Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Magdalena Moll – Head, IR

Jürgen Hambrecht – Chairman and CEO

Kurt Bock – CFO

John Feldmann – Board Member

Analysts

Norbert Barth – WestLB Research

Andreas Heine – UniCredit

Neil Tyler – J.P. Morgan

Thomas Gilbert – UBS

Matthias Cornu – Exane

Paul Walsh – Morgan Stanley

Sophie Jourdier – Citigroup

Andrew Stott – Merrill Lynch

Mutlu Gundogan – Royal Bank of Scotland

Tony Jones [ph]

Jenny Barker – Barclays Capital

Annett Weber – BHF Bank

Stephan Kippe – Commerzbank

Martin Roediger – Cheuvreux

Pandya Jaydeep – Berenberg Bank

Lutz Grueten – Kepler

Martin Evans – J.P. Morgan

Peter Clark – Société Générale

Ronald Koehler – MainFirst Bank

BASF SE (OTCQX:BASFY) Q2 2010 Earnings Call Transcript July 29, 2010 3:00 PM ET

Operator

Ladies and gentlemen, this is the chorus call conference operator. Welcome to the BASF interim report second quarter results 2010. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

This presentation includes forward-looking statements that are subject to risk and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. The presentation contains a number of forward-looking statements, including in particular statements about future events, future financial performance, plans, spreadsheets, expectations, prospects, competitive environment, regulation and supply and demand. BASF has based these forward-looking statements on its views with the respect to future events and financial performance.

Actual financial performance of the entities described herein 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.

Forward-looking statements represent estimates and assumptions only as of the date that they were made. 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, ma'am.

Magdalena Moll

Yes, good afternoon, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our second quarter 2010 conference call. BASF delivered excellent second quarter earnings as sales continued to recover strongly, especially in our chemical activities.

With me on the call today are Jürgen Hambrecht, Chairman and CEO of BASF SE, Kurt Bock, our Chief Financial Officer, and John Feldmann, Board Member Responsible for Performance Products. Following the presentation, all three gentlemen will be available to take your questions. For your reference, we have posted the presentation and the press documents on our website at basf.com/share and with this, I'm already going to hand over to Jürgen.

Jürgen Hambrecht

Yeah, good afternoon, ladies and gentlemen. It must be a really tough day for you all out there. Thank you for joining us here at BASF. In the second quarter, the global economy continued to recover and we experienced better demand from almost all customer industries. High supplies of certain products and positive currency effects further contributed to our excellent second quarter performance.

In Q2, sales rose by 30% to 16.2 billion euros and EBIT before special items almost doubled to 2.2 billion euros compared with the same period last year. Especially, our chemical activities, as Maggie already mentioned, posted new record for sales and earnings despite the first turnaround of our entire managing Verbund site, which we successfully completed mid-June.

In addition, we will further strengthen our portfolio with the announced acquisition of Cognis. As a consequence, our businesses will move even closer to attractive end-user markets and become more resilient to cyclicality.

At the beginning of July, we also announced that we will expand our collaboration with Monsanto, adding wheat, a fifth crop, to our joint plant biotechnology pipeline. At the same time, we agreed to additional investment of up to $1 billion, reflecting the strong leads and commercial prospects in the collaboration's early work.

And with this, I would like to hand over to Kurt, who will now take you through BASF second quarter results in more detail.

Kurt Bock

Yes, thanks, Jürgen. Also, welcome from my side. Ladies and gentlemen, I will today focus on the sequential comparison of Q2 2010 versus Q1. It should help you to better understand business dynamics given the fact that the second quarter of 2009 was unusually weak due to the crisis.

Sales increased by 5% over the previous quarter, while total volumes declined by 2%, given significant lower volumes in oil and gas, the increased volumes in our chemical activities once more by 5%. Prices rose by 2%.

Currency effects contributed to 5% to sales as a result of the strong depreciation of the euro against many other currencies. At 2.9 billion euros, EBITDA was 9% up over Q1, representing an EBITDA margin of 18%.

EBIT before special items rose to 2.2 billion euros, an increase of 13%. Net income amounted to 1.2 billion euros, up 15% quarter on quarter, due to a higher income from operations as well as a lower tax rate. Lower tax rate of 32.5% was a consequence of the significantly reduced share of the oil and gas business which, as you all know, has a very high tax rate. Adjusted earnings per share were 1.50 euros, an improvement of 14%.

Now, I will quickly take you through the business development of our fixed segment. Chemicals recorded another excellent quarter. Sales increased by 50% and earnings by 49%, respectively, due to strong demand across all divisions and regions.

Petrochemicals sales went up by 16%, driven by continued strong demand for cracker products coupled with further price increases in all regions. Planned and unplanned plant auditors had compared us in all events and acrylics led to very tight markets. We were able to improve earnings despite the scheduled turnaround of the Nanjing site, as Jürgen mentioned.

Inorganics sales rose by 15% due to higher volumes, especially for metal systems, inorganic salts and electronic materials. Margins for ammonia and methanol improved. Further demand from key customer industries led to an 11% increase in sales of intermediates. Supply of butanediol, polyalcohols and specialty amines did not suffice to cover actual customer demand.

The weaker euro supported overseas exports from Europe to Asia. Earnings increased only slightly since we encouraged higher fixed costs related to the startup of new capacities.

In plastics, strong demand from key customer industries such as automotive supplies and textiles, higher prices and positive currency effects drove sales up by 18%. Earnings also improved despite several maintenance turnarounds in polyurethane.

In performance polymers, sales increased by 21% and earnings were up significantly. The seasonal upturn of the European construction industry pushed up volumes for foam. We were able to improve margins for foams, polyamide monomers and nylon 66, which were in extremely tight supply.

Stronger sales volumes and positive currencies affected the lifted polyurethane sales by 15%. We experienced a strong product off-take from the appliance, automotive, construction and furniture industries. Rising benzene and toluene costs put MDI as well as TDI margins under pressure.

For polyurethane systems, the houses and the specialty business delivered an excellent performance. Earnings matched the good level of the previous quarter. The performance product segment continued to perform strongly. Synergies from the Ciba integration as well as the implementation of our business models contributed positively to earnings.

Due to shortages of important raw materials, we were not able to fully serve customer demand in several product lines. Compared with last year's second quarter, we also reduced special items from 294 million euros to 21 million euros.

Areas in dispersions and pigments rose by 19%, reflecting improved demand in all businesses and regions. In particular, the global market for additives and pigments remained tight. Successful price increases is more than offset higher cost of raw materials, earnings increased substantially.

Base and care chemicals reached a new record with highest growth coming from Asia. Volumes for all product areas were back at pre-crisis levels and prices improved. When strength supply resulted in tight markets so hygiene and aroma chemicals, earnings remained at a high level.

Product demand in all regions and businesses helped to increase sales in paper chemicals by 5%. While in (inaudible) so costs put increasing pressure on margin, thanks to our extensive restructuring program, fixed costs could be further reduced and consequently, earnings went up.

In performance chemicals, sales rose by 11%, driven by a continued strong recovery of all major customer industries as well as inventory restocking by our customers. Higher raw materials costs could be mostly offset by price increases, earnings improved further.

In functional solutions, sales and earnings rose significantly, benefiting from stronger demand from the automotive industry as well as the seasonal upturn in the construction sector. In catalysts, sales went up by 15%, reflecting higher volumes and increased precious metal prices.

The mobile emission catalyst business records a further recovery in Europe and North America. Higher sales of refinery catalysts were partially offset by a weaker demand for chemical catalyst, where we only note the first signs of a recovery.

Earnings remained on the level of the previous quarter. The seasonal pickup in construction activity in North America and Europe increased sales of construction chemicals by 33%. Nevertheless, the market environment remains difficult, especially in the U.S., Spain, U.K., and Japan, highlighted by the fact that volume was just 3% above last year's second quarter. Only selected emerging markets show a favorable development, the further improved margin and the reduced fixed costs which significantly drove up earnings.

Higher sales volumes in all regions lifted sales and earnings in the coatings division. We benefited from strong demand from the automotive industry in Asia, which also triggered high production, especially by German car makers for export to China.

Moreover, increased demand from European steel producers led to higher sales of industrial coating. Decorative painting business in South America continues to perform strongly. And now, agricultural solutions, despite a late start into the season, sales in the first half of this year increased slightly.

Higher volumes, both in Q1 and Q2, as well as positive currency effects, more than compensated for weaker prices. In Europe, weather conditions continued to be less favorable towards the second quarter, resulting in reduced disease pressure, negatively impacting our fungicide business. Nevertheless, sales rose slightly, due to a higher demand for herbicides.

In North America, we had a mixed picture. Our sales of fungicides declined, our herbicides business continued to grow strongly. We experienced declining demand for some fungicides due to high general inventories.

Excellent demand for our new herbicide Kixor was responsible for the strong growth of herbicides. Favorable business conditions for soybean herbicides in India as well as positive currency effects contributed to a good business performance in Asia.

In South America, sales grew strongly as a result of higher demand for insecticides and fungicides. Lower prices and higher credentials from marketing sales and R&D caused earnings to come in below the record level of last year.

Now, oil and gas. Sales in oil and gas almost remained on last year's level, EBIT before special items advanced by 2%. Sales in E&P declined by 10%, with a significant increase in the oil prices trend averaging about $78 per barrel compared with $59 per barrel in last year – second quarter of last year could not compensate for the OPEC restricted lower oil production in Libya as well as lower selling prices for natural gas.

Earnings decreased by 10%, mainly due to the oil production restrictions in Libya. Sales in natural gas trading were flat. The cold weather in April and May, coupled with the improved demand from industrial customers and power plants led to a strong increase in gas volume. Gas prices, however, declined by more than 10%. Earnings increased significantly as a result of the strong volume growth.

Non-deductible oil taxes included in earnings of 209 million euros were approximately around last year's level. Net income after minority interest, however, declined by 33 million euros to 148 million euros, due to minority interests of 47 million euros versus minus 13 million euros in the same period of last year.

And now, to other – sales in other increased by 32% year on year, mainly as a result of the excellent performance of styrenics. Demand for styrenic polymers was high in all regions. Particularly in Europe, commodities as well as specialty copolymers were in tight supply.

Earnings in other amounted to minus 301 million euros. We increased earnings of styrenics both year on year and quarter on quarter. Earnings in fertilizers on the other hand decreased sharply.

In addition, earnings in other include higher provisions for BASF option program. Our stock outperformed all major sector benchmarks. Currency losses recorded in other, predominantly due to hedging of future sales, were approximately 40 million euros in the second quarter, reflecting the weaker euro.

No further hedging losses were incurred in the segment and you understand our, I think, hedging policy. Special items in other, mainly provisions for plant restructure measures amounted to 106 million euros.

I'm now going to talk about the cash flow. The first half of 2010, we generated a cash flow from operating activities of 2.7 billion euros, what we are seeing is a very satisfying result, given our strong sales growth. Consequently, cash tied up in net working capital increased to 1.4 billion euros. Thereof, 1 billion euros were already spent in Q1.

We nevertheless continue to reduce our days of inventories and sales outstanding. Cash used in investing activities amounted to minus 600 million euros. Last year's figures were of minus 2.9 billion euros to reflect, obviously, the Ciba acquisition.

And finally, our balance sheet. The significant appreciation of many currencies, in particular the U.S. dollar against the euro inflated our asset base by roughly 3.8 billion euros since the beginning of this year. The biggest currency-related increases are fixed assets, which went up by almost 1 billion euros, inventories by about 500 million euros and accounts receivables by about 700 million euros.

Due to the improved business environment, inventories and accounts receivables increased. Currency adjusted, they grew by 2.4 billion euros to roughly 18 billion euros since the beginning of 2010. Net debt climbed by 500 million euros to 13.5 billion euros as a result of the dividend payment.

The 35%, our equity ratio, is very solid. Financing conditions for BASF remain very attractive. We have not observed any significant changes following our announcement to acquire Cognis.

Now, let me hand over to John Feldmann, who will give you an update on this acquisition.

John Feldmann

Thank you, Kurt. Good afternoon, ladies and gentlemen. On June 23rd, we announced that we had reached agreement to acquire Cognis. With the acquisition, we pursue clear objectives.

We want to achieve a leading global position in personal care ingredients and strengthen our leading position in home care. We will significantly expand our nutrition and health activities.

On top, we will become a major supplier of products based on renewable raw materials and finally, we are also strengthening our formulation and application expertise. Our target is to outpace growth in the relevant markets by at least two percentage point and achieve an EBITDA margin of at least 20% in the performance product segment by 2012.

We expect the acquisition already to be earnings accretive by 2012. We will integrate the Cognis businesses into our performance product segment. We currently estimate integration costs between 200 million euros and 250 million euros by the end of 2012 and want to achieve cost synergies amounting to at least 5% of the 2009 sales by 2013.

A detailed integration plan can be – can only be developed after in-depth analysis with the acquired businesses, which we will conduct in a strategic dialog with our new colleagues from Cognis. However, before we can proceed, we need the consent of the anti-trust authorities in the various countries, which we hope to receive by November of this year.

Nevertheless, we are currently initiating the first steps to insure that the organization is prepared to take on about 5,500 employees and $2.6 billion in additional business activities. We decided to split up our existing care chemicals operating division into two new divisions.

Effective August 1st, the nutrition ingredients, aroma chemicals and pharma ingredients and services businesses will form the new division Nutrition and Health. Our personal care, hygiene, home care and industrial formulators businesses will make up the Care Chemicals division.

The respective Cognis segments, health and nutrition and care chemicals will later be integrated into these two divisions. The Cognis product offerings for minings, synthetic lubricants, coatings and crop protection also ideally complete our portfolio. These product lines will be integrated into our performance chemicals, dispersion and pigments, and care chemicals divisions. All these divisions will then be able to offer their customers an even more attractive product portfolio.

In the coming months, together with our colleagues from Cognis, we will work out the details of the integration plan. The worldwide Cognis team has done an excellent job and was very successful in recent years and together, we are looking forward to forming the best team in the industry. With this, I would like to hand back to Jürgen.

Jürgen Hambrecht

Thank you, John. Let me conclude with the outlook for 2010. We expect that the economic recovery will continue at a moderate pace in the second half of 2010. Consequently, we updated our expectations for economic indicators in 2010. In our core check, global chemical production excluding pharma to increase by 7% to 8%, up from 5.3%.

For the full year 2010, we left the average oil price assumption unchanged, which means $75 per barrel and reduce average dollar euro exchange rate from $1.40 to $1.30 per euro. We expect BASF's sales growth to outpace global chemical production growth into 2010. We anticipate that income from operations before special items will improve considerably and we will earn a premium on our cost of capital.

And finally, we expect to increase the dividend and with this, we open up the floor for questions.

Question-and-Answer Session

Magdalena Moll

Ladies and gentlemen, I would now like to invite you to ask your questions to all three gentlemen. I would also like to ask you to please ask the question only from your handset, your telephone handset and not otherwise, because it could cause some problems with the microphone systems and then the transmission of our answers. So with this, we would like to start with Norbert Barth from WestLB. Good afternoon, Norbert.

Norbert Barth – WestLB Research

Good afternoon. I have one question regarding capacity situation and also what you said more when the situation still was a little bit more dark. That in the overall industry, there is some overcapacity in the market and now, it looks as the market recovered stronger than expected, that perhaps that is not any more such the case and you also mentioned that there are still some shortage in some products lines. So, can you elaborate a little bit on that, how you see that now and where you perhaps still see some overcapacities, from the capacity slide.

Jürgen Hambrecht

Okay, Norbert. Let me answer this in more general because others might have the same question. I would say we’d have a split picture here and this developing, going forward, especially on the cracker side, we will have ethylene and propylene in surplus because of new crackers in Asian and the Middle East, additional capacity coming into the market. These supplies are certainly also for polyethylene and polypropelene. We will see it in EO and MEG. We will see it in PO. We will see it in styrene, partly still for MDI, but this is considerably improving.

Now, if we switch over to those who are more tied, already tied, to start with Speedo, which will improve a little bit the situation because additional capacity comes on steam, Acrylics, short. PDI, at this very moment, not so short, but getting shorter as season picks up towards the end of the year; Adipic acid, nylon 66, added value chain, very, very short, capro as well also, C4 is also short.

So all in all, just reflecting the – our major product lines now, I would say this is a mixed bag. Capacity utilization is not yet where it has been in general terms before the crisis, but in some product lines, very short, also because discipline is still there and closed down facilities are not coming back on stream.

Norbert Barth – WestLB Research

Thanks.

Magdalena Moll

The next question comes from Andreas Heine, UniCredit. Good afternoon, Andreas.

Andreas Heine – UniCredit

Good afternoon. I have a question regarding the performance in North America. It was strongly up Q-on-Q. Was it only on the petrochemical side? And maybe one remark also on what you said, moderate growth in the second half of 2010. What do you mean by this sequentially? So, from the first half ongoing growth or is it a moderate growth compared to last year? Thanks.

Jürgen Hambrecht

Let me pick up the last question first, Andreas. What I really mean is both. It will be moderate growth compared to last year quarters because the area is on-board performance and you remember where from product to product it improved. So still, the growth rate, the relative growth rate going forward generally will come down, not any longer, this very high growth rate.

And this applies certainly if you look a line back to the first quarter sequentially going forward, the growth rates will diminish. This is what we understand on moderate growth. For this, I hand over to Kurt with regard to North America.

Kurt Bock

Okay, North America. I think it's across the board with one exception is really ag. In ag, we saw a decline in profitability and we spoke about the reasons of that. What you see in the second quarter is basically what we expected earlier this year in which we communicated fixed costs under control, still down, volumes recovering, margins okay and with that you normally see a nice production in profit. It was very gratifying, by the way.

Magdalena Moll

The next question is coming from Neil Tyler from J.P. Morgan. Good afternoon, Neil.

Neil Tyler – J.P. Morgan

Yes. Good afternoon. A question on the performance products business, John, at your presentation in London, you mentioned that the conversations of customers were not including any sort of conversation about price because of the urgency with which the customers were needing deliveries. I wonder if you could give us, perhaps, your latest thoughts on whether that's still the case because I think, at the time, you mentioned that you didn't expect it to continue indefinitely. Thank you.

John Feldmann

Certainly. Also in the performance product segments, we have some product areas which are extremely short. This is particularly true for those product lines which require a long, long multi-step synthesis process, particularly pigments are very short on supply and therefore the debate there is still about availability of products rather than the actual price situation, something similar is true for our acrylic asset value chain. Polymers, based on acrylic asset and also some products for detergents are relatively short. We don't see this easing up immediately but in the mid-term, it will certainly ease a little bit and we will be then back on the pricing front.

Neil Tyler – J.P. Morgan

Thank you. Thank you. Very helpful.

Magdalena Moll

The next question now from Thomas Gilbert from UBS. Hello, Thomas.

Thomas Gilbert – UBS

Yes. Good afternoon, Maggie. Thanks for taking my questions on oil and gas. If I understood Dr. Bock correctly, the magnitude of the 10% EBIT decline in exploration reduction was due to Libya, yet the non-deductible oil tax is flat. If I try to reconcile that, then it is not only Libya, but also business in Germany, North Sea, Russia that has declined. Could you tell us whether you were able to sell any contract gas at all in the second quarter and whether you think you can get that contract – that lost contract volume back or whether you will – or gas foam will have to renegotiate that lost to EBIT that I think you have incurred in the second quarter? Thank you.

Kurt Bock

Yes, thanks, Thomas. I think those were two questions. One is really about the profitability of our EMP business. We suffered in Libya because we have restrictions and that has a direct impact on our bottom line and it's not really reflected in the non-compensable oil taxes because that is not a linear function of the oil price. You have to be very careful here.

On top of that, obviously, with the natural gas price being relatively weak, we also had lower earnings in the gas exploration business that also has an effect. All the other oil exploration activities and production areas where which we have – Europe, you mentioned the North Sea, have done very well.

The second question was really about could we sell any gas at contract price? Yeah, absolutely because that's the backbone of our business and it continues to be in the future as well. The spot share has increased and we mentioned in our report there is continuing price pressure in natural gas, although we have to say that – and you follow this closely – that the gap means a spot price and the contract price in Europe has narrowed over the last couple of months. The spot price has gone up and almost cut through the contract price.

So, I think it's a very dynamic development. And it's very difficult to make here long-lasting prediction about the price gap between spot and contract. I would be very careful with regard to that.

Thomas Gilbert – UBS

Thank you.

Magdalena Moll

Our next question now comes from Matthias Cornu from Exane. Good afternoon, Matthias.

Matthias Cornu – Exane

Yes. Good afternoon. Thank you very much. I just have a follow-up question on the shortages and in particular, the very tight supply market in acrylics and in polyamide, 6 and 6 ones you mentioned. My understanding was that it has been created by a number of plants turnaround or exceptional stops in some plant in these markets. Do you think the situation could ease into H2 or do you see, going forward, further shortage situation and a very tight situation in to H2?

Jürgen Hambrecht

Matthias, very generally speaking for all the product lines, shortage will continue into the second half. Also, there will be some release in nylon 6 and maybe even parts of acrylics. Still, the question is out whether all capacity, which is in place is able to deliver and this has certainly created a shortage which is going beyond the normal supply situation and this will continue most probably. All in all, I would say this is rather reasonable prospective.

Matthias Cornu – Exane

Okay. Thank you very much.

Magdalena Moll

Now, I would like to ask Paul Walsh from Morgan Stanley.

Paul Walsh – Morgan Stanley

Thank you very much for taking my question. I just had a question on the cost cutting and the Ciba synergy programs. Can you just update us on where we are in terms of next? How much is in the P&L by the end of the second quarter and how much more is set to go and the same thing for the Ciba synergies, please?

John Feldmann

Well, as we have, said, the end of 2009, we had achieved the run rate of synergies of 130 million euros. For the end of this year, we are expecting to be at 350 million euros. This is the indication for the segment and we are on track and on line with these synergies realization.

Paul Walsh – Morgan Stanley

And for the next program?

Jürgen Hambrecht

Next program, we are – with regard to the next program, you know that finally, at the end, the outcome has to be 1 billion euro or above. At the end of this year, we will achieve about 600 million euros and we are really a little bit ahead of our track at this very moment.

Paul Walsh – Morgan Stanley

Thank you very much.

Magdalena Moll

So now, I would like Sophie Jourdier from Citigroup to ask a question. Good afternoon, Sophie.

Sophie Jourdier – Citigroup

Good afternoon. Thanks for taking the question. It's on what you're seeing in China. At the moment, of course, your chemical businesses, the context being some of the price declines we're seeing in commodity markets and some evidence of destocking. I wonder whether you could tell us what you're seeing in your businesses in China.

Jürgen Hambrecht

Sophie, this is a mixed bag. As I talked early on, let me say, capacity demand balance, this certainly applies in the micro context also to China. You are right if we look into the cracker situation. There, this is the weakest spot in the world at this very moment as we have on top capacity coming in Ingleborough [ph] and Singapore, not to speak about the Middle East.

So, C2 is long, C3 is more reasonable, C4 is also in Asia, basically short, but less short compared to the rest of the world. If we look then into other product lines, I have to say this is rather balanced at this very moment. Concerning stocks, speculation always starts in China and the speculation is now towards no contango on oil price anymore, no increase in basic raw material prices, be careful going forward.

And this is why they are looking into their stocks in certain product lines and we will see how this continues in the near future. But I'm still confident because growth in China will continue also on a lower level compared to the first and second quarter, most normally around 10%.

Sophie Jourdier – Citigroup

Thank you. That's very helpful.

Magdalena Moll

Now, the next question is from Andrew Stott, Merrill Lynch.

Andrew Stott – Merrill Lynch

Yes. Good afternoon. Two questions. Where geographically in EMP, do you expect to be growing production over the next 18 months, if you can pick out sort of the key fields. Second question is much more straightforward, depreciation/amortization. There seems to have been a big sequential decline in Q2. I mean, frankly, it always seems to jump around quite a lot from quarter to quarter. I just wonder if you could give some guidance on the full year and also why you saw that sequential decline? Thanks.

Kurt Bock

I think, I will take both questions, Andrew. Key fields, I think we don't really give indications about key fields. We talk about regions where we operate. As you know, we acquired about 18 months ago business activity in Norway, that has developed very nicely. We just recently announced the second finding a couple of weeks ago, so those are very good prospects and they – these fields will be developed over time and will yield positive results for BASF.

We have, in Russia, almost achieved our peak production level. There's still some way to go in run field and in Libya, as we mentioned, we are still restricted by the OPEC, yes, restrictions and as soon as those are lifted, we would also see a recovery of our volumes in that area. Apart from that, I would really direct you to our fact book, which gives you a very good overview of the areas where we operate and where we try to find additional oil and gas reserves.

Depreciation and investments, first of all, investments came kind of down compared with last year. CapEx, that is a result, obviously, of the crisis in 2009 when we really cut back a little bit on investment or delayed certain investments and you probably see this also throughout the certain fourth quarter of this year. If I see it correctly, depreciation levels in Q1 and Q2 have been stable and virtually unchanged, that is pretty much a given number which you can then take by two for the second half of this year. I hope this will answer your question.

Andrew Stott – Merrill Lynch

Yes, it's fine. Thank you.

Jürgen Hambrecht

Let me get involve for one second because it also reflects a little bit growth going into the future. You can be sure that as we go forward in our portfolio shift and I said this already in the last discussions we had with you, that we are more and more focusing on R&D and less so on CapEx because down slim activities are much less CapEx intense and this you need to take into your consideration as we go forward.

Andrew Stott – Merrill Lynch

Okay. Thank you very much.

Magdalena Moll

So now, I would like to ask Mutlu Gundogan from Royal Bank of Scotland to please ask his question.

Mutlu Gundogan – Royal Bank of Scotland

Yes. Hello, everyone. One question from my side, on the outlook of a moderate pace in economic recovery, is that supported by the ordering pattern at the clients? What are you seeing there? Are clients getting more – are they ordering more often? Are they ordering more per order? What are you seeing there? And also, could you also talk about restocking that you've seen in the past? Has that come to an end? Thank you.

Jürgen Hambrecht

Yes, Mutlu. To the first question, with regard to the moderate growth, I think coming back to what I said earlier and complementing to this, you need – you all need to take in consideration the base effect first. Second, and this is related to your second question, restocking has and is playing a role. It'll come to an end. How much is it? Difficult to say, I have only a few figures of general consideration.

For example, in North America, for the entire production industry, the impact on the close and this translate then in GDP terms, have been in the crisis, minus 0.8 percentage points. Now, going up in the first half of this year, in North America, this was plus 0.4 percentage points. Now, the question is – is it going further? North America is losing a little bit of momentum. We will have to see. But all in all, I would say restocking is almost completed. It will continue a little bit, but not much, especially looking into the tight supply chains, John has talked about it a little bit and we talked about earlier, there is still a need to replenish the inventory.

Then, coming back to the moderate growth, I think going forward we need to look into what is going to happen with stimulus package consequences fading out and second one, public debt and the reduced spending which will occur in Europe. It's not going to occur immediately. It comes step by step but it will have an impact. But this is why we need to talk about more moderate growth going forward.

Mutlu Gundogan – Royal Bank of Scotland

Okay. Thank you.

Magdalena Moll

The next question is from Tony Jones [ph]. Good afternoon, Tony.

Tony Jones

My question, we heard from a couple of people on a few questions here that several products, C3 and C4 products and polymers remain quite tight. So, pricing looks like it's going to remain fairly stable in Q3. So that means we've had like five, six months of fairly elevated prices. Then, my thinking is that that might be extended for a couple of months as the competitive assets come back and stocks are restored. So, does that mean then as we go into 2011, there's a risk of negative pricing effects as a year-on-year effect on revenues? Could you give us a bit of feeling in terms of whether that's risk and whether it should be – how we should consider that? Thanks.

Jürgen Hambrecht

Tony, I think we are not yet in the position to really comment on 2011. Let's look into the rest of the year first and we will comment on 2011 as we go into 2011. It's just really too early. Looking into what can be done from a capacity point of view, there is a little bit, but not too much.

Tony Jones

Okay. Thank you.

Magdalena Moll

Now, I would like to ask Jenny Barker to pose her questions.

Jenny Barker – Barclays Capital

Yes, thank you. It's relates to the Russian equity position, the marketing company. I'm not going to try and pronounce the name. The result is very volatile, due to currency gains and losses. And I just wondered, do you hedge these at all? If not, why not and if you do, where is the offset to this volatility that we see in that item?

Kurt Bock

Yes, hi, Jenny. First of all, I'll try to help you with the name. We always use the abbreviation SNGP. That's much easier to pronounce.

Jenny Barker – Barclays Capital

Thank you. All right.

Kurt Bock

Internally because you also struggle with the name what with the operation of the company. And you are right, the volatility in earnings is basically a factor caught by the financing of that operation and this is consolidated at equity currency – I have to say unrealized currency gains and losses are reflected in our income statement as well. So, that the technique behind the numbers in terms of hedging. No, this is not hedged and therefore we see the fluctuation and sometimes you have then a deeper appreciation of the ruble which sometimes you would not expect to have, but it happens, actually.

Jenny Barker – Barclays Capital

But – so it's unforecastable and as we build a sophisticated ruble model then.

Kurt Bock

Excuse me?

Jenny Barker – Barclays Capital

So, we need to build a ruble model if we want to hope to ….

Kurt Bock

I think that would be a great idea, but who is going to help you with that?

Jenny Barker – Barclays Capital

Well, I'm sure your award-winning IR team will be out to help me with that.

Kurt Bock

Okay.

Jenny Barker – Barclays Capital

Thank you.

Kurt Bock

Excellent.

Magdalena Moll

Now, Annett Weber. Good afternoon, Annett, from BHF Bank.

Annett Weber – BHF Bank

Yes. Good afternoon. Just a very short-term question on the so-called summer dip, what is your current assessment of the magnitude of the summer dip? Are you seeing any at all or is it in the usual magnitude? What's your view with regard to this?

Jürgen Hambrecht

I think the summer dip usually is over-estimated generally speaking. But of course, we have summer holidays in Europe and everyone knows that France is closed down for four weeks and Italy is closed down for four weeks and this is reflected in the automotive industry, partly we have it in furniture industry.

A typical example – let's talk about China. The season in the summer is weak if it comes to furniture and bedding and only coming back towards the end of the year. Though, yeah, we have a little bit of eager runs in second half of July and August but overall, we do not see a real summer dip.

Annett Weber – BHF Bank

Okay. Thanks.

Magdalena Moll

And I would like to ask Stephan Kippe. Good afternoon, Stephan, from Commerzbank.

Stephan Kippe – Commerzbank

Good afternoon. Just a quick question, there was a lot to read about some potential difficulties that foreign investors face in China and there was some remarks also from BASF there. Following – first of all, how – could you give us insight how severe this really affects you as maybe – as I see one of the premier partners of China in terms of direct investment? And secondly, has there been – following these remarks – has there been any significant change in attitudes yet?

Jürgen Hambrecht

Yes, Stephan. First of all, I was basically named here as one of the frontrunners. I did this for the German industry, not for BASF, to make this very clear to start with. Now, there are potential difficulties which always have been there and we always have talked about. So – which is intellectual property, fast disclosure, off design, entry first, counterfeiting is a big issue. 70% of counterfeiting is happening in China. Very clear. This, all in all, has no direct impact on our investments at all. We continue to invest in China for the Chinese market.

We will do so going forward with the enlargement of Nanjing, with the investment in Xiangjing, et cetera. Is – has there been a change in China? Yes, it has been. There is constant improvement and there is, let me say, one point where we need to watch out. You may not be aware of that in China in 2008, more than 600,000 patent applications have been made. Just to compare this with Europe entirely, 150,000 and this figure is going up, though everyone who wants to invest in China is – has – will get a good advice if he looks into freedom to operate.

Now, China has turned the intellectual property issue around because they have realized that this is a real value, they need to protect and they are starting to do so. Also, execution entirely in China might be not as strong at this very moment.

Stephan Kippe – Commerzbank

Okay. Thank you.

Magdalena Moll

Now, I would like Martin Roediger to ask his question from Cheuvreux.

Martin Roediger – Cheuvreux

Thank you. On the tax rate, it looks that you are getting affected from the oil taxes in Libya. So, assuming oil production as oil price in the second half to remain on par with the first half, is it fair to assume that the reported tax rate which was 33.5% in the first half is a good proxy for the full year and that means well below consensus, which is going to be around 39%?

Kurt Bock

I think we have to change our estimation of the underlying tax rate, which is about 25% and if you take out the non-compensable oil taxes, you really arrive at that number precisely. What is important in the first and second quarter of the series, our business mix share of chemical income is much, much higher than in the first half of 2009, when actually it was almost 50-50. And now, it's about 25% earnings, at a net income level, 20% net income level which comes from oil and 80% – roughly 80% coming from the non-oil activities and that is a major factor influencing our underlying tax rate. And obviously, any projection needs then to make an approximation of the business mix in, let's say, 2010 and 2011. If you want to look at non-compensable oil taxes, it's probably a good estimate to assume that they will slightly higher in the second half of 2010 than in the first half of 2010.

Martin Roediger – Cheuvreux

Thank you.

Magdalena Moll

Now, I would like to ask Pandya Jaydeep from Berenberg Bank for his question.

Pandya Jaydeep – Berenberg Bank

Yes. Thank you for taking my questions. Basically, two questions. First is, in terms of businesses across the board, which are the areas of concern going forward in this homestead where you have seen a matter of restocking and where we could see demand coming down, especially in Q4 2010 and the second question is what is – what are you seeing in terms of basic raw material prices because, fundamentally, this has been fairly stable and I would like to know what is the outlook on that front. Thank you.

Jürgen Hambrecht

Let me take the two questions here and start with the second one – basic raw material prices starting with oil. I said this before. There is no contango anymore, though there is more a site movement at this very moment be a slight increase. What we expect in the second half of the year is slight increase in raw material prices, generally. Looking into concerns with regard to businesses and stocking and restocking or let me say coming even to the point of starting destocking, the only point where we really see already inventory coming up a little bit is in automotive in China. There are companies who have too much stock. This is just a problem in the U.S and in Europe, basically the same.

So, this is the more critical area. Then we have other concerns where our customer industries are in heavy restocking – sorry, heavy restructuring. This is a payable industry in Europe and North America, growing, basically, only in Asia. The rest is shrinking still. And here we have much – a very severe situation because paper prices are at their lowest, whereas raw material prices concerning pulp and chemicals are rather high. So here we have to say this is certainly somewhat of a concern.

Pandya Jaydeep – Berenberg Bank

Okay. Thank you so much.

Magdalena Moll

And I would like to say hello to Lutz Grueten from Kepler and ask him for his question.

Lutz Grueten – Kepler

Hi. Good afternoon. Thanks for taking my question, which is on ag chem. You have mentioned decline in demand for some fungicides due to higher general inventories. Has that worked out with the end of the second quarter or do you expect further inventories coming to the market share in the third half? And what's your – third quarter and what's your price assumption for the fungicides in the U.S., please, in the second half?

Kurt Bock

Our goal was really to work our debt out of this inventory situation during the first half of 2010. I think, we have achieved that to the extent possible. The fungicide business, actually, in the second half of this year on the Northern Hemisphere is coming down, so it doesn't really have a significant role to play for sales or earnings. But I think, to answer your question briefly, I think the general effect, inventory effect, has come to an end by the end of the second quarter.

Lutz Grueten – Kepler

Thank you.

Magdalena Moll

Well, now we come to Martin Evans from J.P. Morgan.

Martin Evans – J.P. Morgan

Yes, thanks. Just one quick question on catalysts where you point out it made a significant contribution to earnings in Q2. I'm assuming that essentially is connected with the automotive rebound and the restocking from the industry. Are there any other trends on auto caps that have emerged in the second quarter, possibly in terms of the value of the catalysts or emissions legislation or any other heavy duty trends that we should be aware of? Thanks.

Kurt Bock

Yes, hi, Martin. You are correct with your assessment of our catalyst business. Earnings recovered because volumes in automotive went up. Although you have to keep in mind, we saw recovery – the absolute volume of the automotive industry is still well below pre-crisis levels, especially in the developed countries and in the developed countries, this is often parts because there you sell the bigger catalysts and the bigger the catalysts, the higher our profit, obviously. While in Asia, especially in China, we sell very well. We have a very high market share program. It's the highest in the industry. But the catalysts per car, obviously, are much smaller and therefore less profitable. Underlying trends, I think, I'm not aware of any major change in legislation, which would affect us.

The underlying trend is still that the developing countries are adopting stricter standards and this will drive, actually, the higher usage of catalysts. And the other point is really heavy duty diesel catalysts, which will be the growth area of the future and where right now the stakes are being – they are distributed or being fought for. And I think we have a very good position to get a very nice share in that good growth segment, which is really driven by legislation.

Martin Evans – J.P. Morgan

Thank you very much.

Kurt Bock

You're welcome.

Magdalena Moll

Now, we move on with Peter Clark from Société Générale. Good afternoon, Peter.

Peter Clark – Société Générale

Yes, thank you. It's a quick one. You alluded to in a lot of areas that stocks are probably back towards normalized levels or perhaps certainly gone up a bit. But also in terms of the ordering pattern because, obviously, before you've been indicating that there's been a sort of just-in-time ordering pattern from customers and you said if that continues, you would have to look at your pricing mechanisms. So really, time or two together, if inventories have gone back to normal levels in some areas, yet the ordering pattern remains that sort of hand-to-mouth type pattern. Are you looking at your pricing mechanisms in some of these businesses? Thank you.

Jürgen Hambrecht

Let me take this one. Order pattern, to be very straightforward, I think there has not been a major change in this area. It's still rather short. With regard to pricing mechanisms, we are not going to change this because value before volume is certainly – has driven us to the place we are.

We have reduced our complexity of products and so forth and this has helped very much to make this more easily. But we will continue with the overall approach we had in the last quarters into the second half.

Peter Clark – Société Générale

Thank you. And actually, appearing more that pricing mechanism would be pushing up because I thought it was a more expensive way for you to serve this very short ordering pattern on the pricing pressure the other way.

Jürgen Hambrecht

Very simple. If customers ask on short term what shall you do? We need to serve our customers how they like it and, let me say, in the best way, we certainly try to optimize. Though overall, I would say, the overall pattern will not change significantly.

Peter Clark – Société Générale

Okay. Thank you.

Magdalena Moll

So now I would like to ask Ronald Koehler from MainFirst for his question.

Ronald Koehler – MainFirst Bank

Yeah. Thank you. I would like to ask a question on agrochemicals and Latin American pricing. Obviously, we are looking now for the new season in Latin America. Is this season, let's say, decoupled from the price pressure we have seen in North America or other to ask is – are you – are you have here the, let's say, historically prices which you had last season or any changes on the price levels in agrochemicals in Latin America?

The second question is on exploration production. Obviously, we see now a mixture of Russian gas and more gas, it's much more difficult to forecast price movements. Therefore, I would like if you could provide us volume and prices for exploration production to get a little more clarity here and perhaps, I guess gas prices now have to go up. I'm not sure about the Russian ones but overall, do you now believe we are at the low point here in your mixture in the gas prices and would you see benefit from higher gas prices due to the lack? These are the questions.

Kurt Bock

Well, I'll try to answer, starting with the last one. Let us think about this question or your request to get more detail in EMP in terms of volume price. I mean, we have to think about that a little bit. As you know we normally don't provide these kinds of data for businesses below the business segment. Gas prices, have they bottomed out? It's always hard to predict. There's lots of volatility going on.

Demand has recovered, as we mentioned. Also the LNG supply is still available. I would say that probably there is more upside potential than downside potential. To put it that way, but I would predict that our forecasters are certainly continuing volatility in pricing. Coming to ag, is South America different from North America? Yes, certainly, in many, many ways. One difference is the crops. For instance, sugar cane is very important. In South America, sugar cane has done relatively well.

Pricing this year is pretty strong compared with the other crops. You have weak, soft commodity prices all over the place with actually one exception, which was sugar cane and we are very well positioned in sugar cane also with our insecticides. So, I think we can take advantage of said situation for us. South America is very much a fungicide and insecticide area where we have good products available and we have done very well in Q2. And I don't see any reason why we shouldn't be able to continue to do so for the upcoming season.

Ronald Koehler – MainFirst Bank

So the price pressure you have seen in North America is not spreading to Latin America and fungicides then?

Kurt Bock

No. These are regional markets and those markets are unrelated in terms of pricing.

Ronald Koehler – MainFirst Bank

Okay. Thank you.

Kurt Bock

You're welcome.

Magdalena Moll

So right now, we are working down our last three questions. The first one comes from Norbert Barth from WestLB.

Norbert Barth – WestLB Research

Yes, again. Perhaps two short questions. One is regarding your cash situations, we see improvement. Do you really see buying back shares? And perhaps the second question to Kurt Bock – perhaps you find it inappropriate, but I want to ask you, becoming the new CEO, do you see a little bit of what will be your priorities and kind of strategy or – because some – despite, I think, the team is clearly going close together, but perhaps each person see it a little bit different from a different angle point of view. So perhaps you can tell us something.

Jürgen Hambrecht

Norbert, yes, I have to step in. Cash is clear. What we are going to do. No share buyback for the time being and with regard to the strategy, Kurt will talk about this, let me say, the second half of next year. This is still and we are working together since many, many, many years. This is still the strategy which is going on and you know exactly what we are doing. So, this is not for discussion at this very moment.

Norbert Barth – WestLB Research

Thanks.

Magdalena Moll

So coming – moving on with Neil Tyler from J.P. Morgan and then we have the final question from Paul Walsh.

Neil Tyler – J.P. Morgan

Yes, hello again. But one more question, actually, back to the ag business and the margin development. You started both price pressure and increased fixed costs. I see from the release, the R&D has gone up by about 100 basis points as a percentage of sales. In terms of the rest of the 500 or so basis points of margin drop year on year, can you give some idea of how much of that was – was it the gross margin level and how much was your fixed cost inflation and therefore – and what the outlook for the SG&A is in that business? Is that going to continue to inflate at the same rate or is that going to – is that more a sort of phasing issue? Thank you.

Kurt Bock

Yes, Neil. Those are very decent question. We really don't give that level of detail at the business level. What I – when you look at our EBITDA margin for the first six months of 2010, they are a few percentage points below the level of 2009. We still foresee that the second half will do relatively well. Will we be able to achieve the EBITDA margin which we had, which was a record in 2009? Very hard to say. The market circumstances are quite challenging right now and I think all of our competitors commented in that direction.

So it needs to be seen. We have some flexibility as always in terms of the marketing and sales selling costs and we are very, very cost conscious, as you can imagine. We will continue with our R&D spend, that is really important to build our pipeline. But I'm not really in a position right now to give you a precise SG&A margin for the, let's say, 12 months of 2010.

Neil Tyler – J.P. Morgan

Okay. Thanks very much.

Kurt Bock

You're welcome.

Magdalena Moll

Well, with this we come to Paul Walsh for his final questions.

Paul Walsh – Morgan Stanley

Thanks very much for taking one more question from me. It's two parts, please. In the gas distribution trading business, I'm sure my analysis is wrong. But it looks to me like your year-on-year pricing is going to start to accelerate in terms of delta from the third quarter, given the way you compete your selling prices in the gas distribution and trading business.

I wondered if you would comment on that particular statement. And secondly, there's a very deliberate reference in your outlook to the fact that you're going to raise the dividend, and you've just said buybacks are out of the question. How should we read into that in terms of the magnitude of increase and the dividend that we're likely to see this year because you've done very large increases in previous years over the last five. And I wondered if we were just looking at any organic sort of nominal increase or something more meaningful like we got in 2006 and 2007, I think it was. Thank you.

Jürgen Hambrecht

Well, I'll take the last one and make it very simple. This is a decision to be taken by the supervisory board. But what we can tell you – and we always said – that we are going to increase the dividend as we earn premium on cost of capital. And it certainly depends on the premium level. So, I cannot give you here any further guidance than that.

Now, we had the first question and I really have to say, Paul, I really didn't get your question because there was somehow – maybe it's the weather outside here. We have thunderstorms though maybe this is the reason we didn't get it. But I didn't understand your first question. I only got that this is in-related with gas trading.

Paul Walsh – Morgan Stanley

Yeah. On the gas distribution and trading business, it looks, according to my analysis, which, of course, could be wrong, that your selling prices will show a meaningful increase year on year from the third quarter based on how you compute your selling prices in gas distribution and trading. And I was wondering if you could make a comment on that. That your selling prices in the gas distribution and trading business will start to increase or accelerate year on year from Q3.

Kurt Bock

Yes. That's a very good assessment. Yes. Absolutely.

Jürgen Hambrecht

Now, the real issue is you just look into quarter-by-quarter pricing of oil last year and there is still – major part is contracted. So, it's very clear that the gas price will go up.

Paul Walsh – Morgan Stanley

Thank you very much.

Magdalena Moll

So with this, actually we come – have come to the end. We hope that we have answered all your questions successfully. And before we close, however, I would like to focus your attention on one point. We would like to invite you to our next event and that is coming up really fairly soon. Namely, it's roundtable on agriculture solutions. This will take place in New York on the 5th of August and then the following week in London on the 10th and in Frankfurt on the 12th. So, we will update you there on the newest developments in plant biotechnology, especially, we can go in more detail with respect to the expansion of the collaboration with Monsanto. And then we will give you also an update on the first half year performance of our crop protection business and the outlook for the rest of the year.

With respect to our next reporting date, please pencil in October 28, 2010. Then we will publish our third quarter results. And with this, we all would like to say thank you for joining us this afternoon and should there be any leftover questions, which I don't think there are, but if there are, then please contact any member of the IR team and we will be very happy to help you. So with this, have a good afternoon and good-bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BASF SE Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts