2 2021. The improvement was mainly driven by the considerable increase in net income compared with Q2 2020. This was partly offset by the lower release of funds from changes in net working capital.
Cash flows from investing activities amounted to plus €323,000,000 an improvement of about €1,000,000,000 compared with the prior year quarter. This was mainly due to the proceeds from divestitures, Particularly, the divestment of BASF's Pigment Business with EUR 767,000,000 payments made for The plant and equipment and intangible assets were slightly above the prior year level. Cash flows from financing activities amounted Similar liabilities exceeded additions by €1,000,000,000 While in the prior year quarter, net additions in the amount €3,500,000,000 increased financing cash flows. Dividend payments were slightly above the level of Q2 2020. Free cash flow increased by €254,000,000 to €1,800,000,000 due to higher cash flows from operating activities.
Turning to our balance sheet at the end of June 2021 compared with the year end 2020. Total assets increased by €2,600,000,000 to €82,900,000,000 on account of higher current assets. They rose by 3 point €9,000,000,000 on account of higher current assets. They rose by €3,300,000,000 to €33,100,000,000 This was primarily due to higher trade accounts receivable and increased inventories resulting mainly from the stronger business performance and higher raw material prices. Other receivables and miscellaneous assets also contributed to the increase, mainly due to higher precious metal trading items.
Net debt rose by €1,600,000,000 to €16,200,000,000 This resulted from reduced Cash and cash equivalents and a slight increase in financial indebtedness. Compared with the respective figure at the end of June 2020, net debt Decreased by €4,300,000,000 Equity amounted to €38,100,000,000 at the end of June 2021, an increase of EUR 3,700,000,000 compared with year end 2020. This was driven by net Income mainly due to actuarial gains and translation effects. On June 30, the equity ratio was 45.9%. With that, back to you, Martin.
Yes. Before I turn to the outlook, I would like to share an example that How BSS Innovations Contribute to a Circular Economy and the Success of Our Customers. Plastics are versatile materials. If they remain in use as long as possible and ideally do not even end up at waste at all, they can also make an important contribution to sustainability. To support our customers in driving sustainability connected with plastics, BASF's plastic additives teams focused its Sustainable solutions under the new global brand, Valeras.
We help our customers to reduce CO2 emissions with our focus on lower product carbon footprint and bio and renewable feedstocks. Valeras builds on the extensive experience in stabilization, protection, technical and regulatory support of BASF to strengthen in 2 technology approaches to the circular economy, extend the loop and close the loop. Valera includes additive solutions that reduce VOC emissions in foams, enhance biodiversity in plastic greenhouse and reduce energy consumption during PP nonwoven fiber production. To help achieve global recycling targets, which are ranging from 25% to 100% in the packaging industry. The portfolio will expand to include BASF's Additive Packages for Mechanically Recycled Plastics and Applications.
Ladies and gentlemen, we will conclude with BASF Group outlook. As already announced on July 9, we increased our outlook for 2021 based on the strong business development in the 1st 6 months of the year. We now expect sales in the range of €74,000,000,000 to €77,000,000,000 EBIT before special items is anticipated to reach between €7,000,000,000 7,500,000,000 The return on capital employed is expected to be between 12.1% 12.9%. The considerably increased earnings Expectations in the Chemicals and Materials segment are the main reason for the increase of our forecast. We continue to expect a certain normalization in margins and thus earnings of the Upstream businesses in the second half of the year, but to a lesser extent than previously assumed.
Regarding our Accelerator sales, we now expect €21,000,000,000 to €22,000,000,000 in 2021. No changes have been made to the forecast of our expected CO2 emissions. Our adjusted outlook It's based on the following assumptions regarding the global economic environment in 2021. Cross domestic product is expected to grow By 5.5 percent, industrial production and chemical production are expected to grow by 6.5% each. We now assume an average exchange rate of US1.20 dollars per euro and an average annual oil price of US65 dollars Per barrel brand crude.
Our forecast assumes that there will be no more severe restrictions on economic activity due to measures to combat the COVID-nineteen pandemic in the second half of twenty twenty one. And now we are glad to take your questions.
Ladies and gentlemen, I would like to open the call for your questions. The first question is from Markus Mayer, Baader Helvea. Please go ahead.
Yes. Good morning. I have two questions, if I may. The first one on the magnitude of the startup costs in Nutrition and Care on this vitamin A plant. And then the second one is On the product mix effect you experienced in your Activision, maybe if you can also give some Light on this effect as well.
Thank you. Yes. Good morning. Markus, this is Hans. On the Startup cost that we have in Q2 in Nutrition and Care for vitamin, I'll give you a round figure there.
That's between €20,000,000 30,000,000 Keep in mind, though, that this is the start up effect that I'm talking about. We also had a number of turnarounds, which we typically don't specify the respective costs, That's also something that plays a role when you look at the results of Nutrition and Care. Okay. Thank you. Product sorry, the product mix in ag, What do we have there?
We had Q2 of last year, which had to do with weather development. We had Still higher sales, in particular, in seats and trades than we had in Q2 of this year. CETA and Trade Business, higher margin business than the Crop Protection business, and that plays a major role in The product mix and the resulting outcome. Let me say in addition to that, if you look at The earnings, and this is on the EBIT before special items level of Agricultural Solutions. And if you look at the Currency effect that we have in there of somewhere between €40,000,000 50,000,000 that's actually the key explanation Of the decline in results that you see at that back, you have a quarter at the same level than where we were last year.
Thank you.
Thank you.
The next is Christian Faitz from Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Thank you, Steffi. Good morning, everybody. Two questions from my side, please.
Is it because of the late cyclicality of your And then the second Question would be on Nutrition. Can you please elucidate a bit the price pressure, particularly in Nutrition and Health, which is consistent since Q2 last year, is that mainly coming from the vitamin side? Thank you. And also, obviously, congrats on the results minus ag.
Thank you, Christian. I'll start with your first question on Nutrition and Health. Yes, there is some price pressure. There is also something else and that is The raw material cost pressure that we need to keep in mind here, you know how this works. Our upstream segments, they pass on any type of price increases on the raw material side relatively quickly.
I tend to say within 30 days, The further you would go downstream in the portfolio, the longer it actually takes and that's something that we Typically see, you know how it is when prices go up, you see the kind of margin pressure that we have. And when Come down, raw material prices, you'd see typically the margin expansion, and that is exactly what we have here. Maybe one more word to put things in perspective for Nutrition and Health. Please also keep the comp in mind, which is extremely You may recall that last Q2, we talked about the resilience of the business, the very High demand that we had seen in particular in the months April May 2020, the pre buying that took place there, I think all that needs to be factored in to put overall Nutrition and Health In the right light with what we consider and admit is a weak quarter. The first question, could you Help me begin with that, please.
Yes. It was Performance Chemicals. The price momentum It's relatively weak compared to any other traditional chemical segment. Is that because of the late cyclicality of your customer industries, I. E, oil
Thanks again for repeating the question. When you look at the Industrial Solutions I think we have overall price increase there of 13% in Q2. That does not fully compensate for the kind of raw material price increase that we have. But again, the general explanation that I gave earlier is true here. You're moving a step downstream from our 2 upstream segments, I.
E, Chemicals and Materials. It just takes a little longer to pass On the prices, but I'd say overall, and if I understood you correctly, you included the Industrial Solutions segments, and your congratulations, nice strong performance that we have seen there.
Okay. Thank you. Fair enough. Thanks, Scott.
The next question is from Andrew Stott, UBS. Please go ahead, Andrew.
Yes. Good morning, Stefanie and good morning, Martin and Hans. I had two questions. The first one's on the decarbonization debate. Just Maybe questions from Martin here.
What are your thoughts on the proposals from the Fit for 55 program? Where do you think Chemicals ends up being within the C band mechanism? And if so, what are the implications for BASF's decarbonization strategy, if any? That's the first question. The second question, a bit more straightforward on CapEx.
I wonder if you could give us an update now on CapEx for 2021, 2022 and 2023 on the basis of that in file coming in. So I assume
you've got
to take about half of that €1,300,000,000 of CapEx, but I just don't know the
Yes. Andrew, good morning. Yes, the Fit for 55 package It's a package which you have to digest first. It's 3,427 pages Of regulation, quite amazing. I have to say, not so many surprises.
We have also been able, I think, in the dialogue before to Changed one or the other thing to a minor heavy impact, but it is still a heavy package. It's 55% reduction, which I think was clear to everyone that this will come. It has also translated in the meantime into a more tight Climate law in Germany, which is also accelerating this path and even more reduction in a shorter period of time. So actually it's no big surprise and that is all factored in our plan, which we have showed you in Capital Market Day in March. The CBAM is actually something I'm personally very critical about CBAM.
I think it's just not going to work. It's not only the WTO Compliance, it is a very bureaucratic piece because if you apply that to chemistry and you just think about how Value chains are branching out. You have to know for each and every product that's imported and exported what actually the fair CO2 carry is. I think it's almost impossible. That's why we in the SEPHIC, which is the European Association for the Chemical Industry in Europe, We have actually decided not to hunt for participation in the C BAM, but rather let that first be tested in other big commodities.
So it's now the 5 commodities and there's only one from chemical industry in which is ammonia, which is a relatively easy to understand commodity And then with that also the fertilizers. So it will affect us not dramatically much, but certainly we are also A large ammonia producer and you know also that with CEBA now the free allocation of CO2 certificates are actually cut off in 2023, And that is a major burden in cost, but that really hits the whole industry. And I think it's a good example to now learn How that actually impacts export import and also certain value chains. So It is the starting point of a long, long journey. There's a lot of question marks, and I can only repeat myself here.
If you really want to manage that and convert that To an advantage where I think we can do, we need a lot of dialogue that overall regulation is positive because so far, PIT for 55 is actually A wish list what they want to do, but it is not a list of regulation to help us to actually really realize those targets. So Maybe we have some more time in future, then I will talk more in detail about that. I think about CapEx, I would say we are so far very well on track. And I think Also the €3,600,000,000 for this year, we will most probably around spend also around that amount. Going forward with CapEx 2022, 2023, that is stepping up.
That's always what we said because then the big Investment in China and Golden Island will kick in. I cannot give you detailed numbers now. We will do that within the next 5 years numbers Where we can provide also a little bit more, let's say, maybe an outlook, how that will develop and how steep it will increase. But we will also then show you a More in the battery materials, what we intend to do, and this is both the drivers. But in the same moment, we are very Harsh and very disciplined in the allocation for all the other businesses.
So I would say it doesn't bear any surprises, Andrew, But give us some more time to provide, I think, more detailed numbers.
The next question will be From Matthew Yates, we have Ben Jaidip Pandia followed by Laurent Favos. And now it's Matthew Yates, Bank of America. Please go ahead.
Hey, good morning, everyone. A couple of questions. First one, sorry for going back to ag, but you're making substantially Less profits in the quarter than you did a few years ago before you even acquired the Bayer assets. So When we think about the moving parts you've talked about, is it really foreign exchange that's the big problem? And when you talk about higher fixed costs, is that specifically relating to freight?
Or is that something More of an investment in the business that maybe we see some return on going forward. So that's the first question. The second one is around Wintershall. And I wanted to ask What the strategic options are for that asset and how we can avoid this becoming somewhat of a stranded Asset, if the market continues to be resistant to valuations in the oil and gas sector. Other than an IPO, are you also exploring options for a trade sale?
Or could you even contemplate some sort of Spin off to shareholders, if given the improvement in the rest of the business, you're making good progress on deleveraging anyway. So could you simply just spin the asset off? Thank you.
Yes. Matthew, this Hans, let me take your two questions. I'll start with Ag. We talked about the The significant FX effect that we have that burdens the earnings of Ag, I mentioned already without that, we would At the same level as in Q2, and there is one very simple explanation for that, which is the U. S.
Dollar, which was Sort of locked in at $1.10 in Q1 and Q2 of last year, and we have it slightly above $1.20 in Q2 Of this year. There's also something to be kept in mind when you compare them later on once our competitors report and report their figures In U. S. Dollars, at this point in time, simply the disadvantage of showing the numbers in euro terms. Yes, we have increased fixed costs, as Martin has explained already.
Pulling through higher volumes means also that Your fixed manufacturing cost increase, we have in line with the higher volumes also higher selling cost and as part of that Also higher freight costs and then we have something that is also true and I mentioned this already is It's in the fixed cost, it's in the variable cost, but significant increases in raw material prices, in part in situations Where prices for the products are fixed at the beginning of the season and these raw material prices then hit you during the course of the season. Hope that helps to put this in perspective. Wintershall Dea, a stranded asset, I would say definitely not. We made a conscious decision here seeing where the broker prices were When it comes to valuation and when it comes to valuation for an IPO, what is at this point in time In particular of relevance are the years 2022, 2023, 2024. We saw the strong move on the front end of the curve, but 2020 2024, we're clearly lagging behind.
It's slightly improving as we had expected. It also looks like the multiples are improving. So from that point of view, I think we made economically here the right Decision, you're asking with other alternatives. I can tell you that between the shareholders, we have agreed on A path for an exit, which is the IPO, and we'll continue on that path. And let me also reiterate what I Said during my brief speech earlier, the strategic decision for BASF is absolutely clear.
We will implement as we have implemented on the divestitures of the Water and Paper Treatment Chemicals business, the Construction Chemicals The Pigments business, we will also implement in this case.
Thank you, Hans.
Next question is from Jaydeep Pandia on Field Research. Please go ahead.
Thank you. I want to go back to the CMD you guys did in 2018, where you gave the 3% to 5% EBITDA Sort of CAGR target, and obviously, at that time flagged that this is not going to be easy. As of today, you're probably going to do almost all the CAGR in 2021 if EBITDA is close to roughly EUR 12,000,000,000 based on the $9,000,000,000 base of 2018 roughly. So just want to understand, as we think about life ahead for BASF, I mean, how sustainable is this earnings level today? Do you think that Basically, if you add all the sort of over earning you're doing in certain upstream areas versus some of the investments less under earning that is in the downstream areas, There's still room to grow from the current profitability level of roughly sort of €12,000,000,000 or is it really An exceptional year this year, and therefore, we should actually be thinking about some moderation in the outer years, and therefore, go back to this more like a 3%
growth rate level rather than the 5% growth rate level in
terms of the range. Growth rate level rather than the 5% growth rate level in terms of the range. That's my first question. And second question really is around your battery business. So obviously, you've announced a big sort of joint venture with Shanshan.
How do you actually Unlock value in this business from a Capital Markets point of view. I mean, in the longer term, do you plan to sort of separate this business With a focused strategy, or you intend to just keep it in BASF and therefore, this This is going to be an important part of your strategy, but it is always going to be for the capital markets to accept any value to it. Thanks so much.
Yes. Jenny, this is Hans. I'm trying to find the right answer for your first question. And let me say this, With the new corporate strategy that we launched in the end of 2018, we announced a number of measures. These measures included the divestitures that I talked about briefly.
So in other words, changes in The portfolio upgrading the portfolio overall, it included certain cost measures on which we have Put into what we call the excellence program on which we will deliver, as you will see, by the end of this year, I have no doubt. We have Put a strong focus on customer, where some of you have asked me over time, well, Hans, should an organization like this We're always focused on customers and I always said the same. Yes, absolutely. But at times, it may make sense to Putting more focus on it and with that also fuel more growth in BASF. As Martin has explained, As it looks, both in Q1 and in Q2, our growth, and this is measured in volume, is stronger than Volume growth overall of the chemical industry.
We've implemented a number of other measures in the meantime. That should all help us to increase profitability of The BASF Group. Let's see whether this 1 year will be the catch up year and form then the new baseline for the 3% to 5%. But as Martin and I sit here, we are firmly convinced that the BASF Group is able to deliver that, And we will do everything to actually also fulfill the promises that we made there.
Nothing to add from my side, Hans. And JD, I then I have asked I will try to answer your question about the battery material business and our acquisition In China, I mean, you know that we have a footprint which includes North America, Japan and now with And also Europe, but we have no capacity in China, and this is the largest market in the moment. And also, Nevertheless, this chain is in a whole move, I would say, over all the different steps of the value chain. There's new alliances. There's a lot of investments coming up, coming up, Giga Factories, Material Factories, also investments in the mining.
It is very important to have Position also in China because the Chinese suppliers are delivering a major part of the material For the value chains globally in the current moment, as it allows us to also link in very quickly via Shanshan's position Into some of these opportunities. On the other hand, you see that when we bought ourselves into this enterprise, And also, Sunshine was interested because the world is not only China anymore. They also want to get, let's say, access more to the Europeans. And I think with this, we have a good opportunity to really exploit all the different constellations and setups you have in this value chain worldwide. And don't forget that we also for this got a very quick access in additional capacities because now we will be really a big animal.
It's Only one, by the way, to have the global footprint, but we have 160,000 tons of capacity come at the end of 2022. And that gives us really the opportunity to very quickly grow and to build up these new alliances and customer bases and be very flexible In the demand of the customers. And as I said, I mean, this is very, very dynamic. And with this, I think we can accelerate the growth. We can build our position and we can increase or enlarge our customer base.
And I think with this, we should be able to also really unlock
We will continue with Laurent Favre, Exane BNP Paribas. Following him, we will have Tony Jones, then Charlie Webb and then Andreas Heine. So now Laurent Favre, please go ahead.
Thank you, Stephanie. Good morning all. My first question is on that normalization In the Upstream, as you said, less than you still assume that conditions will normalize, but just less than before. I was wondering if you could give us a bit more color on the various moving parts there of your assumptions. And in particular, Do you see now the risk of further normalization into the first half of twenty twenty two?
Or do you think that, that scenario is off the table? And if you could separate, I guess, Chemicals and Materials in your comments, that would be great. And then secondly, Hans, On the Ag side, compared to February, when you issued the guidance for slight EBIT growth, there are new moving parts on higher costs And better soft commodities, I guess, currency, if anything, are slightly better. If you net all of those new increment, do you think you can grow EBIT slightly in ag
Conditions for Chemicals and Materials segment in the 2nd quarter overall were better than in the 1st quarter. And that was coming on one hand very strong demand because I mean in all the different businesses, There is really solid demand globally. There's also I think the world has been a little bit surprised by low inventories and then big business, so they have To Phil, and then we have also the supply chain topics. Some of the markets are actually because also of the supply Change issues and the shortage of containers. There is not in every business an arbitrage business from one region to the other.
So partly, they are a little bit more Segregated markets, and that's also why everything reacted quite sensibly in a pattern and also where some of our Players in the major commodities had supply problems, even coming back to the big freeze in the U. S, which took weeks And actually and partly until today to really normalize and to work down the backlog. So if you look in a lot of the margins, I have to say, we really have super margins in the moment, very, very high level, and it's just not Right to assume that this is going to stay forever. I mean, if you look in products also like acrylic acid, but also BDO, but then also MDI, TDI, this is all very much on the high level and simply with the effect that some in some areas the supply normalizes And even the demand stays strong, you just have a certain relaxation of margins. I expect, however, that even in the second half, This is still a super margin level.
It's not record margins anymore, but it is very, very good margin. So for that reason, We have to figure into our numbers that there is a certain normalization. And you know how sensitive that is. I mean, in In the MDI case, one of the competitors had Forsmacher and then immediately prices react. So that is always, let's say, the choker in the There could be some unfortunate or unplanned outages, which would change the situation.
But overall, I mean, margins level are So high compared to the last 5, 6 years that they have to go down to a certain extent. But that should not send you the signal that They are now collapsing on the floor. It's just really a normalization.
And the level of H2? That's all for my question. The risk beyond that H2 normalization you are factoring in, in your new guidance, You would still say that they are abnormal in your new guidance, in your new scenario for H2 for this year?
Yes. I mean, this is what I said. I mean, we would we have factored in a high level of margins, But not that high as in the first half.
Thank you.
This is Hans, Laurent. Thanks for your question. On ag, yes, we had expected to be slightly ahead of Have won last year. We're in fact down by order of magnitude €45,000,000 to €50,000,000 Things have actually from raw material cost to currency have not gone in our favor. It remains to be seen how the second half We'll develop.
You know that this is seasonally weaker than the first half of the year. It is predominantly the business In South America, we need to see how this will go. It looks definitely more challenging Now then it looked when we gave the guidance in February. Hope this helps.
Thank you.
Looking at the time, I think we have to speed up a little bit. So perhaps if you can restrict yourself to ideally only one question, that would be great. So now Now we have Tony Jones, Redburn. Please go ahead.
Yes. Good morning, everybody. I've got One question. Actually, I have 2, but I'll go with 1. For cash flow and capital allocation, with EBIT this year, the new guidance is going to
be a well over €7,000,000,000
How are you
thinking about returning any excess cash to shareholders in a sort of like peak earnings year? Or are you favoring growth investments and strategic M and A? Thank you.
Maybe I'll take that, Tony. This is Hans. Great question. So first of all, let's bring the year home, number 1. Number 2, you know what our priorities are for cash and they have not changed a bit.
Okay. Thank you.
Short answer. So now we have Charlie Webb, Morgan Stanley. Please go ahead.
Morning, gentlemen. Thank you, Steffi. Just the one for me then. As we look at the auto sector, maybe you can just provide us a bit more detail in terms of what you're seeing into the second half and in particular how that relates to Certotec. Clearly, it seems regs are still very positive on the Autocat side as well as precious metals obviously helping out in Q2.
Just How do you see Surface Technology kind of through the second half of
the year would be helpful.
Yes, Charlie, maybe I'll take that one. I mean, automotive, I think I said that already in February that the semiconductor issue is not an issue in blip for 1 or 2 quarters, but it is a more Long term problem, and I think that has shown that I was right on that. We clearly reduced our number For assumption for cars produced, so we are currently thinking about 83,000,000 units to be produced in this year. So that is definitely lower. We have, however, been surprised that the Q1 was stronger than anticipated.
It's about 800 1,000 units, but that means for the other three quarters, this is actually a minus of 1,300,000 units. So, second half will be a little bit weaker, respective, the opportunities. And that has nothing to do with demand Because the demand is strong, you see also in the U. S, the inventory of cars is really, really low. You see also that The delivery times of the OEMs increased, so it is really a semiconductor shortage that really Provides this framework not to produce more cars.
I mean this overall move into e mobility is very exciting Because now more and more of the players are accelerating their plans to change from combustion to e mobility, I think a very clear commitment. It's a proof point that we have been right with our assumptions for the battery materials. And I talked about that already. That's Really very, very dynamic. But let me really say here also, we have a lot of other projects that are connected with e mobility because a lot of Things are differently constructed in a car that is has an electric power drain.
And overall, I think we mentioned that There's much more chemistry in terms of value in a car that is electrically driven than a combustion. So overall, that is really good news for Supplier like DSF, and let me give you one example. If you think about the different fluids you need in a car, you think if you don't have a combustion engine, you don't have to cool it anymore, Then you need actually less. It's exactly the opposite. You need about 3 to 4 times as much fluid to also cool the battery.
So There's a lot of opportunity and a lot of the projects we have with even higher attention and A faster execution than we thought. So overall, a quite challenging but also very interesting and dynamic development.
And just on Surface Technology in terms of the Autocat business, obviously strong first half. Just wondering how that looks into the second How far are we along in that kind of regulation upgrades in Asia, in China?
Yes. I mean, overall, I mean, still For the years to come, the combustion engines are the biggest with the big numbers here. There is also Euro 7 in the euro, China 7 coming up for a further intensifying regulation. That still drives innovation. We need new CAT systems.
We'd have to adapt. So I would say over the next years, that is still a good business.
Okay. Thank you very much.
Now we have Andreas Heine, Stifel, and then we have 3 more analysts in the line. That will be Peter Clark, Chetan Udeshi and Sebastian Bray. So now Andreas Heine, Stifel, please go ahead.
Well, I tried to, but very brief. In Q3 in Chemicals, if I look to the prices, I can see, I would say, on average, prices might be even higher than in the second quarter. Is there anything I miss if you look on what you see for that particular segment in the current quarter? 2nd, in agro, we have seen soft commodity prices being Very much, Albert. No one in the Crop Protection and Seed business could react on this as the season was already running.
So now I guess everyone is hoping for price increases, especially for the second half in the Latin American season. Is there anything you can share with us on this price Increases for LATAM in the second half, especially also to offset what you have lost on the currency last Yes.
Andreas, a short answer on the Chemicals margins. If you look in some of the margins, They already, at the end of Q2, turned down a little bit. So if you see MDI and TDI in Asia, Caprolactam, more flat and some others also, let's say, started already to normalize a little bit. That's why we expect simply with the higher availability that this is going to continue. If I then do the math, I would say the Q3 in average margins A little bit lower than we had in Q2.
Thanks. Yes. Andreas on this hand. I think your summary was great. FX needs to be taken into consideration for the business in the Southern Hemisphere.
Increased raw material prices have to be taken into the equation, and I think that will also be reflected in the pricing policy.
Thanks.
Now Peter Clark, Societe Generale. Please go ahead.
Yes. Good morning, everyone. I think you've sort of alluded to this, but it's the flip side of the super profitability upstream and looking at the lag effect You're talking about downstream passing some of this stuff on. I know they're different inputs, whatever. But if Coatings are for an example, I mean, some of your peers are talking about peak Impact of the inflation probably in terms of Q3 and then stabilization from the winter and then perhaps gentle moderation On the supply disruptions easing, I'm just thinking if your thoughts are similar to that and how it might impact some of those businesses being squeezed at the moment as well.
Peter, the Saenz, thanks for your question. I'd say, in general, We have a similar view. Martin just described what our expectations are for Q3 second half of the year for prices in upstream. Coatings business typically business where it also takes Definitely longer than upstream to pass on the price increases. Demand overall is despite The semiconductor issues that we have, demand overall is good and strong, which is also reflected in the results of Q2 and The first half of the year, but there's definitely some work to be done on the price front.
But just to add, let's not get Now if we are at the peak and we enjoy as long as we can do. And as I said, I mean, if you talk about normalization, This is not collapsing margins. And as long as the demand stays healthy and that's what we can see also from the order entry and everything, I think there's no reason to For concern too much.
Got it. Thank you.
Okay. Now Chetan Udeshi, JPMorgan. Please go ahead.
Yes, hi, morning. Two quick questions. One just, it seems you are alluding to maybe slight reduction in margins in the Margins in the upstream businesses. So should we take that as a sort of guide for, let's say, what Q3 We could be in terms of earnings, maybe a slight reduction from Q2 levels of, say, just around 2,400,000,000 Or do you think there are some other factors we need to take into consideration when thinking about Q3 versus Q2. And secondly, can you remind us what are what is the existing sales and
For the first one, I mean, I think we alluded to it already. I mean, it is a certain normalization. If you look on some of the margins, they are just not healthy in the moment. They are so high that you cannot expect that customers overall stay with that. And with the better supply, it is just Immediately reacting to somehow go down.
But as I said, it is still a margin in most of the lines, It's far above our normal average. It's still a very attractive margin. So and there is one element coming in seasonality In some areas, and that's always factored in, and BASF Patent has that as well that in summer months, sometimes they draw a little bit less because some of the companies So to shut down or reduce or whatever, go down with the shift or something like that. And I think that is then also now, let's say, going in the same That is simply normalizing. But please consider that this is still very, very attractive margins in commodity area.
On the battery materials business, Chetan, as you know, we don't provide the financials for our strategic business units. But what I can tell you is that this is a nicely growing business, and it certainly grows in line with the overall growth that you see in electromobility.
Thank you.
Now the final ideally one question from Jern Brey, Berenberg.
Yes. Hello. Thank you for taking my question. This is on the battery materials business. What exactly was the purchase price that BASF paid for the 51% stake in the Shanshan Materials business, was it about $650,000,000 Why was this not disclosed?
And just as a follow-up to this, What is the total organic CapEx investment that BASF will make in battery materials To reach the 160 kiloton by the end of 2022, the company has previously disclosed 400,000,000 In Europe, how much on top of that will come to reach the EUR 160,000,000 in total? Thank you.
Sebastian, maybe on the second one with the battery materials on the investments. I mean, we have currently our EBMI that is the European investment is which is in execution, which will then be finalized next year. And all the other parts that are actually coming in now are coming in Via China. So there is no other capacity expansion in the moment in the numbers from our side. And Hans,
Yes. I mean, with respect to the price, we've given you what we can give you Following the agreements that we entered into, so I can't tell you more than that it is a mid triple digit million Yes, figure. Sorry for that.
Was it a condition of the agreement that the price not be disclosed? Pardon me? Was it a condition of the agreement that you signed with These shareholders are shun, shun that the price not be disclosed.
And these are the usual confidentiality rules that are in place. And as a result of that, We haven't disclosed more than what we just said.
That's understood. Thank you.
Welcome.
Ladies and gentlemen, this brings us to the end of our conference call. Let me take this opportunity to draw your attention to another virtual event we will offer on Monday, December 27, the BASF investor update scheduled to begin at 11:30 a. M. Central European Summer Time and And at around 3 p. M, we'll be dedicated to our major growth projects, the new Verbund site in Sanjiang and our Battery Materials business.
Martin Brodermuller and Markus Kamit will give speeches and in the Q and A sessions, they will be joined by the respective presidents. Should you have any further questions at this time, please do not hesitate to contact the members of the BASF IR team. Thank you for joining us today, and goodbye for now.