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

Executives

Magdalena Moll – Head, IR

Hans-Ulrich Engel – CFO

Manfredo Rubens – President, Finance

Analysts

Thomas Gilbert – UBS

Jeremy Redenius – Sanford Bernstein

Tony Jones – Redburn

Norbert Barth – Baader Bank

Lutz Gruten – Commerzbank

Martin Rodiger – Cheuvreux

Richard Logan – Goldman Sachs

Ronald Kohler – MainFirst

Jaideep Pandya – Berenberg

Annett Weber – BHF Funds

Paul Walsh – Morgan Stanley

Andrew Benson – Citi

Jeffery – HSBC

Peter Clark – Societe Generale

Laurent Favre – Merrill Lynch

Markus Mayer – Kepler

Martin Evans – JPMorgan

BASF (OTCQX:BASFY) Q1 2012 Interim Earnings Call April 27, 2012 2:30 AM ET

Operator

Good morning ladies and gentlemen. This is the conference operator. Welcome to the BASF Interim Report First Quarter Results 2012. 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 risks and uncertainties including those pertaining to the anticipated benefits to be realized from the proposals described herein. This presentation contains a number of forward looking statements including in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, 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 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 of they were made. 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, madam.

Magdalena Moll

Yes thank you very much, Jason and good morning, ladies and gentlemen. On behalf of BASF team, I would like to welcome you to our first quarter 2012 conference call. BASF had a good start into the year 2012.

With me on the call today to explain the results are Hans-Ulrich Engel, our Chief Financial Officer and Manfredo Rubens, President of the Finance Division. Hans will summarize the key financials, highlight important milestones of the first quarter and review the segment results for you. Afterwards Hans and (inaudible) will be happy to take your questions.

Since we have our annual channel meeting immediately after this call, we have limited today's conference call to one hour. We have posted the speech and the charts as well as all the press documents on our website basf.com/share.

And with that, I would like to hand over to Hans.

Hans-Ulrich Engel

Thank you very much Maggie. Ladies and gentlemen good morning and thank you for joining us. After rather slow fourth quarter 2011, we have seen a significant improvement in business activities since the beginning of the year. however in line with our assumptions, demand in our chemical activities could not match the level of the exceptional lease drawn first quarter 2011 which benefited from high consumption and restocking effects. The market environment for agricultural solutions as well as the oil and gas businesses on the other hand was quite favorable leading to a good start in to 2012. In the first quarter we increased sales by 6% to 20.6 billion euros. Overall volumes were flat. Volumes in our chemical activities declined by 5% due to lower demand as well as the modification of an earning's neutral swap for better products. We were able to successfully raise prices by 5%. Higher raw material costs could not be fully passed on to the market.

EBITDA amounted to 3.9 billion euros, up 16% versus the first quarter of last year. EBITDA as well as EBIT were positively impacted by the disposal gain of our fertilizer activities in Belgium and France in the amount of 645 million euros. EBIT before special items came in at 2.5 billion euros, 7% below the record first quarter of last year. Net income was 1.7 billion euros, 28% lower than a year ago. Last year's results included a capital gain of close to 900 million euros from the sale of our stake in K+S. Adjusted earnings per share were 1.57 euro in Q1 2012 after 1.94 euro in Q1 2011.

In the first quarter we achieved important milestones. We significantly strengthened our activities in battery materials through several small acquisitions. In January we announced the acquisition of a stake in Sion Power, the global leader in the development of lithium sulfur batteries. In February, we bought Ovonic, the global leader in nickel metal hydrate battery technology. We also signed a purchase agreement for Merck's electrolyte activities. The transaction was closed last week. And just yesterday we announced the acquisition of Novolyte Technologies, the manufacturer of electrolyte formulations for lithium batteries. With production sites in Europe, the United States and Asia Pacific region, we are now positioned as the global supplier in the electrolyte formulation business. Last but not least, our battery material plant in Ohio is on track to start operation in Q4 this year. All these above, support our goal to become the leading supplier of batter materials.

Last month we signed an agreement with Petronas for the expansion of our existing joint venture in Kuantan, Malaysia and the construction of a number of new downstream plants at Petronas new integrated rapid complex in south (inaudible) next to Singapore. The projects are to be implemented between 2015 and 2018. In total, we planned joint investments of 1 billion euros.

Finally, at the end of Q1 we completed the sale of our fertilizer activities. We realize the disposal gain of 645 million euros which was booked as special item in other.

Now I will explain the financial performance of our business segment in more detail. The basis of comparison is the first quarter 2011. In the chemical segment, we generated higher sales. The Styrolution joint venture contributed positively to the topline because feedstock sales to the joint venture are now reported as third party sales which are shown as structural effect. Volumes dropped mainly due to an earnings neutral swap agreement for propylene which became effective in Q3 of 2011. On a comparable basis, volumes increased slightly. Due to ongoing high raw material prices, EBIT before special items did not reach the high level of Q1, 2011. In petrochemicals, sales increased significantly. Prices for cracker product moved up by a year. Prices for all other product lines were below the very high prior year levels. Margins declined because we could not fully pass on the high raw material costs to our customers. Overall, EBIT before special items was considerably lower.

In intermediate, sales decreased slightly. Demand was high from key customer industries, such as plastics and coatings but did not match the very good level of the previous year. Thus volumes and margins declined. Consequently EBIT before special items came in lower. Sales in inorganics was stable. EBIT before special items did not match the very good level of Q1 2011 mainly due to lower margins in basic products.

In our plastic segment, sales decreased. Price increases could not compensate for considerably lower volumes. The record margins for polymer precursors and polyurethanes generated in Q1 2011 could not be sustained. Earnings was substantially below the excellent level of the previous year.

In performance polymers, sales were slightly lower. Slow textile fiber demand in Asia led to lower volumes and margins for capital (inaudible). On the other hand, continuously strong demand from the automotive industry particularly in North America lifted sales in engineering plastics. Home sales exceeded the prior year quarter based on healthy demand from the construction and packaging industries. However, EBIT before special items grew up substantially mainly to a margin decrease. Sales in polyurethanes were down moderately. Sales for the appliance and construction industries weakened but demand from the automotive sector remained robust. The scheduled turnaround of our guide negatively impacted volumes. We continue to pursue our value before volume strategy and successfully implemented price increases for TDI and MDI. As a result, we saw margins in both TDI and MDI recovered during the quarter. EBIT before special items was significantly below prior year given lower volumes to margins.

Sales in performance product was stable. Demand for several product lines was lower than a year ago. In the prior year ago, we benefited from tight markets in several products. However, price increases in positive currency effects compensated for lower volumes. As we could not fully pass on high raw material costs, margins were softer and EBIT before special items declined.

Dispersions & Pigments sales rose significantly driven by higher volumes and prices. Pigment sales were strong in North America, but softer in Asia and Europe. Due to higher costs of idle capacities and an unfavorable product mix effect, EBIT before special items fell short of the prior year.

In Care Chemicals, sales decreased. The challenging competitive environment let to lower volumes overall. Specialties however continue to perform strongly. Hence price increases could not fully offset higher raw material costs, EBIT before special items fell significantly.

Sales in nutrition and health increased slightly due to continued good demand in nearly all businesses, some are short lower volumes. Margins and vitamins were affected by higher raw material costs which could not be passed on fully. EBIT before special items was down on softer margins.

In Paper Chemicals, we made substantial progress in our restructuring efforts. We were able to increase sales although the market remained challenging. EBIT before special items improved benefiting from higher selling prices and fixed cost reductions.

Sales in performance chemicals slightly increased. To compensate for higher raw material costs, we raised prices. In a competitive market environment, volumes were below the previous year. As a consequence, EBIT before special items decreased.

In our functional solutions segment, we slightly increased sales. Demand from the automotive industry, especially from premium car manufacturers improved further. Lower precious metal prices and volumes however, had an offsetting effect. EBIT before special items improved. Sales in catalyst dropped slightly due to lower prices in volumes and precious metal trading while we experienced high demand for mobile emissions and chemical catalysts. EBIT before special items increased due to the good volume growth in mobile emissions and chemical catalysts.

Sales in construction chemicals grew by 7%. Demand in Asia and South America remained favorable and North America showed a first positive development.

Business in Europe was affected by the cold weather and continuing weakness in Southern Europe. We increase prices in all regions. EBIT before special items slightly increased in this seasonally weak quarter.

In coatings, sales were up due to the continued high demand in particular, from premium car manufacturers as well as good business in Asia and North America. In decorative paints, sales declined due to lower volumes. We realized price increases across all regions and for all major product lines. EBIT before special items almost matched the good level of the previous year.

Sales in Agricultural Solutions rose significantly. We were able to grow volumes in all indications and implemented a 3% price increase, thus maintaining the positive pricing momentum from the previous two quarters. EBIT before special items was up significantly. The start of a new season in the Northern Hemisphere was strong. In Europe, the recent launch of our new fungicide Xemium is already a success.

First quarter sales in the three major fungicide markets; France, Germany and UK confirmed that Xemium has blockbuster potential. Our crop protection business in the Eastern European growth markets also developed favorably. In North America, the early start of the season supported sales growth especially in herbicides. Our plant health business also developed well. Sales in Asia came in slightly lower as the increased demand in China could not fully compensate for weaker season in Japan. North American sales increased due to strong demand for fipronil-based products or sugarcane applications.

Sale in oil and gas increased strongly driven by natural gas trading as well as exploration and productions. EBIT before special items rose sharply. Sales in exploration and production were up by 25%, primarily driven by higher prices and volumes. With an average of $119 per barrel spent, the oil price was considerably above the level of the prior year's quarter. Volumes also grew as a result of higher oil production in Libya and higher gas production in Russia and the Netherlands, as a result, earnings short.

In natural gas trading, sales grew substantially given higher volumes and prices. Due to the cold temperatures in Europe in the first quarter, we were able to significantly expand trading volumes. Earnings strongly improved due to higher natural gas volumes as well as from operations of the new OPAL pipeline. Non-compensable taxes on oil production amounted to 451 million euros compared to 280 million euros in the first quarter of the previous year. Net income was 416 million euros, an increase of 110 million euros versus Q1 of last year.

Let me give you a brief update on the situation in Libya. In Q1 we achieved to increase our production to roughly 70,000 barrels of oil per day. At this point, we cannot predict when we will be back at a production level of 100,000 barrels per day. The technical condition of the infrastructure remains the bottleneck.

In other sales decreased by almost 30%, due to the deconsolidation of styrenics following the formation of the Styrolution joint venture with INEOS. EBIT before special items declined to minus 330 million euros, mainly due to the missing contribution from styrenics and a higher provision for the long-term incentive program. Special items were positive due to a 645 million euros disposal gain from the sale of the fertilizer business.

Cash provided by operating activities was 1.6 billion euros in the first quarter of this year. The rise in working capital of roughly 430 million euros reflected increased raw material prices compared with one year ago. Cash from investing activities amounted to 159 million euros. This includes a cash inflow of roughly 680 million euros, primarily resulting from the divesture of our fertilizer activities. The prior year figure contained proceeds almost 900 million euros on the K+S disposal.

CapEx rose by 173 million euros to 720 million euros compared to the previous year's quarter. Free cash flow came in at 900 million euros, compared to 1.7 billion euros in the first quarter of 2011. From the beginning of this year, we were able to reuse net debt by 1.5 billion to 9.4 billion euros.

Our outlook for 2012 remains unchanged. We strive to increase volumes in 2012. We aim to exceed the record levels of sales and EBIT before special items achieved by the BASF Group in 2011. And as stated at our analyst conference at the end of February, in the first half of 2012 we will most likely not achieve the exceptionally high results of the comparable period in 2011. However, based on our assumption that the chemical demand will pick up in the second half of this year, we expect to outperform the second half year results of 2011. Finally, we strive to earn a high premium on our cost of capital again in 2012.

Ladies and gentlemen, as Maggie already said, please understand that our earnings call has to be rather short today due to our annual general meeting this morning. So, the key topics at this annual general meeting will be the approvals for a dividend of 2.50 euros per share, which means an increase of 0.30 euros over prior year and new share buyback program for up to 10% of BASF shares over the next five-year period.

And with that, Manfredo Rubens and I look forward to your questions.

Question-and-Answer Session

Magdalena Moll

Thank you, Hans and I will now like to open the call for questions and ask you for this time today to please limit your questions to only one at a time so that we can take as many questions as possible. Of course, you are always invited to rejoin the queue and then we will also take you for a follow-up question. So with this, I would like to start the first question with Thomas Gilbert from UBS.

Thomas Gilbert – UBS

The operating earnings in Asia are down 47%. Obviously small in agriculture, small in oil and gas. Is that the key region where you expect demand to pick up again? And can you talk through which business you think mostly had this temporary dip in the earnings decline? Thanks for answering that question.

Hans-Ulrich Engel

Region Asia, if you look at the developments there, in the first quarter, first thing you see relatively slow start into the year. Chinese New Year. This year already in January certainly impacting January's results. If you look at it from a quarter-over-quarter perspective, compared to Q4 of last year, you see an improvement in our earnings in Asia.

You were asking with respect to businesses, you are pointing out at Agricultural Solutions is small, absolutely that's right. Oil & Gas we don't have in Asia. Where have we seen weaker business? We've seen that in particular in petrochemicals with relatively low margins as a result of weak demand in the first quarter and of relatively high raw material prices.

If you look at the naphtha price development that we've seen, that was actually at record highs during the first quarter driven by the oil price, while cracker margins as a result of that were relatively low. We also expect to see improvements there as we've seen that already during the course of the first quarter. We've seen demand picking up during the first quarter, towards the end of the first quarter. And if I look at the beginning of the month of April we see that trend continuing.

Magdalena Moll

So our next question is coming from Jeremy Redenius from Sanford Bernstein. Good morning Jeremy.

Jeremy Redenius – Sanford Bernstein

Hi good morning. I see personnel costs are up 9.6% this quarter. Could you please talk about how much of that is recurring throughout 2012? I ask because I saw part of it was from the long-term incentive program, and also I noticed back in your annual reporting that your contractor headcount was really high versus history and I am wondering if that might imply that there is some temporary nature to that increase?

Hans-Ulrich Engel

Yes. I think Jeremy, you are pointing to the key topic already with the LTI. In the first quarter that has a significant impact on the personnel costs. And you know that, that is a sort of volatile area, the LTI depending on share price development and we've seen a significant positive share price development during the first quarter. If I recall that correctly, we moved from 53.80 roughly to more than 65 by the end of the first quarter. And a result of that significant impact there in our personnel costs, you should expect that to, from my point of view, to be at a lower rate going through this year.

Jeremy Redenius – Sanford Bernstein

Is there a more underlying estimate that you can give us?

Hans-Ulrich Engel

Well, the more underlying estimate I'd look at something in the order of magnitude of roughly 4% during the course of 2012.

Magdalena Moll

The next question is now coming from Tony Jones from Redburn.

Tony Jones – Redburn

Good morning thanks for taking my question. A quarter after the trough, usually you do struggle a bit to pass on the high input costs as you talked about today. And but then the next quarter, you usually correct it quite quickly but that's usually predicated upon trading conditions sequentially improving a little bit. Could you just talk through with a month more or less of Q2 over and your visibility? What do you think about order book and customer activity in sentiments and then combined with it, do you still think there is appetite to raise prices and deal with the margin compression problem? Thank you.

Hans-Ulrich Engel

Is there appetite Tony, to raise prices? Absolutely. There is no question about that. What do we see in trading conditions? We've seen during the course of the first quarter already that towards the end of the second month going into the third month, we see that demand is picking up. So if you compare it to the fourth quarter of last year and if you compare our EBIT before special items performance in Q1 to Q4, you can actually see that because we're roughly 1 billion stronger in our EBIT before special items than we were in Q4 which obviously is seasonally a weaker quarter. But nevertheless we saw demand picking up and that also continues going into Q2 and that should provide us with the opportunity to keep raising prices.

You see that our prices on a Group level in the first quarter were roughly 5% higher. Our raw material costs in the first quarter are in the range of, I'd say roughly, 10% higher than Q1. So, we absolutely have to go for the price increases.

Magdalena Moll

The next question is now coming from Norbert Barth from Baader Bank.

Norbert Barth – Baader Bank

Yes Norbert speaking. Question on the agro side. I think the volume increase of 3% looks a little bit low compared, also to compared, it doesn't also what you stated that there was some early starts. So what do you lost market share and perhaps you can also give the split to the three different products line? It looks that especially fungicide was heavily hit. Can you explain the trading situation there?

Hans-Ulrich Engel

First of all, let me say and then Manfredo will answer your question that we are rather happy with the performance of Agricultural Solutions business in the first quarter and with that, I hand it over to Manfredo.

Manfredo Rubens

I think we cannot comment on the competitors obviously. But we were very happy with the start that we had in the business. It's really about profitable growth. You mentioned the volumes, but also look at the prices and if you do a little comparison there, then you see that from a profitability standpoint we have done very well. And we have increased prices now for the third consecutive quarter and this is also on the back of the innovation.

You know that we have a couple of new products being introduced into the markets, the fungicide Xemium and also the herbicides Kixor. And I think those new products in an environment which is very favorable for Ag with fairly high soft commodity prices, volatile, but on a very favorable level, there is a lot of preparedness by the growers to invest into the products, particularly also the new products that we have. So we are very confident that we're running towards an excellent year an Ag camp.

Going through the indications, I think we've seen fairly early start in the herbicide segment particularly in North America. The fungicide season is developing as we see also strong demand again. We go for innovation, we go for prices, we don't go really for the market share as maybe some of the other competitors do.

Norbert Barth – Baader Bank

Do you have figures for fungicides, what the volume development was or the split was?

Hans-Ulrich Engel

We'll look this up and get back to you.

Norbert Barth – Baader Bank

Okay.

Hans-Ulrich Engel

On the fungicide, what you may want to take into consideration is that there is also these drought situations that we have in southern part of Brazil and in Argentina which certainly has an impact on the fungicides business in the first quarter. We'll look that up and get back to you.

Magdalena Moll

Well then the next question comes from Lutz Gruten from Commerzbank.

Lutz Gruten – Commerzbank

Yes good morning, thanks for taking the questions. Just a quick one regarding the next program and the achievements in the first quarter, I think by end last year you have achieved already 600 million. Could you confirm the full year target at end of 2012 and the achievements for Q1, please?

Hans-Ulrich Engel

Yes, I can actually confirm that end of last was 800 million and the target for the year 2012 is (inaudible) billion and I am very confident that we will achieve at least that.

Lutz Gruten – Commerzbank

One number on Q1, please?

Hans-Ulrich Engel

One number on Q1, in addition to the 800, I don't think that we've disclosed next on a quarterly basis in the past, but you can assume that we added what we wanted to add during the first quarter on top of the 800.

Magdalena Moll

So the next question now comes from (inaudible) from Nomura.

Unidentified Analyst

Thanks for taking the question. I'm just curious about inventory management and the industrial operating rate in the industrial divisions. How did that evolve in Q4 versus Q1? Realized the question, so we can see inventories were down in Q1 versus Q4 despite the price increases and also working capital outflow was pretty limited if you take into account seasonality in Ag. So, I'm just wondering whether you kept operating rates at low levels and continue to reduce inventories, that couldn't be an explanation of some of the margin pressure. Thanks for your comments.

Hans-Ulrich Engel

John, obviously working capital is something that we always have on our mind. If you look at our net working capital, that's quite a significant number. If you look at our inventories, they are right around 10 billion euros. You are right, they came down.

Frankly, from my perspective, that makes me relatively happy, because it shows that we manage our inventories in the right way. Have we managed our operating rates accordingly? Of course, we have. We always do that. That's part of just the regular housekeeping that you do, but I can also tell you that overall, run rates have certainly not come down in Q1 compared to Q4.

Unidentified Analyst

They were flat?

Hans-Ulrich Engel

They were actually slightly higher.

Magdalena Moll

Fine, with this we are coming now to Martin Rodiger from Cheuvreux.

Martin Rodiger – Cheuvreux

On Libya, sorry, if you have already talked about that because I entered late, what was the average production rate per day in Libya in the first quarter and what should we expect for the second quarter?

Hans-Ulrich Engel

Yes, the average production rate came in actually higher than what we had expected when we talked about it at the annual press conference in the end of February. We are running at this point in time at an average production rate in Q1 and run at 70,000. We had expected to be in the order of magnitude of 60,000. We had a very strong production month in March for a number of reasons. One of the reasons was that another field being operated by another company didn't produce as much as expected, and as a result of that, there was more capacity in the export pipeline than what we had figured in when we talked about the 60,000 barrels. So, we came out at 70,000 barrels per day. That is also what we see at this point in time on average for the full year 2012. It all depends on the availability of infrastructure that is still a challenge and the bottleneck and that may make this number a little volatile.

Magdalena Moll

So the next question now comes from Richard Logan from Goldman. Good morning Richard.

Richard Logan – Goldman Sachs

Good morning and thanks for taking my questions. Yes, was just coming back to the pricing relative to raw material cost, I think you mentioned across the division's Nutrition & Health, Care Chemicals, Performance Products and Petrochemicals and those are the divisions that where you weren't able to fully offset raw material cost increases and going into the second quarter of those divisions, where do you feel most confident with regards to being able to fully offset?

Also just more broadly, do you anticipate to be able to fully offset raw material cost increases across the group in the second quarter? Thanks.

Hans-Ulrich Engel

Yes Richard, excellent question. Had I the crystal ball, it would be actually easier to answer that. But what do we see. As I said earlier, we see demand picking up. That should provide us with more or better space to increase prices. We have to as I said, because one of the reasons why margins were depressed where obviously we weren't able to pass on raw material prices fully.

As you know, the further you go downstream the longer it typically takes for the upstream, the faster we are able to adjust our prices to raw material movements. But I can assure you, we are pressing for the price increases that we need to have.

Magdalena Moll

(Inaudible) Ronald Kohler from MainFirst.

Ronald Kohler – MainFirst

Yes hello. I would like to take the question on others. Obviously, now you have because of the styrenics and you sold fertilizer, you have still reported 122 million in that fertilizer line in the others as a positive contribution and I just wanted to ask what is the roughly run rate, let's say, of remaining contributions out of that line? And in additional to others, I guess had some hedging losses in the first quarter as euro was weaker and can you confirm that and can you please give us a kind of magnitude for epic hedging losses?

Manfredo Rubens

On the fertilizers you have to realize we had the transaction, the divestiture of the fertilizer business at the end of the first quarter and so we still in the first quarter had a remaining contribution from fertilizers. So this is basically what you see in that area. On the other hand, you have to realize that we had divested styrenics and so there is a missing contribution compared to prior year month quarter on the styrenics part. The contribution from styrenics was higher than the contribution from the fertilizer or the missing contribution I have to think, the missing contribution from styrenics was higher than the contribution from fertilizer.

Ronald Kohler – MainFirst

The question is little more ongoing so which means, how much kind of ongoing business EBIT line you will feel happy. Will it go to roughly zero or will that be some income from the other in the operations?

Manfredo Rubens

No, there's very little income, basically zero. On the FX hedging, what you see is basically a negative deviation compared to prior year quarter, but it's a reduction of the profits or the hedging gains that we had.

Ronald Kohler – MainFirst

So which means you still had hedging gains or the hedging losses in?

Manfredo Rubens

Well, that really depends on the development of the currency. So I can't really say.

Ronald Kohler – MainFirst

I mean in the first quarter, did you have hedging gains or losses?

Hans-Ulrich Engel

We had slight losses, very slight losses.

Magdalena Moll

We now come to the question. This is Jaideep Pandya, from Berenberg.

Jaideep Pandya – Berenberg

Coming back to the number you said, raw materials writing for 10% roughly for the Group and you're increasing prices by 5%, could you give us a little bit more color, if you just looked at your downstream, what is sort of the negative squeeze that you have, because you clearly have some right now? Is this is a more structural issue that worries you that there is always an inherent lag. I understand the problem with the specialty chemicals about the lag. But is it something that you structurally can change in your or do something more better, is what I'm trying to ask here.

Hans-Ulrich Engel

Is that to a certain extent structural? Yes, it is. You've seen that over the years happening. The further you go downstream in the portfolio, the longer it takes to pass on the raw material cost. What do you do and you've see us doing that over last years. You focus more and more on businesses that allow for differentiation among other things through innovation, and as a result of that add value pricing and this is what you clearly see us doing and what you see also as a main focus for us of our, we create chemistry strategy where we've clearly addressed that we want to move more and more in the direction of functionalized materials and solutions and I think a good example for that are the battery materials and also water chemicals and water technologies, just to give you an idea there.

Jaideep Pandya – Berenberg

And can you just maybe give a little more color on how much negative squeeze you had in downstream?

Hans-Ulrich Engel

We don't differentiate there in our portfolio and break it up between the various segments.

Magdalena Moll

So now we come to Annett Weber from BHF Funds.

Annett Weber – BHF Funds

I've got to come back on the volume trends that you have observed in Q1, and some of your competitors hinted at relatively volatile movements in terms of the year-on-year volume growth in Q1. Now, I was wondering whether you could possibly provide us with more concrete numbers when it comes to the year-on-year volume growth that you have seen on kind of monthly basis in Q1 and what you are seeing in this respect for April.

Hans-Ulrich Engel

Year-over-year if you look at that Q1 at Q1, you see that in our chemical activities. So including the segments Chemicals, Plastics, Performance Products and Functional Solutions, you see volume declines in a range between 4% and 9%. Keep in mind there that we have a special situation as a result of an optimization our supply chain with cracker products that has quite an significant impact in the Chemicals segment in the order of magnitude of roughly 5% on the volumes. We want our word of explanation on that. What we had in the past was a swap, where we swapped polymer grade with chemical grade propylene and we now swap like-for-like and as a result that doesn't show up as sales any longer as it did in the past and that leads to this significant volume reduction for the BASF Group without which we would have been positive on the volume where we're showing 0% at this point in time.

If you look at it Q4 over Q1, you are seeing volume improvements across the portfolios of Q4 to Q1, volume improvements across the portfolio, the volatility that you are addressing is direct, the visibility is still rather low, but the trend that we're seeing and that goes across the portfolio, take out those products that are seasonally impacted such as, for example, the natural gas trading and also the Agricultural Solutions business or focus on the chemical activities, trend there is increasing and volumes also going into Q2.

Annett Weber – BHF Funds

You mean increasing year-on-year?

Hans-Ulrich Engel

Increasing quarter-over-quarter. So Q1 to Q1, we have this decline that I explained factoring the impact of the swap, which gets you the chemical activities to roughly flat volumes quarter-over-quarter. If you compare Q4 2011 to Q1 2012 you see volume improving.

Annett Weber – BHF Funds

And if you looked at March, for example?

Hans-Ulrich Engel

You see in that trend as I said, volume improving.

Annett Weber – BHF Funds

March this year versus March last year?

Hans-Ulrich Engel

March this year versus March last year, we are back to the Q1 to Q1 comparison and their volumes are overall down. Factoring the impact of the swap, they are flat, roughly flat.

Magdalena Moll

Next one is Paul Walsh from Morgan Stanley.

Paul Walsh – Morgan Stanley

I just wanted to come back to the Chemicals and Plastics businesses because clearly the margin pressures there were most acute in the first quarter. Are you seeing cash margins or perhaps you talked about polyurethanes being tough caprolactam, adipic acid in plastics and obviously we know that cash margins were weak in Chemicals but it does look like the situation has improved as we've moved through the first quarter and I just was wondering if you give some insights as to how you see those two divisions performing sequentially moving into the second quarter.

Hans-Ulrich Engel

Yes, what we've seen there and here I will start with Q4 2011 was a situation where volumes came down, moved into Q1. Volumes as I explained earlier, they're increasing. We see this going forward also in Q2 also in these two segments, so chemicals and plastics.

On the margin side we also see improvement. Please factor in that I think you mentioned the polyurethanes in particular. Please factor in that in polyurethanes, we were affected by a scheduled turnaround that we have in our Geismar, Louisiana, U.S. site, where MDI and TDI as a result of that scheduled turnaround was down for, if I recall that correctly, roughly seven weeks. That certainly had an impact on our cost position there and with that on our margin position, both plants, the MDI and TDI plant are backup running in full swing since the fourth week of March and that's how we go into the month of April.

Paul Walsh – Morgan Stanley

Are you able to quantify the impact of the down timing Geismer in the first quarter?

Hans-Ulrich Engel

We don't disclose that.

Paul Walsh – Morgan Stanley

Are we talking tens of millions or--?

Hans-Ulrich Engel

We're talking six to seven weeks downtime of a scheduled turnaround.

Magdalena Moll

Now we're coming to Andrew Benson from Citi.

Andrew Benson – Citi

Can you try to define the impact the cheap U.S. shale gas may have had on your business and how you think that may evolve looking out?

Hans-Ulrich Engel

What kind of an impact does shale gas have on our business? At this point in time, it has, I'd say, a positive impact on our North American business. If you look at natural gas prices in North America, I think we're looking at an average natural gas price slightly above $4 per million Btu in the year 2011.

First quarter price in 2012, if I recall that correctly is somewhere in the order of $2.50 per million Btu. Spot price yesterday I believe was somewhere around $2.10 and that is actually all significantly cheaper than what we see in Western Europe or in Asia Pacific, as an example. Do we benefit from that? Yes, we do. We do through overall a lower cost position on an important feedstock for oil production and on an important energy source for our sites in North America.

Magdalena Moll

So we are coming to Jeffery here from HSBC.

Jeffery – HSBC

All my questions have been asked. Thank you.

Operator

Okay. So then we are coming to Peter Clark from Societe Generale.

Peter Clark – Societe Generale

One little question, digging into the coatings business, in particularly direct coatings. Just wondering in Latin America if price was enough to offset the volume decline you saw in underlying sales growth was ahead in that business and then looking ahead, just your feel for the outlook for volumes in that business, and consumer businesses in Latin America generally and I'm thinking Indelco, of course, one of your competitors has been pretty aggressive and claim they are now leader in Brazil. Just wondering, do you sense that you've lost a little share or is it just a feeling that the market is gone a bit softer?

Hans-Ulrich Engel

I think what we had was a seasonal or weather related impact in our art deco business in South America in the first quarter. Brazil and that is the key market. It has seen a lot of range that impacted our business. The other impact that I think we saw had to do with distributor's destocking in the first quarter. With respect to market share I am not aware of market share losses in the South America and here in particular in the Brazilian market.

Peter Clark – Societe Generale

Okay. So are we right in thinking you expect about business to recover somewhat as we go through the year in terms of the volume you saw the hit in Q1?

Hans-Ulrich Engel

That is our expectation, yes.

Magdalena Moll

So then we come to Laurent Favre from Merrill Lynch.

Laurent Favre – Merrill Lynch

On taxes, to look at the notes on adjusted EPS, and I look at adjusted taxes, excluding the Libyan exceptional tax and excluding, of course, the fertilizer disposal and the K&S disposal, it looks like taxes were down 7%, which is a lot less than earnings outside of Libya. I'm just wondering, if you could tell us if there was anything exceptional in taxes in Q1 or if it was Q1 last year. So any comment on that side would be very helpful.

Hans-Ulrich Engel

Yes, I'll take that question. You said it correctly. We have an increase in the tax rate from last year first quarter of 24.7 to 39.6 in the first quarter of this year. The two impacts you highlighted, one is the almost tax free disposal of the K+S shares in the prior year quarter and we have some impact also from the sale of the fertilizer business in this quarter. The second major impact is the oil and gas, or the Libyan production that has picked up in higher oil taxes in the first quarter of this year compared to the prior year.

Other than that, there were no major special effects that we have in the numbers. If you adjust for the oil taxes, then you get to a tax rate of 29%, which is, given the special effect from the divestiture in the first quarter of the fertilizer business on the high side. We still look at an underlying tax rate for the year in the magnitude somewhere between 20% and 25%. So this is a good estimate.

Magdalena Moll

And then we come to Markus Mayer from Kepler.

Markus Mayer – Kepler

A more broader question. Do you expect a major disruption at European automotive production due the explosion of Evonik's Marl production site? Would you be able to switch your production to (inaudible) supply get at CDT and then due to this two things that this force majeure will restart the discussion of the advantage of a backward integration that you have obviously?

Hans-Ulrich Engel

There was a lot of background noise, did I understand your question correctly. You are asking with respect to the incident at the Evonik site?

Markus Mayer – Kepler

Exactly, and also if you could switch the new production, (inaudible) supply gap for CDT and the system also restart the discussion of having advantage in the backward integration.

Hans-Ulrich Engel

Can we switch production to CDT? Unfortunately, not. We have CDT production which we're using in our old system and then in addition to that have sales contracts which require us to supply the remaining volumes to these customers with whom we have long-term sales contracts. Can we offer alternative solutions to the automotive industry instead of the PA12? That's the key product here that we're talking about, the polyamide 12s. There is discussion about that. But as you know in the automotive industry, long certification processes. So what we'll have to do is in close cooperation with automotive industry, see what type of solutions we can offer to help in this very unfortunate situation and these discussions are ongoing and of course with a high focus.

Markus Mayer – Kepler

Do you think there have been major instruction effect on European automotive players?

Hans-Ulrich Engel

That is frankly too early to say at this point in time. It reminds me somewhat of the discussions that we had last year after the natural disaster in Japan where there were certain parts, where the original thinking was they only come out of Japan. You saw how quickly the automotive industry was able to adjust to the situation there and based on everything that I'm seeing, the automotive industry is working, but as I've said, with high focus on finding alternative solutions as quickly as they can. So, it remains to be seen.

Magdalena Moll

So the next question is from Martin Evans, JPMorgan.

Martin Evans – JPMorgan

Just on Care Chemicals, are you disappointed by that performance or is it just a very much a short-term blip? Because, obviously, with Cognis in there now and they sort of hoped for defensive nature of that business and yet we read the volumes are down, raw materials are not been passed through fully and EBIT fell. So, could you maybe just give us little bit of a point, just the dynamics now in that Care Chemical business on what the outlook is?

Hans-Ulrich Engel

I think your question was, are you happy with that performance, the answer to that is obviously no. We understand what the reasons are for this performance in the first quarter. Number of things coming together there based on everything that we are seeing. The beginning of the second quarter, there is stronger in Care Chemicals than what we've seen in the first quarter and I actually think we'll see during the first quarter that this is actually, as you put it, a blip in Q1 and that all the issues that we have there are addressed and that happens within the very short period of time.

Magdalena Moll

So, ladies and gentlemen, due to the fact that we are getting close to the Annual General Meeting, I hope for your understanding today, that we are closing our conference call now. There were seven additional questions but we have written your names down and we will contact you immediately after the call from the Investor Relations team.

I also wanted to bring to your attention that we will next report on our second quarter 2012 results on July 26. For now, we would like to thank you for joining us. We hope that we have answered all your questions intensively and if there are any left open then please do not hesitate to contact any member of the Investor Relations team. We would be very happy to help you. In the meantime, we wish you good luck and a lot of success with your analysis and nice day. Thank you, bye-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 Management Discusses Q1 2012 Interim Results - Earnings Call Transcript
This Transcript
All Transcripts