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Urethane Comments from BASF

August 2, 2021

BASF SE (BASFY) CEO Martin Brudermuller on Q2 2021 Results – Earnings Call Transcript

Jul. 28, 2021 2:42 PM ETBASF SE (BASFY), BFFAF

BASF SE (OTCQX:BASFY) Q2 2021 Earnings Conference Call July 28, 2021 4:00 AM ET

Company Participants

Stefanie Wettberg – SVP, IR

Martin Brudermuller – Chairman & CEO

Hans Engel – CFO

Martin Brudermuller

Good morning, ladies and gentlemen. Thank you for joining us today. On July 9, BASF released preliminary figures for the second quarter of 2021 and increased the outlook for the full year. Today, we will provide you with further details. Let us begin with the highlights of the second quarter of 2021. The strong growth momentum of the previous 2 quarters has continued. We achieved volume growth and price increases across all regions and all segments compared with the prior year quarter. In some businesses, we were able to restore and, in some cases, increase our margins with the price increases. In others, there’s still some way to go.

EBIT before special items rose by more than €2 billion compared with Q2 2020 and reached €2.4 billion. This is also considerably above the prepandemic level of roughly €1 billion in Q2 2019. Considerably higher earnings in our upstream businesses were the main driver for the strong increase in earnings overall. Compared with Q1 2021, margins in some commodity product lines such as isocyanates slightly declined in Q2 2021 but remain on a high level. In our downstream segments, we managed to increase volumes and prices based on strong demand. However, pressure from increased raw material prices remained high in several downstream businesses.

Let us now turn now on to the macroeconomic data. The indicators for the second quarter are estimates as most of the countries have not yet published their figures. According to the currently available data, global chemical production increased by almost 10% in Q2 2021 compared with the previous year quarter. With an increase in volumes of 28%, BASF Group grew well above global chemical production. All regions recorded strong demand growth. This was most pronounced in Asia, excluding China, and in Europe. In the prior year quarter, these regions as well as North America were significantly impacted by the COVID-19-related lockdowns. And in comparison, chemical production in China had already grown in Q2 2020.

This slide shows our volume growth by region. Sales volumes are compared with volumes in the respective prior year quarters. During the past 3 quarters, we increased volumes in all regions. In Greater China, we recorded double-digit volume growth during the past 5 quarters. In Q2 2021, volume growth in China was less pronounced as the recovery was already in full swing in the second quarter of 2020. Volume growth, however, remains strong at 10%. In Europe and in North America, volumes grew considerably in Q2 2021 as the prior year quarter in these regions has heavily been impacted by the lockdowns due to the pandemic.

We move now on to the volume development by segment. In Q2 2021, we increased volumes in all our segments. The volume increase was strongest in the Surface Technologies and Materials segment. Volumes also grew considerably in the Industrial Solutions, Chemicals and Agricultural Solutions. Overall, volumes increased by 28% or €3.5 billion in absolute terms compared with the prior year quarter.

We now look at our sales development compared with the second quarter of 2020. Sales of BASF Group increased by 56% to €19.8 billion. As already alluded to, considerably higher price in volumes were the driver for this. In total, organic sales growth amounted to 63% in Q2 2021. Currency effects of minus 7% were mainly related to the depreciation of the U.S. dollar. Portfolio measures had a negligible impact on sales.

As I already mentioned, EBIT before special items came in at €2.4 billion. We achieved considerably higher earnings in the Chemicals, Materials, Surface Technologies and Industrial Solutions segment. Further details on the earnings development in these segments can be found in our half year financial report published this morning. In the Nutrition & Care and Agricultural Solutions segment, EBIT before special items declined considerably. I will talk about that on the next slide. Earnings in Others also declined considerably compared with Q2 2020, and this was mainly due to higher additions to provisions for variable compensation components as a result of the strong earnings development.

Laurent Favre

My first question is on that normalization in the upstream, as you said, less than — you still assume that conditions will normalize but just less than before. I was wondering if you could give us a bit more color on the various moving parts there of your assumptions. And in particular, do you see now the risk of further normalization into the first half of 2022? Or do you think that, that scenario is off the table? And if you could separate, I guess, Chemicals and Materials in your comments, that would be great.

And then secondly, Hans, on the ag side, compared to February, when you issued the guidance for slight EBIT growth, there are new moving parts on higher costs and better soft commodities, I guess, currency, if anything, are slightly better. If you net all of those new incrementals, do you think you can grow EBIT slightly in ag for the full year?

Martin Brudermuller

Laurent, then I’ll take the first question. I mean, first of all, let me say that the conditions for Chemicals and Materials segment in the second quarter overall were better than in the first quarter. And that was coming, on one hand, very strong demand because, I mean, in all the different businesses, there is really solid demand globally. There’s also — I think the world has been a little bit surprised by low inventories and then big business, so they have also to fill. And then we have also the supply chain topics. Some of the markets are actually, because also of the supply exchange issues and the shortage of containers, there is not in every business, an arbitrage business from one region to the other.

So partly, they are a little bit more segregated markets, and that’s also why everything reacted quite sensibly in a pattern. And also we have some of our players in the major commodities had supply problems, even coming back to the big freeze in the U.S., which took weeks and actually and partly until today to really normalize and to work down the backlog. So if we look in a lot of the margins, I have to say, we really have super margins in the moment. Very, very high level. And it’s just not right to assume that this is going to stay forever.

I mean if you look in products also like acrylic acid, but also BDO, but then also MDI, TDI, this is all very much on the high level and simply with the effect that in some areas, the supply normalizes. And even the demand stays strong, you just have a certain relaxation of margins. I expect, however, that, even in the second half, this is still a super-margin level. It’s not record margins anymore, but it is very, very good margin. So for that reason, we have to figure into our numbers that there is a certain normalization. And you know how sensitive that is.

I mean in the MDI case, one of the competitors had a force majeure and then immediately prices react. So that is always, let’s say, the joker in the pocket that there could be some unfortunate or unplanned outages, which would change the situation. But overall, I mean, margins levels are so high compared to the last 5, 6 years, that they have to go down to a certain extent. But that should not send you the signal that they are now collapsing on the floor. It’s just really a normalization.

Andreas Heine

Well, I’ll try two, but very brief. In Q3, in Chemicals, if I look to the prices, I can see, I would say, on average, prices might be even higher than in the second quarter. Is there anything I missed if you look on what you see for that particular segment in the current quarter?

Second, in agro, we have seen soft commodity prices being very much up, but no one in the crop protection and seed business could react on this as the season was already running. So now I guess everyone is hoping for price increases, especially for the second half in the Latin American season. Is there anything you can share with us on this price increases for Lat Am in the second half, especially also to offset what you have lost on the currency last year?

Martin Brudermuller

Andreas, the short answer on the Chemicals margins, if you look in some of the margins, they already, at the end of Q2, turned down a little bit. So if you see MDI and TDI in Asia, a couple, Lat Am, more flat and some others also, let’s say, started already to normalize a little bit. That’s why we expect simply with the higher availability that this is going to continue. If I then do the math, I would say the Q3 in average margins are a little bit lower than we had in Q2.