BASF SE (ADR) (BASFY.PK) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.25.13 | About: BASF SE (BASFY)

BASF SE (ADR) (OTCQX:BASFY)

Q2 2013 Earnings Call

July 25, 2013 5:00 am ET

Executives

Magdalena Moll - Senior Vice President of Investor Relations

Kurt W. Bock - Chairman of the Board of Executive Directors

Hans-Ulrich Engel - Chief Financial Officer, Member of the Board of Executive Directors, Chairman of BASF Corporation and Chief Executive Officer of BASF Corporation

Analysts

Thomas Gilbert - UBS Investment Bank, Research Division

Jean De Watteville - Nomura Securities Co. Ltd., Research Division

Tony Jones - Redburn Partners LLP, Research Division

Paul Richard Walsh - Morgan Stanley, Research Division

Lutz Grueten - Commerzbank AG, Research Division

Andreas Heine - Barclays Capital, Research Division

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

James Knight - Exane BNP Paribas, Research Division

Peter Spengler - DZ Bank AG, Research Division

Christian Faitz - Macquarie Research

Norbert Barth - Baader Bank AG, Research Division

Michael Rae - Goldman Sachs Group Inc., Research Division

Geoffery Haire - HSBC, Research Division

Ronald Koehler - MainFirst Bank AG, Research Division

Andrew Benson - Citigroup Inc, Research Division

Jaideep Pandya - Berenberg, Research Division

Peter Clark - Societe Generale Cross Asset Research

Laurence Alexander - Jefferies LLC, Research Division

Andrew Stott - BofA Merrill Lynch, Research Division

Markus Mayer - Kepler Capital Markets, Research Division

Neil Christopher Tyler - Redburn Partners LLP, Research Division

Operator

Good morning, ladies and gentlemen. This is the Chorus Call conference operator. Welcome to the BASF Interim Report Second Quarter Results 2013. [Operator Instructions]

This presentation may contain forward-looking statements that are subject to risks and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. Forward-looking statements may include, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation and supply-and-demand. BASF has based these forward-looking statements on its views and assumptions with respect to future events and financial performance. Actual financial performance could differ materially from that projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, readers should not put undue reliance on any forward-looking statements. The information contained in this presentation is subject to change without notice, and BASF does not undertake any duty to update the forward-looking statements and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations.

Ladies and gentlemen, at this time, I would like to turn the conference over to Magdalena Moll, Head of Investor Relations. Please go ahead.

Magdalena Moll

Yes, good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our Second Quarter 2013 Conference Call.

While the chemical industry experienced its lower growth, BASF maneuvers well through this environment. With me on the call today to explain the results are Kurt Bock, our Chairman and Chief Executive officer; and Hans-Ulrich Engel, our Chief Financial Officer. Kurt will summarize the key financials, highlight important milestones and conclude with the outlook for 2013. Hans will review the segment results of the second quarter. And afterwards, both gentlemen will be happy to take your questions.

We have posted the chart and the speech as well as the press documents on our website, www.basf.com/share.

With this, I would like to hand over to Kurt.

Kurt W. Bock

Yes, thank you, Maggie. And good morning, ladies and gentlemen, also from my side.

The global economic environment remains challenging. While the economies in the Eurozone are stagnating, the recovery in the United States is gaining ground. In China, growth in the second quarter has been lower than anticipated, leading to more moderate growth perspective for Asia Pacific. The major Latin American economies also faced sluggish demand growth. These trends add up to a picture of prevailing volatility and uncertainty in the global economy. In Q2 2013, BASF successfully maneuvered through this environment.

We increased sales by 3% to EUR 18.4 billion. This growth was mainly attributable to the excellent development of our Agricultural Solutions segment and higher volumes in Oil & Gas. In an overall challenging market environment, our Chemical activities showed a moderate volume growth of about 2% but a slight decline in sales due to lower prices and negative currency effects.

EBITDA remained stable at the level of EUR 2.5 billion. EBIT before special items declined by 5% to EUR 1.8 billion. This was caused primarily by a significant lower result in Other. Overall earnings of all our 5 business segments slightly increased. Specifically, we saw higher contributions from the segments Functional Materials & Solutions, Agricultural Solutions and Oil & Gas; while earnings from our Chemicals as well as Performance Products segments were lower. The decline of EBIT before special items in Other is related to a swing in our long-term incentive program. While we increased the provision for the program in the second quarter of this year, we reversed provisions in the second quarter of last year.

Special items amounted to minus EUR 59 million, resulting primarily from the restructuring measures. In the second quarter of last year, we reported negative special items of EUR 261 million, mainly caused by restructuring measures as well as impairment charges on a Norwegian oilfield development project.

EBIT grew 6% to EUR 1.8 billion. As the tax rate amounted to 23.8% in the second quarter of 2012, the tax rate was at 18.5%, positively impacted by the above-mentioned oilfield impairment, which was highly tax-deductible in Norway.

Net income came in 4% lower at EUR 1.2 billion. Adjusted earnings per share decreased to EUR 1.40 in Q2 after our EUR 1.59 last year. A EUR 2 billion operating cash flow surpassed the previous year's level at about -- at around EUR 100 million, driven by changes in net working capital. Free cash flow remained almost unchanged at EUR 936 million.

Let me move from the Q2 perspective to our half year view. In the first half of 2013, we exceeded the high level of sales and EBIT before special items of the first half of 2012. Our operating cash flow of EUR 4 billion was EUR 619 million above last year.

Before we go through more detail for our individual business segments, please allow me to highlight a couple of milestones. We signed up and agreed on a further expansion of our joint venture in Nanjing. In addition to the superabsorbent polymers plant currently under construction, the acrylic acid value chain would be further strengthened with additional acrylic acid and butyl acrylate plants. We also investigate a potential expansion of the ethylene oxide production and a new neopentylglycol plant.

For our very successful crop protection business, we have initiated measures to further expand the global asset footprint. In China, in Rudong, we will build a new formulation and packaging plant, servicing the local market with nearly our entire portfolio of crop protection solutions. In Brazil, we will further increase our production and formulation capacities at our Guaratinguetá site. Furthermore, we announced that we will open a new plant for biological crop protection products in Chile.

We would also like to update you on the status of the transaction between BASF and Statoil, which we announced in Q4 of last year. We now expect closing of the deal on July 31. Sales and earnings from the producing fields that we obtain from Statoil, we will book from August 1 of this year. Income between the economically effective date, January 1; and closing date will reduce the agreed-upon compensation payment of USD 1.35 billion.

Now I would like to turn over to Hans, who will comment on the performance on the individual business segments. Hans?

Hans-Ulrich Engel

Thank you, Kurt. And good morning, ladies and gentlemen, also from my side. Let me highlight the financial performance of each segment in comparison to the second quarter of 2012. I'll start with Chemicals.

Sales in the Chemicals segment declined. Weaker-than-expected demand, especially in Asia, allowed for only a small overall volume growth. Prices declined, driven by a decrease of raw material cost. We faced slightly negative currency effects. EBIT before special items came in significantly lower.

In Petrochemicals, sales decreased. Volumes were stable in most product lines. Overall, prices fell, driven by the decreasing oil price. The scheduled 7-week maintenance turnaround of our cracker in Antwerp concluded, as planned, by the end of June. We were able to improve cracker margins in Europe and North America where we have optimized our Port Arthur cracker towards lighter feed. Cracker margins in Asia, however, remained unsatisfactory due to lower demand. Overall, EBIT before special items increased.

Sales in Monomers were almost stable. Caprolactam and polyamides suffered weak demand and oversupply, particularly in Asia, and prices came under pressure. However, this was more than offset by stable demand for the isocyanate TDI and MDI, as well as for glues and impregnating resins. EBIT before special items decreased substantially mainly due to lower margins in caprolactam and polyamides.

In Intermediates, sales decreased against a strong basis of comparison. Prices came under pressure due to lower raw material cost. Volumes were slightly up. Margins decreased due to less-favorable product mix. EBIT before special items was lower than in Q2 2012.

Now to the Performance Products segment. Sales in Performance Products segment came in slightly lower. This was largely caused by negative currency effects. Volumes were up, primarily driven by better demand in Care Chemicals. Prices were slightly down as lower raw material cost were passed-through to our customers. The consolidation of Pronova BioPharma positively contributed to sales. EBIT before special items came in at the level of Q1 2013. Year-over-year, earnings declined. Besides intense competition in some product lines, this was due to the devaluation of the Japanese yen. Furthermore, we received insurance payments in 2012 for damages caused by the earthquake and tsunami in Japan. We continue to implement the restructuring measures already announced.

In Dispersions & Pigments, sales decreased despite a slight volume increase. Demand for dispersions improved, mainly in Asia and Europe. Pigment sales decreased mainly due to the divestiture of the IMEX printing inks business in the third quarter of 2012. Demand for resins from North American and Asian customers decreased. EBIT before special items was significantly down due to lower product margins and a less-favorable product mix.

Sales in Care Chemicals were slightly up as sales volumes increased in all businesses and regions. Prices of some bulk products declined given lower raw material cost. Due to higher sales volumes, we were able to strongly increase our EBIT before special items.

In our Nutrition & Health division, sales increased because of the consolidation of Pronova BioPharma. Demand was up in aroma chemicals and in pharma. Business both in human and animal nutrition was weaker. Prices were lower due to intense competition, especially for vitamins. The Pronova integration is proceeding smoothly, and the business performs very well. EBIT before special items decreased due to margin pressure and higher R&D cost. Special items of minus EUR 16 million mainly resulted from the depreciation of the inventory step-up of the acquired Pronova business.

Sales in Paper Chemicals decreased due to the continuously challenging market environment. Paper Chemicals demand for packaging remained stable. Chemicals for the production of graphical paper continued to decline. Prices were mainly down as a result of lower raw material cost and intense competitive pressure. Therefore, EBIT before special items decreased substantially.

In Performance Chemicals, sales came in lower mainly due to negative currency effects related to the weaker Japanese yen. Volumes for fuel and lubricant solutions went up, as well as for water, oilfield and mining solutions. This was offset by a weaker demand for plastic additives as well as leather and textile chemicals. EBIT before special items decreased.

Now to Functional Materials & Solutions. In that segment, sales were slightly up, mainly supported by continued good overall demand from the automotive industry. Volumes in this segment rose. We were able to increase prices, but this was offset by negative currency effects. EBIT before special items increased strongly due to higher volumes and margins.

Catalysts sales were flat. Demand for mobile emission catalysts grew in all regions. Refinery catalysts volumes rose as well. In chemical catalyst, demand was below the record level of Q2 2012, especially for custom catalysts. Precious metal trading saw a rather volatile and uncertain market conditions, with revenues coming in at EUR 588 million versus EUR 631 million a year ago. Start-up and R&D costs incurred by the battery materials business impacted earnings. However, EBIT before special items rose strongly due to the good performance of refinery and mobile emission catalysts.

Sales in Construction Chemicals came in lower. The business decline in South and Central Europe was almost offset by growth in other European countries. As announced last week, we will sell the BASF Wall Systems business in Germany to ROCKWOOL. In North America, demand was slightly lower due to adverse weather conditions. Volumes in Asia were down due to portfolio optimization. Prices remained flat. Our ongoing measures to reduce fixed cost are effective. Margins have improved, and EBIT before special items has increased strongly.

In Coatings, sales increased due to higher volumes and prices. Demand for automotive OEM coatings grew significantly in all regions, including Europe, where we have strong business relations with premium car manufacturers. Automotive refinish coatings also developed positively, particularly in North America, South America and Asia.

Business in decorative paints was weaker due to lower demand in the South American premium markets and the divestment of the Relius business in Europe. Earnings rose strongly due to higher volumes and better margins.

Sales in the Performance Materials division were up. We saw higher volumes in engineering plastics and PU systems. Demand was driven by automotive, appliances as well as electrical and electronic equipment customers. We enjoyed good business growth in -- with European OEMs in engineering plastics due to new projects. Sales to the construction industry improved both in North America and Asia. EBIT before special items increased strongly.

Now to Agricultural Solutions. Our Agricultural Solutions segment delivered an excellent sales growth of 18%. Due to high demand in all regions and indications, we achieved a volume growth of 14% and we were able to raise prices by 3%. Currency headwinds amounted to minus 2%, while the Becker Underwood consolidation caused a positive structural effect of 3%. EBIT before special items grew by 17%. Earnings for the first half of 2013 already amount to almost EUR 1 billion.

In Europe, positive business momentum continued mainly due to higher demand for fungicides in Germany, France and Southern Europe. This was supported by beneficial weather conditions towards the end of the quarter. In North America, very strong sales growth was driven by excellent demand for herbicides, especially Kixor; and for our plant health, fungicides F 500 and Xemium. Sales in South America grew strongly, in particular for our insecticides and for F 500. We saw some anticipation of orders due to customer concerns about continued volatility of the Brazilian real. In Asia, sales were up significantly as strong demand for fungicides in China and herbicides in India more than compensated for negative currency effects in Japan and India.

Overall, we remain very confident that we will continue our series of good results. We expect that our innovative solution offering will lead us to new annual sales and earnings records also in 2013.

To Oil & Gas. In the Oil & Gas segment, sales grew significantly. This was driven by an expanded production of our Achimgaz joint venture, as well as higher volumes in natural gas trading, especially on spot markets. EBIT before special items improved significantly. Net income increased by EUR 72 million to EUR 280 million. Please be reminded that, due to the changes in IFRS 10 and 11, sales from our Libyan onshore production are no longer reported in the top line.

Sales in Exploration & Production decreased by 10%, attributable to the lower oil price. The average price for Brent crude oil was $102 per barrel in the second quarter 2013 compared to USD 108 in the second quarter of 2012. The average oil price in euros also decreased from EUR 85 to EUR 78 per barrel. Production volumes were slightly above prior year, primarily driven by the commissioning of new wells at Achimgaz. EBIT before special items in Exploration & Production increased. The main reasons were the higher contributions from our Russian activities, and from Argentina where the government recently implemented a new gas price scheme to stimulate investments into production and development programs.

Sales in the Natural Gas Trading business grew significantly due to higher volumes. Because of intense pressure on margins, EBIT before special items came in substantially below the level of the prior year's second quarter.

Now to Other. Sales in Other increased to EUR 1.1 billion mainly due to higher styrenics sales of the Ellba joint venture and higher raw material trading activity. EBIT before special items came in at minus EUR 217 million. The decline of EUR 151 million compared to the second quarter of 2012 was mainly caused by a large swing in provisions for the long-term incentive program. As alluded to earlier, we had to build provisions, whereas in the same period of last year, we were able to reverse provisions. We incurred very minor special items in Other compared to minus EUR 117 million in the second quarter of 2012 when we booked the already-mentioned oilfield impairment charges.

Let me now turn to our cash flow. Please be reminded that we now will summarize the first half of 2013. At EUR 4 billion, cash provided by operating activities was strong, exceeding the prior year number by EUR 619 million. Net working capital increased due to higher receivables. However, this was partially compensated by lower inventories, illustrating our stringent inventory management. Cash used in investing activities amounted to EUR 2.6 billion. CapEx increased to EUR 1.9 billion compared to EUR 1.6 billion.

In the first half of 2013, we used EUR 500 million for acquisitions, predominantly for Pronova. In the previous year's first half, we received roughly EUR 400 million, supported by the divestiture of the fertilizer business. Free cash flow increased by about EUR 350 million to EUR 2.1 billion. We issued bonds totaling EUR 2.1 billion, and we paid EUR 2.4 billion to shareholders of BASF SE and EUR 100 million to minority shareholders in group companies. Overall, financing activities led to a cash outflow of EUR 800 million.

Net debt amounted to EUR 12.5 billion. This represents an increase of EUR 1.3 billion in comparison to the end of the first half in 2012. Our equity ratio was at a strong 41%.

And with that, back to you, Kurt.

Kurt W. Bock

Yes, thank you, Hans. And before we take your questions, I would like to talk about our outlook. The ongoing economic volatility and uncertainty, which we see reflected in our order books, makes us more cautious regarding our macroeconomic assumptions. We do not expect that the global economic growth will accelerate into the second half of the year. For 2013, we now expect lower -- global GDP expand only by 2%, down 0.4 percentage points from our previous assumption. Industrial production, we now see at 2.7%, and chemical production at 3.1%, a reduction of 0.7 and 0.5 percentage points, respectively. We have reduced our assumption for the average Brent oil price for the year from previously USD 110 to now USD 105 per barrel. The projected dollar-euro exchange rate remains unchanged at 1.30.

Nevertheless, BASF targets for 2013 to exceed the 2012 record levels in sales and EBIT before special items in this quite challenging environment. We will continue with our measures to improve operational excellence and to increase efficiencies. Our operational excellence program STEP, which we announced in November 2011, is on track to deliver EUR 1 billion of earnings contribution annually by the year 2015. We expect to be at a level of EUR 300 million already in 2013.

Thank you for your attention. And we are now happy to take your questions.

Magdalena Moll

Yes. I would like to open the call now for questions and ask you to please limit your questions to only one at a time so that we can take as many questions as possible. And of course, you are always welcome to rejoin the queue for a follow-up question. Operator, would you like to repeat the system on how to ask questions?

Question-and-Answer Session

Operator

Of course. This is the Chorus Call conference operator. [Operator Instructions]

Magdalena Moll

So the first question will come from Thomas Gilbert from UBS.

Thomas Gilbert - UBS Investment Bank, Research Division

Just a very simple one, it's on the earnings of the Chemicals segment in the second quarter. I understand the year-over-year rationale for polyamide and caprolactam that you're providing us. What I do not understand is the 300 basis points margin down versus what you had in the first quarter. And the trading activity has been pretty much the same, yet the EBIT is down EUR 150 million. Can you just tell us in which of the -- I understand, year-over-year, it's Monomers, but what, versus the first quarter, went down in the second: is that Intermediates, Monomers or Petrochemicals? And if I dare ask, on a 7-year view, do you think this segment is closer to trough, or mid cycle, or peak?

Kurt W. Bock

Thomas, thank you for your question. Let's go through the divisions quickly. In Petrochemicals, we had better cracker margins in North America and Europe, weaker margins actually in Asia, compared with Q2 of 2012. EBIT rose by about EUR 90 million. CM, lower results due to a steep decline in caprolactam and polyamide, I think you alluded to that. And there's a steep decline in profitability, both, compared to Q1 and to Q2 of last year. In Intermediates, we saw slightly weaker demand for amides and a slight reduction with regard to last year.

Thomas Gilbert - UBS Investment Bank, Research Division

Can I just say, uptake for the caprolactam and for the amide markets were weak in the first quarter on a spot basis. Do I understand that you will have some contracts that rolled off from this and into the second quarter?

Kurt W. Bock

It's both contract pricing and spot pricing, I think, simply declined in trading conditions, and that led to a further deterioration of margins in caprolactam.

Magdalena Moll

So we're now moving to the second question, from Jean De Watteville from Nomura.

Jean De Watteville - Nomura Securities Co. Ltd., Research Division

I just have a simple question to understand the sales bridge in Exploration & Production. You -- the sales are down 10% year-on-year, and you're talking about volumes being slightly up and mainly thanks to Achimgaz. So I just would like to understand what's the mix effect and the construction of the price effect. Clearly, the Brent was down, but that was only 7% decline. As far as I understand, your -- gas prices in Europe were broadly flat. So can you just go through what's a -- what's the reason of that decline, and any specific in terms of fuel contracts or the mix effect or any other factors?

Hans-Ulrich Engel

Yes, Jean, this is Hans. First explanation is, decline, you're looking at the U.S. dollar Brent price. If you look at it from a Brent price in euro perspective, the decline is actually higher than the 5%, explanation number one. Explanation number two, slightly different mix gas-oil, and that gets you then to the overall 10%.

Magdalena Moll

We're moving on to the next question, that is from Tony Jones from Redburn.

Tony Jones - Redburn Partners LLP, Research Division

It's about cost savings versus inflation. I've been having a look at the OpEx over the past quarters. And if I add up all the different cost lines and then compare it year-on-year, and operating cost actually increased by about 3%. Now I realize there are other M&A effects, but many of your acquisitions are not that sizable at this point, so I'm actually wondering whether a lot of the cost savings coming through from the STEP program are just being offset by other inflationary effects. And I also noticed, R&D continues to rise. I mean, as this is something we're seeing for other companies, could you just help us reconcile this inflation? And how should we think about cost inflation versus STEP over the next year or so?

Kurt W. Bock

Yes. Thank you, Tony, for the question. And with regard to STEP, I think it's quite clear that this program, which is up to, say, at about EUR 1 billion until the end of 2015, will not directly go to the bottom line, in some cases, because it's simply offset, as you said, by price inflation. So we have never claimed that, automatically just doing this program, we will improve our earnings by EUR 1 billion. A large part of that initiative is necessary -- absolutely, necessary to offset continuous margin, probably which our industry has seen for many, many years, and cost inflation at the same time. So if we did not do the program, then obviously, our results would be, by the end of 2015, EUR 1 billion lower. But it's simply not possible to just add the EUR 1 billion to our current result and then say, "Okay, that's going to happen until 2015." There is cost inflation which is ongoing. Some of that cost inflation is warranted. For instance, R&D, we have increased our R&D spending again a little bit, and this is part of our long-term strategy and absolutely necessary and helpful. On the other hand, we have reduced headcount increase quite nicely, I'd say. If you look at the headcount increase of BASF group in the first half of this year, it's almost entirely attributable to consolidation of acquired companies but also to a changing -- changed scope of our consolidation of companies. If you exclude those effects, we had virtually no headcount -- almost no headcount increase globally. So we are really putting both feet on the brake here to contain cost development.

Magdalena Moll

So on. Our fourth question comes from Paul Walsh, Morgan Stanley.

Paul Richard Walsh - Morgan Stanley, Research Division

My question really was about the outlook around the second half, and I guess that encompasses comments pretty much across each of the divisions. Q4 was a particularly tough quarter last year. How should we think about the year-on-year dynamics across the businesses, in particular relating to Q4? And in Chemicals, my understanding is you saw a significant reduction in profit in Q2 because of the planned maintenance and downtime that was prolonged. Again, could you put that within the context of what you're seeing for the second half?

Kurt W. Bock

Paul, thank you for the question. First, let me state that what we see right now is pretty much a flat development going into the second half, and this is underlined by what we see in our daily sales numbers and our incoming orders. July actually is pretty slow. There -- so there is really no tailwind from the overall economy which would propel our business. And we have said that we want to improve both sales and earnings for the entire year. We have achieved this in the first half. And to -- taking first and second quarter together, we had some special factors like the Other component or the famous LTI program. And on the other hand, in the second half, and I think this is what you allude to, we compare against a relatively weak Q4. But I think we'd take nothing for granted right now. If you go through our segments, it's quite clear that we have to work very, very hard and to improve. Further on, we are, on -- I think, on a good part in Functional Materials & Solutions. Ag has done an incredible job over the last 6 months. And again, when you talk about ag, it's very interesting, you see an 18% increase in the second half of this year compared to another 22% increase in the second quarter of last year. So there is continuous growth in ag. Oil is doing quite well. Oil, it's a little bit difficult to forecast exactly what is going to happen in the fourth quarter in terms of weather, et cetera, you know this. Performance Products, ongoing restructuring. Some of the businesses: Others are performing very well. And then, I think we are up to a, let's say, challenging second half. Again, nothing is being taken for granted. We have to work very hard to achieve our goals, and we are determined to do that.

Magdalena Moll

So now we are moving to Mr. Grueten from Commerzbank.

Lutz Grueten - Commerzbank AG, Research Division

On the EUR 300 million target from STEP in 2013, can you give us a number which was already achieved in H1?

Kurt W. Bock

Pretty much half of that came in, in H1, plus, minus EUR 10 million, EUR 20 million, yes.

Magdalena Moll

That's a quick one. So now we are moving on to Andreas Heine from Barclays.

Andreas Heine - Barclays Capital, Research Division

I'd like to know more about the Performance Products. Basically, at the beginning of the year, you strived to increase earnings in each and every segment. Looking on the first half, in Performance Products which is down 13%, do you see this is still realistic? And what do you expect from restructuring coming in the second half of 2013? And is there anything like the insurance income we have seen in the second quarter of last year which we'll have to have -- have to take into consideration in Performance Products?

Kurt W. Bock

I don't think there's any special factor like this relatively small insurance payment, which we received for the Fukushima incident in the first -- or second quarter of last year in this segment. Again, it's -- when you look at Performance Products, it's a mixed bag. Some of the business developed quite nicely. Care Chemicals had a relatively strong development in Q2. Nutrition & Health certainly benefited from the Pronova acquisition, which is doing very well, by the way, and integration is right on track. We are certainly facing tough times in Paper Chemicals. I think this is well understood. And the restructuring measures are being implemented. And then in Dispersions & Pigments, the pigments piece is a challenging part of all the business. And here, again we have announced restructuring measures in early May which essentially affect our operations in Central Europe, and namely in Switzerland. What has impaired the result in Q2, actually, is the currency development. We have quite some strong exports into Japan, and we got really hit pretty hard by the yen devaluation, which was quite high, as we all know. So that is a special factor. And it's to be seen how this will develop into -- going into the second half. Coming to -- more specifically to your question about the outlook, what I said this morning at the press call is it's very challenging and it's possible that we will not achieve our performance above last year in Performance Products, which we were then quoted by the news agency, that we said it's impossible. It's certainly not impossible, but it's certainly much more challenging today to achieve than, let's say, 6 months ago when we had expected slightly better trading conditions. Put it that way.

Magdalena Moll

For the next question, it comes from Jeremy Redenius from Bernstein.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

It's Jeremy Redenius from Sanford Bernstein. Looking at the Chemicals segment volume growth, I'm wondering if you could give us a sense of what the underlying trend is there. I recognize that Antwerp is down because -- was down in the quarter. Same period last year, Port Arthur was down. Plus, I believe there is an adjustment for the propylene swap such that the volume growth picture on a year-over-year basis, I think, is a little bit challenging to reconcile. So I'm wondering if you could just try to do your best to give us a sense of the underlying volume trend there, please.

Kurt W. Bock

Thanks. First of all, overall in Chemicals, we had a slight volume increase of 1%. Actually, in Petrochemicals, volume growth is stable. In Monomers, it decreased slightly. Intermediates, also a slight decline -- a slight -- almost zero, I'd say. So what we see is a -- pretty much a stable development going forward. There is no much volume volatility in that segment at this point in time.

Jeremy Redenius - Sanford C. Bernstein & Co., LLC., Research Division

[indiscernible] that, that was consistent through the quarter? For example, I'm looking at NASDAQ crack spreads in Asia and see them improving through the quarter and into the third quarter. Is that consistent with your view as well?

Kurt W. Bock

What we saw is, really, we were able to improve our cracker margins in Europe and North America. In Asia, they were negatively affected by relatively weak demand.

Magdalena Moll

The next question now comes from James Knight from Exane.

James Knight - Exane BNP Paribas, Research Division

It's on China and Asia and kind of related to Jeremy's question. But could you give us your perception of how much of a lower demand is destocking related, adjusting to a lower level of growth going forward? So the destocking. And if it is a significant amount of that, then what is your feel for how long this period of destocking in China and Asia could last?

Kurt W. Bock

James, thank you for the question. I think we have talked about relatively slow growth in our business in China since the fourth quarter of 2011. And this has continued now going into the second quarter. We were able to grow our business but at rates which are definitely lower than what we had seen in the past. We think that a good chunk of that deceleration is really due to a destocking effect, and this is compounded now by the -- let's say, a continuous reduction of growth rates, which really means people are adjusting inventory levels to lower expectations. It's very hard for us to say when this is going to stop. I think, awfully a lot depends on whether we will achieve a 7.5% GDP growth in China and whether the government is going to do something about the relatively low growth and will start to inject some stimulation into the economy, which then could reverse expectations because, right now, and you just saw the PMI number right now, I think expectations are still that a further slowdown is possible.

Magdalena Moll

The next question comes from Peter Spengler from DZ Bank.

Peter Spengler - DZ Bank AG, Research Division

I have a question on the automotive demand situation in Europe, Asia and the United States. It seems to me that it was quite good, or stable at least. And maybe you can give us some more details.

Hans-Ulrich Engel

Yes, Peter. This is Hans. Automotive development, overall in light vehicle, we see globally a growing market. Somewhere in the order of magnitude of 2.5% to 3% is of our expectation. A strong growth in North America; good growth also in Asia Pacific; weakness, as we all know, in Europe. If I look in our business, and there in particular in the mobile emission catalysts into engineering plastics and obviously also into OEM coatings, we see business increases, volume increases, across all 3 regions. I'd say these are driven by, one, the innovation that we have in our respective parts of the portfolio; and two, in particular in Europe, that may be the astonishing part of the news, that we have increase there in our automotive business. I think it's the strong relationship that we have there with the manufacturers of the premium brand which then are obviously benefiting from their exports, and from that, we benefit from it.

Magdalena Moll

The next question now comes from Christian Faitz from Macquarie.

Christian Faitz - Macquarie Research

Gentlemen and Maggie, ag or Agricultural Solutions [indiscernible] in the second quarter. Can you highlight how you were impacted by adverse weather conditions in Europe, if at all? I guess your strong fungicide portfolio helped. And if at all, how much inventory do you have on your own books because of adverse weather conditions? You will have seen the comments from [Indiscernible] yesterday.

Kurt W. Bock

Yes, Christian, thanks for your question. I don't really think we got hit by any adverse weather conditions, at least we aren't reporting on that. And with regard to product underground, we are not aware of -- and we are measuring this very carefully because, otherwise, you would, let's say, not see the full picture. We are not aware of any excess inventory underground. Quite contrary, the product which we have sold is being sprayed as we speak.

Magdalena Moll

So now the next question comes from Norbert Barth from Baader Bank.

Norbert Barth - Baader Bank AG, Research Division

Kurt, you mentioned that the Statoil deal is now all ready to close. Am I right that your outlook for the second half also includes the effect of -- asking the other way around, can you give us a feeling or indication, especially on a EBIT basis, what that means for the last 5 months from that point? And perhaps also give us a little bit of update on the swap with Gazprom, when we can expect that closing, and the impacts.

Kurt W. Bock

Let's start -- Norbert, let's start first -- let's start with the swap with Gazprom. As I -- as we said today, we are -- as we speak, we are filing the documents necessary with the EU commission. That's probably going to happen within the next couple of weeks. And then the EU commission has time to review those documents and then come to a conclusion. Our expectation has been that we'll -- that we can conclude this by year end. That needs to be seen, it really depends how this process now develops. And I think we are doing everything to provide all the necessary information and documentation for approval by the EU commission. With regard to Statoil, yes, your observation is correct: The Statoil result from those producing fields is included in our forecast for Oil & Gas, and it will contribute. I don't think we've talked about a specific contribution levels, but I can tell you it's highly earnings positive and also cash flow positive, as we had explained when we announced the acquisition about a year ago.

Hans-Ulrich Engel

[indiscernible]

Magdalena Moll

Next question comes from -- oh, sorry.

Kurt W. Bock

[indiscernible] And Hans just reminds me, and think this is easy to calculate, we basically said it will add another 35,000 barrels per day in Norway. For the rest, it's a little bit of math.

Norbert Barth - Baader Bank AG, Research Division

Okay.

Hans-Ulrich Engel

Yes.

Magdalena Moll

We are moving on with Michael Rae from Goldman.

Michael Rae - Goldman Sachs Group Inc., Research Division

I was just wondering, in light of the market conditions that you've been experiencing so for this year, are there any areas of capital expenditures that you're thinking differently about, any projects that are delayed or deferred or even canceled?

Kurt W. Bock

Yes, thanks for the question, Mike. Well, actually, we are reviewing our CapEx budget continuously whether there's anything we don't like and shouldn't do or should maybe delay. What I can tell you today, we haven't really identified any project where we think that our medium- and long-term forecast for supply-demand, and that is really what counts, it's not -- I mean, it's -- next 6 or 12 months, is not valid anymore. And therefore, we have not changed our CapEx plan. And frankly, the short-term measures in that respect from today's point of view are completely unjustified. The long-term growth picture for our industry is in okay. Again, growth might be a little bit lower than what we had anticipated 2, 3 years ago, but it's still growing quite nicely. And here, you have to be very, very specific about markets and products. And to give you a precise example: We talk about caprolactam and margin of caprolactam coming down. I think BASF has not invested in caprolactam in this capacity for the last 30 years. We have an installed capacity which is highly, highly cost efficient and productive, but we were never really keen on growing in that specific segment because you see capro as a precursor for our polyamide business, and then there is also a certain trading business on top of that, but it was never a focus of our attention. So we really try to focus our investments on areas where we have competitive strengths. And as Peter talked about, acrylic acid in China. We -- at the same time, we bought an acrylic acid plant in Brazil, which is going to be the first one and only one, by the way, in Brazil, plus this superabsorbents plant. And these types of investments make an awful lot of sense from our point of view.

Michael Rae - Goldman Sachs Group Inc., Research Division

Can I just ask a more specific follow-up, which is can you just give us a progress update on the MDI complex in Chongqing? Is that progressing okay?

Kurt W. Bock

I think our plant is progressing as planned. It's we -- there is always a little bit of a surprise in China, if you can imagine, but overall, it's -- our investment is on-track. We are not completely independent of adjacent investments which happen around our facility where we have partners who also provide them for MDI. And this is something we certainly have to watch carefully to make sure that they also are on-track.

Magdalena Moll

And now we are moving on with Geoff Haire from HSBC.

Geoffery Haire - HSBC, Research Division

Just had a quick question on the Chemicals business, looking into the second half of the year. Clearly, caprolactam impacted you in the second quarter. I was just wondering if you could talk a little bit about the impact of butadiene prices may have in the second half on the margins in Petrochemicals and maybe the rest of the group, as well.

Kurt W. Bock

That is a very specific question, I have to say. We don't see any major change, frankly, if I look at the data, we have seen so far in Q1 and Q2. And again, it's one of the products which we produce in Petrochemicals, so it's a Verbund production, obviously, so it's not completely independent of what we produce as well.

Magdalena Moll

And we are moving on with the next question, Ronald Koehler from MainFirst.

Ronald Koehler - MainFirst Bank AG, Research Division

It's, once again, on the planned and unplanned shutdowns you had in Chemicals. I reckon that you had several, let's say, unplanned and plus the planned obviously in Antwerp. And I just wanted to find out, was it, let's say, a burden which was clearly above what you would expect for the second half in the Chemicals part? Can you a little bit elaborate on this cost maintenance shutdowns or unplanned shutdowns?

Kurt W. Bock

Overall, the charge due to unplanned and planned shutdown is at about the level of last year, no major deviation.

Ronald Koehler - MainFirst Bank AG, Research Division

And looking forward in the second half year, would that mean it will come down relative to Q2 [indiscernible]?

Kurt W. Bock

The same. For the second half, we only have planned shutdowns, and that is what we try to do. I kind of talked about unplanned shutdowns from today's point of view, but if you compare what we know today about our turnarounds and shutdowns in the second half of this year, this is pretty much at the level of what we have seen last year. So there's no major deviation, nothing you should factor into your models, actually.

Ronald Koehler - MainFirst Bank AG, Research Division

And also not sequentially, meaning, Q3 versus Q2 and Q4 versus 2Q.

Kurt W. Bock

Q3 will -- might go a little -- be lower than Q2.

Magdalena Moll

And for the next question, it's now coming from Andrew Benson from Citi. Andrew?

Andrew Benson - Citigroup Inc, Research Division

Just a minor one. On the Natural Gas Trading, a huge increase in sales and a somewhat lower EBIT. And you're talking about competitive pressure. Can you just explain what's going on in that sub-division, please?

Hans-Ulrich Engel

Yes, Andrew. This is Hans, happy to do so. Overall, Q1, driven by a significantly higher sales. Weather related as well followed in the northwestern part of Europe. In Q2, we have slightly higher spot sales than we had in prior year's quarter, so that leads to a volume increase. But we're all fully aware of the margin environment for natural gas that is rather compressed and then leads to a lower earnings compared to prior year's quarter in the Natural Gas Trading business.

Andrew Benson - Citigroup Inc, Research Division

And is that, like, maybe ongoing net margin pressure?

Hans-Ulrich Engel

We do not expect that margin pressure to cease.

Magdalena Moll

Next question is now coming from Jaideep Pandya from Berenberg.

Jaideep Pandya - Berenberg, Research Division

Just coming back to your 2015 targets and just taking sort of all what you've said in this call into account, the fact that your STEP program is basically an inflation hedge and the fact that you are seeing some margin pressure in some of the products. I mean, what gives you confidence that you can increase EBITDA margins by 4% in a portfolio, unless you plan to change your portfolio significantly? Can you just walk us through what kind of macro assumptions you are taking for '14, '15? I know it's a bit too premature, but the target is out there and it's quite high compared to your current profitability.

Kurt W. Bock

I'm not sure I'm following your math completely. It was a 4 percentage points. But what we do have done over the last couple of years, we have invested in new capacities, and I think I spoke about that quite a bit, in very specific markets where we believe that BASF has a competitive strength and advantage. Those capacities will translate also in sales and earnings in over time. So there is a natural -- kind of natural improvement of earnings. And then we have to work very hard on the cost side. I have not said, to be very precisely, that the entire STEP program is eaten up by cost inflation, but I have said we have to be very cognizant that a major part of the program is necessary to cope with cost inflation and margin developments. You've seen -- some of our business have seen our businesses for many, many years. Actually, I think this is kind of an -- also a natural development in almost all industries. And then we are now in 2013, we have 2 years to go. We work extremely hard. We have a little bit of a cyclical downturn in some businesses. It needs to be seen how this works out over time. So I think this is doable and achievable. But again, we never said, not even when we announced this target, that this would be a walk in the park and will come automatically without a major effort on our side.

Magdalena Moll

The next question is coming from Peter Clark, Société Générale.

Peter Clark - Societe Generale Cross Asset Research

It's one regarding China and Asia. You made the point, of course, that further slowdown is possible. Now I -- so did make the point that's actually seen now at the very end of Q2 into Q3 as a step down. And these were in businesses that feed a lot of sectors, some of which you overlap with, actually. And I'm just -- I just want to clarify that that's not something you saw at the end of the quarter in terms of China or in Asia, a further step down in the underlying trade.

Kurt W. Bock

I cannot comment specifically on China here, but what we have seen, though, and this started about a year ago, that at the end of each quarter so far, there is a slowdown of activity. It feels [indiscernible] I think as the case, that our customers are really cleaning up their supply chain -- chains and their inventories coming to the end of the quarter. So there is always a noticeable slowdown in activity, and then they come back after the closure of the quarter. In July, this might be a little bit a delayed effort because, as we know, in the Northern Hemisphere, July and August are kind of low and -- or slow months in general.

Peter Clark - Societe Generale Cross Asset Research

I think you've said that before, actually, on China, a couple of years ago. It happened, I think, last year as well.

Magdalena Moll

Now, Laurence Alexander from Jefferies.

Laurence Alexander - Jefferies LLC, Research Division

I guess, another just way of asking about visibility, if -- do you have any end markets that have come in significantly better than you expected 3 to 4 months ago? And secondly, as you think about the 4-quarter to 6-quarter view, can you compare the degree of visibility you have now as you start thinking initially about next summer compared to where you were in January, thinking about this -- the shape of this year? I mean, has the level of visibility become any better?

Kurt W. Bock

Well, I don't think the level of visibility has become any better. And for that reason, we give this kind of cautious outlook with regard to the development over the next couple of months and quarters. What has improved slightly better than what we had expected is, from our point of view at least, ag, agriculture. And it's also automotive because, when you read the papers, obviously you're aware that automotive, especially in Europe, is growing very, very slowly. And we are now at volumes which are -- which we had produced about 20 years ago in Europe as an industry. Here, it is a case where BASF has a higher share in high-end cars, and that sets us quite well. So the automotive industry for BASF has developed, actually, quite nicely, and not just in Europe but also in Asia where we have captured market share over the last couple of quarters as well.

Magdalena Moll

So now we are coming down to the last 3 questions. The first one is from Andrew Stott from Bank of America.

Andrew Stott - BofA Merrill Lynch, Research Division

This is on Functional Materials & Solutions, the margin gain that you see year-on-year. I mean, you seem pretty pleased with every single business unit in terms of margin trend. I just wonder if you can give a feel for the sustainability of that margin as you move into the second half. I mean, I get the seasonality, but in terms of the progress you're making.

Kurt W. Bock

I will cover construction, Coatings and performance, and then Hans will talk about Catalysts. Construction is a -- let's say, a seasonal business, but more importantly, our restructuring measures here are -- have become effective, and this would help us going into Q3 as well. Coatings and Performance Materials are both heavily leveraged for the automotive industry, and both are very well positioned with the automotive industry. So it very much depends on the development of that industry which I just talked about and -- when Laurence asked the question. So that's not a guarantee for continuously good performance, but I think we have put a lot of self-help measures into place as well to improve our bottom line. And just to give you one example here: Performance Materials is a newly created division which was really only started on January 1 where we now combine the Polyurethane specialties, plus the, what we call, engineering plastics which is essentially polyamides. Both go very much into automotive construction, et cetera. And we see very positive results from putting these 2 business now into 1 division where you can really capture synergies in terms of how you penetrate markets, how you do sales and marketing and pricing. So this has worked out very nicely so far. And with that, Hans, Catalysts?

Hans-Ulrich Engel

Yes. On Catalysts, I mean, we've seen a good second quarter. And if I look at the 3 industrial businesses, the mobile emission catalyst business, the chemical catalyst business and the refinery catalyst business, they all performed well. Our chemical catalyst, not quite at the record level that we've seen in Q1 and Q2 of the year 2012, but that actually was not here to be expected. If I look at that based on historic averages, that business has done well. The emission catalyst, as I already mentioned, we've won quite a few platforms over the last years and we are now harvesting the fruit coming from that. And in the refinery catalyst, we were burdened with high railroad costs last year, which we do not see to the same extent this year, so I am cautiously optimistic with respect to the second half.

Magdalena Moll

So now we are coming to Markus Mayer from Kepler.

Markus Mayer - Kepler Capital Markets, Research Division

One question remaining on the -- again, on capro and polyamides. And it seems that the overcapacities save these businesses for a longer period of time. Do you have an intention to restructure the capro and the polyamide units in Asia? What are exactly the measures you've undertaken to improve earnings there?

Kurt W. Bock

So Markus, actually, we don't have capro capacity in Asia. We have our capacity in Europe and in North America and we are partially exporting from those locations into Asia. As I said before, we have not invested into capro for the last 25 years. At least, we have proved and improved our capacities in our plants consistently and continuously. So they're at, I think, competitive. Margins are now going down. That is not completely unexpected because we are coming from record margins in 2011, which was certainly not sustainable, at least not at that level. And we will now measure this trough, and we have done this before quite successfully. What is important, that even in a trough period, that you will make still consistent money in that particular business, and that is possible from our point of view. But still, margins are not where they should be, from our point of view.

Magdalena Moll

So I'm coming to the final question, from Neil Tyler now, with Redburn.

Neil Christopher Tyler - Redburn Partners LLP, Research Division

A quick question on investments in South America, please, very quite specific. But firstly on the acrylic acids on -- that you referred to earlier, whether you have signed any longer-term take-off agreement for that facility and, therefore, sort of the extent of exposure you'll have to the merchant market. And secondly, again referring to one of the comments you made earlier in the government scheme to encourage Oil & Gas investment, you've made plenty of comments in the past about how Oil & Gas investment in Argentina wasn't attractive. And I wonder whether that's bolstered your view in any -- to an extent?

Kurt W. Bock

Let me start by talking about Argentina first. It's still a, let's say, complicated or complex country to operate within. I think, in Oil & Gas, we have quite an experience how to do that. We have now a scheme in place offered by the government which essentially supports E&P activities, which I think was a big problem of Argentina, that they have quite some high-consumption E&P, exploration and development of fields. Smooth new fields [ph] wasn't really, financially, not very attractive. And therefore, there was a lack of supply. I think the government has realized this by now and is actually stimulating additional exploration and development activities, and we are taking advantage of that as well. Then going to Brazil where we invest into acrylics and superabsorbents: Yes, we are the -- we will be the only local producer of superabsorbents. We have grown world class in Brazil. So these families are -- it is buying now baby diapers. And we certainly, before we made the investment, made sure that we have customer for those products. So we are very comfortable with regard to the market development. And actually, our customers, many of them are global companies we are working with for many, many years in all parts of the world and are really keen to have the capacities in Brazil available.

Neil Christopher Tyler - Redburn Partners LLP, Research Division

Okay, well, good. So -- but that they are not sort of signed for take-off agreements. I mean, it's a sort of level of comfort regarding relationships but nothing [Indiscernible].

Kurt W. Bock

We don't -- we really don't go into any specifics, but you can be assured that we don't have a completely odd position of sales we'll see. I mean, we have hedged our market exposure quite effectively, I'd say.

Magdalena Moll

So ladies and gentlemen, before we conclude the call, there's 3 statements that I would still like to make. First of all, and I think this is of great interest to you, we have just posted our new BASF fact book on our website, so please take a look. And we hope that you will like it and use it for your daily work.

Secondly, we would also like to ask you to reserve September 13 in your calendars. On that day, we will host an Oil & Gas roundtable in London. Rainer Seele, the CEO of Wintershall will present our Oil & Gas strategy and the potential of Oil & Gas for the future earnings of BASF Group. We will definitely appreciate if you could join us at the event.

And finally, I would like to make some announcements regarding the composition of the BASF Investor Relations team. I think some of you might have already realized, but Florian Greger has taken over the Director, Investor Relations, position now in the U.S., following Markus Zeise. And Ingo Rose, he is now the deputy head here in Ludwigshafen for investor relations. And I'm also happy to announce that BASF Investor Relations will expand its global footprint: Starting in October of this year, Amber Usman will take on the position as Senior Investor Relations Manager in Asia Pacific, located in Hong Kong. And she will be responsible for our activities in this region. With the new position, we will be able to significantly enhance our services to our financial community also in Asia Pacific.

So this brings me now to the end of the conference call. We will next report on our third quarter 2013 results on October 25, 2013. And I would like to thank you that you joined us on this call. And that -- there will still some more open questions. We have noted the questions down, and the people down, and we will call you back, a member of the investor relations team will call you back very soon.

So thank you very much again, and have a nice day. Bye-bye.

Operator

Ladies and gentlemen, the conference is now over. You may disconnect your telephones. Thank you for calling. Goodbye.

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