BASF SE
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Stefanie Wettberg:]

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the second quarter results. . This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in Opportunities and Risks of the BASF Report 2020. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements.

[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.

[Hans Engel:]

Thank you, Martin, and good morning, ladies and gentlemen. Let me first give you an update on our recently announced acquisitions. In May 2021, BASF and Shanshan, a leading Chinese lithium-ion battery material supplier, agreed to form a BASF majority-owned joint venture to produce cathode active materials and precursors in China. The purchase price for BASF will be in the mid-triple-digit-million euro range. Hunan Shanshan Energy operates 4 production sites for CAM and PCAM in Hunan and Ningxia with an annual capacity of 90 kilotons by 2022. By forming the intended joint venture, BASF further strengthens its position in Asia, building up an integrated unique global supply chain for customers in China and worldwide. Through this joint venture, we will increase our annual capacity to 160 kilotons by 2022, with further expansions underway, making BASF the first company with production capacities in all major markets. Closing of the transaction is targeted for later this summer following the approval of the relevant authorities. In June 2021, BASF and Vattenfall signed a contract for the purchase of 49.5% of Vattenfall's wind farm Hollandse Kust Zuid by BASF. The purchase price amounts to €300 million. Including BASF's contribution to fund the wind farm construction, BASF's total commitment amounts to around €1.6 billion. Please consider that following the intended resale of around 50% of our share in this project to a financial co-investor, we expect to consolidate our participation at equity. As a result, the related CapEx will then not be reported as such in the financial statements of BASF Group. The wind farm is expected to become fully operational in 2023 with first electricity produced already in 2022. It will be the largest offshore wind farm in the world, with 140 wind turbines and a total installed capacity of 1.5 gigawatts. It will also be the first offshore wind farm without public subsidies for the power produced. BASF is acquiring the electricity from the wind farm for its ownership share through a long-term power purchase agreement. This will enable us to substitute gray power with green power and thus implement innovative, low-emission technologies at several of our production sites in Europe, mainly in Antwerp. Closing of the transaction is expected in the fourth quarter of 2021, subject to the approval of the relevant authorities.

[Martin Brudermuller:]

Yes. Before I turn to the outlook, I would like to share an example that illustrates how BASF innovations contribute to a circular economy and the success of our customers. Plastics are versatile materials. If they remain in use as long as possible and ideally do not even end up as waste at all, they can also make an important contribution to sustainability. To support our customers in driving sustainability connected with plastics, BASF's plastic additives teams focused its sustainable solutions under the new global brand, VALERAS. We help our customers to reduce CO2 emissions with our focus on lower product carbon footprint and bio and renewable feedstocks. VALERAS builds on the extensive experience in stabilization, protection, technical and regulatory support of BASF to strengthen into technology approaches to the circular economy, extend the loop and close the loop. VALERAS includes additive solutions that reduce VOC emissions in foams, enhance biodiversity in plastic greenhouses and reduce energy consumption during PP nonwoven fiber production. To help achieve global recycling targets, which are ranging from 25% to 100% in the packaging industry, the portfolio will expand to include BASF's additive packages for mechanically recycled plastics and applications. Ladies and gentlemen, we will conclude with BASF Group's outlook. As already announced on July 9, we increased our outlook for 2021 based on the strong business development in the first 6 months of the year. We now expect sales in the range of €74 billion to €77 billion. EBIT before special items is anticipated to reach between €7.0 billion and €7.5 billion. The return on capital employed is expected to be between 12.1% and 12.9%. The considerably increased earnings expectations in the Chemicals and Materials segments are the main reason for the increase of our forecast. We continue to expect a certain normalization in margins and thus earnings of the upstream businesses in the second half of the year but to a lesser extent than previously assumed. Regarding our accelerator sales, we now expect €21 billion to €22 billion in 2021. No changes have been made to the forecast of our expected CO2 emissions. Our adjusted outlook is based on the following assumptions regarding the global economic environment in 2021

[A - Stefanie Wettberg:]

Ladies and gentlemen, I would like to open the call for your questions. . The first question is from Markus Mayer, Baader-Helvea.

[Markus Mayer:]

I have two questions, if I may. The first one on the magnitude of the start-up costs in Nutrition & Care on this vitamin A plant. And then the second one is on the product mix effect you experienced in your ag division. Maybe if you can also give some light on this effect as well.

[Hans Engel:]

Yes. Markus, this is Hans. On the start-up costs that we have in Q2 in Nutrition & Care for vitamin, I'll give you a round figure there. That's between €20 million and €30 million. Keep in mind, though, that this is the start-up effect that I'm talking about. We also had a number of turnarounds, which we typically don't specify the respective costs, but that's also something that plays a role when you look at the results of Nutrition & Care.

[Martin Brudermuller:]

Product -- sorry, the product mix in ag, what we have there, we had Q2 of last year, which had to do with weather development. We had actually still higher sales, in particular in seeds and traits than we had in Q2 of this year. Seeds and traits business, higher-margin business, than the crop protection business. And that plays a major role in the product mix and the resulting outcome. Let me say in addition to that, if you look at the earnings, this is on the EBIT before special items level of Agricultural Solutions, and if you look at the currency effect that we have in there of somewhere between €40 million and €50 million, that's actually the key explanation of the decline in results that you see. If they add that back, you have a quarter at the same level than where we were last year.

[Stefanie Wettberg:]

The next is Christian Faitz from Kepler Cheuvreux.

[Christian Faitz:]

Yes. Two questions from my side, please. Is it because of the late cyclicality of your customer and its recent Performance Chemicals that price momentum is so comparatively weak? And then the second question would be on Nutrition. Can you please elucidate a bit the price pressure, particularly in Nutrition & Health, which is consistent since Q2 last year? Is that mainly coming from the vitamin side? And also obviously, congrats on the results, minus ag.

[Hans Engel:]

Thank you, Christian, and I'll start with your first question on Nutrition & Health. Yes, there is some price pressure. There is also something else, and that is raw material cost pressure that we need to keep in mind here. You know how this works. Our upstream segments, they pass on any type of price increases on the raw material side relatively quickly, I tend to say within 30 days. The further you would go downstream in the portfolio, the longer it actually takes, and that's something that we typically see. You know how it is when prices go up, you see the kind of margin pressure that we have. And when prices come down, raw material prices, you'd see typically the margin expansion, and that is exactly what we have here. Maybe one more word to put things in perspective for Nutrition & Health. Please also keep the comp in mind, which is extremely strong. You may recall that last Q2 we talked about the resilience of the business, the very high demand that we had seen, in particular in the months April and May 2020, the prebuying that took place there. I think all that needs to be factored in to put overall Nutrition & Health in the right light with what we consider and admit is a weak quarter. The first question, could you help me again with that, please?

[Christian Faitz:]

Yes, it was Performance Chemicals, the price momentum is relatively weak compared to any other traditional chemical segment. Is that because of the late cyclicality of your customer industries, i.e., oil and gas, et cetera, et cetera?

[Hans Engel:]

Thanks again for repeating the question. When you look at the Industrial Solutions segment, I think we have overall price increase there of 13% in Q2. That does not fully compensate for the kind of raw material price increase that we have. But again, the general explanation that I gave earlier is true here. You're moving a step downstream from our 2 upstream segments, i.e., Chemicals and Materials, it just takes a little longer to pass on the prices. But I'd say there, overall, and if I understood you correctly, you included the Industrial Solutions segment in your congratulations. Nice strong performance that we have seen there.

[Stefanie Wettberg:]

The next question is from Andrew Stott, UBS.

[Andrew Stott:]

Two questions. The first one is one decarbonization to date. Just maybe questions for Martin here. What are your thoughts on the proposals from the Fit for 55 program? Where do you think chemicals end up being within the CBAM mechanism? And if so, what are the implications for BASF's decarbonization strategy, if any? That's the first question. Second question, a bit more straightforward on CapEx. I wonder if you could give us an update now on CapEx for '21, '22 and '23 on the basis of Vattenfall coming in. So I assume you've got to take about half of that €1.3 billion of CapEx, but I just don't know the phasing on that, so I appreciate any help.

[Martin Brudermuller:]

Yes, Andrew, yes, the Fit for 55 package is a package which you have to digest first. It's 340 -- 3,427 pages of regulation, quite amazing, I have to say, not so many surprises. We have also been able, I think, in the dialogue before, to change the one or the other thing to a minor heavy impact, but it is still a heavy package. It's 55% reduction, which I think was clear to everyone that this will come. It has also translated, in the meantime, into a more tight climate law in Germany, which is also accelerating this path and even more reduction in a shorter period of time. So actually, there's no big surprises, and that is all factored in, in our plan, which we have showed you in Capital Markets Day in March. The CBAM is actually something -- I'm personally very critical about CBAM. I think it's just not going to work. Not only the WTO compliance. It is a very bureaucratic piece. Because if you apply that to chemistry and you just think about how value chains are branching out, you have to know for each and every product that's imported and exported what actually is the fair CO2 carry is. So I think it's almost impossible. That's why we, in the Cefic, which is the European association for the chemical industry in Europe, we have actually decided not to hunt for participation in the CBAM but rather let that first be tested in other big commodities. So it's now the 5 commodities, and there's only 1 from chemical industry in, which is ammonia, which is a relatively easy to understand commodity. And then with that also the fertilizers. So it will affect us not dramatically much. But certainly, we are also a large ammonia producer. And you know also that with CBAM now, the free allocation of CO2 certificates are actually cut off in 2023, and that is a major burden in cost, but that really hits the whole industry. And I think it's a good example to now learn how that actually impacts export/import and also certain value chains. So it is a starting point of a long, long journey and there's a lot of question marks, and I can only repeat myself here. If you really want to manage that and convert that into an advantage, where I think we can do, we need a lot of dialogue that overall regulation is positive. Because so far, Fit for 55 is actually a wish list, what they want to do, but it is not a list of regulation to help us to actually really realize those targets. So maybe we have some more time in future, then I will talk more in detail about that. I think about CapEx, I would say we are so far very well on track. And I think also the €3.6 billion for this year, we will most probably around -- spend also around that amount. Going forward, with CapEx 2022, 2023, that is stepping up. That's always what we said. Because then the big investment in China and Golden Island will kick in. I cannot give you detailed numbers now. We will do that within the next 5 years' numbers, where we can provide also a little bit more, let's say, maybe an outlook how that will develop and how steep it will increase. But we will also then show you a bit more in the battery materials what we intend to do. And this is both the drivers. But in the same moment, we are very harsh and very disciplined in the allocation for all the other businesses. So I would say it doesn't bear any surprises, Andrew, but give us some more time to provide, I think, more detailed numbers.

[Stefanie Wettberg:]

The next question will be from Matthew Yates. We have then Jaideep Pandya followed by Laurent Favre. And now it's Matthew Yates, Bank of America.

[Matthew Yates:]

A couple of questions. First one, sorry for going back to ag. You're making substantially less profits in the quarter than you did a few years ago before you even acquired the Bayer asset. So when we think about the moving parts you've talked about, is it really foreign exchange that's the big problem? And when you talk about higher fixed costs, is that specifically relating to freight? Or is that something more of an investment in the business that maybe we see some return on going forward? So that's the first question. The second one is around Wintershall, and I wanted to ask you what the strategic options are for that asset and how we can avoid this becoming somewhat of a stranded asset if the market continues to be resistant to valuations in the oil and gas sector. Other than an IPO, are you also exploring options for a trade sale? Or could you even contemplate some sort of spin-off to shareholders if given the improvement in the rest of the business? You're making good progress on deleveraging anyway, so could you simply just spin the asset off?

[Hans Engel:]

Yes, Matthew, This is Hans. Let me take your 2 questions. I'll start with ag. We talked about the significant FX effect that we have that burdens the earnings of ag. I mentioned already, without that, we would have been at the same level as in Q2. There is one very simple explanation for that, which is the U.S. dollar, which was sort of locked in at $1.10 in Q1 and Q2 of last year. And we have it slightly above $1.20 in Q2 of this year. There's also something to be kept in mind when you compare them later on once our competitors report and report their figures in U.S. dollars at this point in time, simply the disadvantage of showing the numbers in euro terms. Yes, we have increased fixed cost, as Martin has explained already. Pulling through higher volumes means also that your fixed manufacturing cost increase. We have, in line with the higher volumes, also higher selling costs. And as part of that, also higher freight cost. And then we have something that is also true, and I mentioned this already, isn't in the fixed cost, it's in the variable cost, but significant increases in raw material prices, in part in situations where prices for the products are fixed at the beginning of the season. And these raw material prices then hit you during the course of the season. I hope that helps to put this in perspective. Wintershall Dea, a stranded asset, I would say definitely not. We made a conscious decision here, seeing where the broker prices were. When it comes to valuation and when it comes to valuation for an IPO, what is, at this point in time, in particular of relevance are the years '22, '23, '24. We saw the strong move on the front end of the curve, but '23 and '24 were clearly lagging behind. It's slightly improving as we had expected. It also looks like the multiples are improving. So from that point of view, I think we made economically here the right decision. You were asking what other alternatives, I can tell you that, between the shareholders, we have agreed on a path or an exit, which is the IPO. And we'll continue on that path. And let me also reiterate what I said during my brief speech earlier, the strategic decision for BASF is absolutely clear. We will implement as we have implemented on the divestitures of the water and paper treatment chemicals business, the constructions chemicals business, the pigments business, we will also implement in this case.

[Stefanie Wettberg:]

Next question is from Jaideep Pandya, On Field Research.

[Jaideep Pandya:]

I want to go back to the CMD you guys did in 2018, where you gave the 3% to 5% EBITDA sort of CAGR target. And obviously, at that time, flagged that this is not going to be easy. As of today, you're probably going to do almost all the CAGR in 2021 if EBITDA is close to roughly €12 billion based on a €9 billion base of '18 roughly. So just want to understand, as we think about life ahead for BASF, I mean, how sustainable is this earnings level today? Do you think that, basically, if you add all the sort of overearning you're doing in certain upstream areas versus some of the investments as underearning that is in the downstream areas, there's still room to grow from the current profitability level of roughly sort of €12 billion? Or is it really an exceptional year this year and therefore we should actually be thinking about some moderation in the outer years, and therefore, go back to this more like a 3% growth rate level rather than the 5% growth rate level in terms of the range? That's my first question. And the second question really is around your battery business. So obviously, you've announced a big sort of joint venture with Shanshan. How do you actually unlock value in this business from a capital markets point of view? I mean, in the longer term, do you plan to sort of separate this business with a focused strategy or you intend to just keep it in BASF? And therefore, this -- is this going to be an important part of your strategy but it is always going to be for the capital markets to ascertain a value to it?

[Hans Engel:]

Yes, Jaideep, this is Hans. I'm trying to find the right answer for your first question. And let me say this, with the new corp strategy that we launched in the end of 2018, we announced a number of measures. These measures included the divestitures that I talked about briefly. So in other words, changes in the portfolio, upgrading the portfolio overall. It included certain cost measures on which we have put into what we call the excellence program on which we will deliver, as you will see by the end of this year, I have no doubt. We have put a strong focus on the customer, where some of you have asked me over time, "Well, Hans, should an organization like BASF, you always focused on customers?" And I've always said the same, "Yes, absolutely. But at times, it may make sense to put even more focus on it, and with that, also fuel more growth in BASF." As Martin has explained, as it looks, both in Q1 and in Q2, our growth, and this is measured in volume, is stronger than volume growth overall of the chemical industry. We've implemented a number of other measures in the meantime. That should all help us to increase profitability of the BASF Group. Let's see whether this one year will be the catch-up year and form then the new baseline for the 3% to 5%. But as Martin and I sit here, we are firmly convinced that the BASF Group is able to deliver that. And we will do everything to actually also fulfill the promises that we made there.

[Martin Brudermuller:]

Nothing to add from my side, Hans. Jaideep, then I ask -- I will try to answer your question about the battery materials business and our acquisition in China. I mean you know that we have a footprint which includes North America, Japan and now with the investment, also Europe. But we have no capacity in China, and this is the largest market in the moment. And also, nevertheless, this chain is in a whole move, I would say, overall, the different steps of the value chain. There's new alliances. There's a lot of investments coming up, Gigafactories, material factories, also investments in the mining. It is very important to have a position also in China because the Chinese suppliers are delivering a major part of the material for the value chains globally in the current moment. Us -- it allows us to also link in very quickly via Shanshan's position into some of these opportunities. On the other hand, you see that when we bought ourselves into this enterprise, that also Shanshan was interested because the world is not only China anymore. They also want to get, let's say, access more to the Europeans. And I think, with this, we have a good opportunity to really exploit all the different constellations and setups you have in this value chain worldwide. And don't forget that we also, for this, got a very quick access in additional capacities because now we will be a very big animal is the only one, by the way, to have the global footprint. But we have 160,000 tons of capacity come at the end of '22. And that gives us really the opportunity to very quickly grow and to build up these new alliances and customer bases and be very flexible in the demand of the customers. And as I said, I mean, this is very, very dynamic. And with this, I think we can accelerate the growth. We can build our position, and we can increase or enlarge our customer base. And I think, with this, we should be able to also really unlock value quickly in this business. I hope that answers your question.

[Stefanie Wettberg:]

We will continue with Laurent Favre, Exane BNP Paribas. Following him, we will have Tony Jones, then Charlie Webb and then Andreas Heine. So now Laurent Favre, please go ahead.

[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.

[Laurent Favre:]

And as per the level of H2?

[Martin Brudermuller:]

Come again?

[Laurent Favre:]

That's therefore my question. The risk beyond that H2 normalization you are factoring in, in your new guidance. You would still say that they are abnormal in your new guidance, in your new scenario for H2 for this year?

[Martin Brudermuller:]

Yes. I mean this is what I said. I mean we would -- we have baked in a high level of margins but not that high as in the first half.

[Hans Engel:]

This is Hans, Laurent. Thanks for your question. On ag, yes, we had expected to be slightly ahead of half 1 last year. We're, in fact, down by order of magnitude, €45 million to €50 million. Things have actually, from raw material costs to currency, have not gone in our favor. It remains to be seen how the second half will develop. You know that this is seasonally weaker in the first half of the year. It is predominantly the business in South America. We need to see how this will go. It looks definitely more challenging now than it looked when we gave the guidance in February. I hope this helps.

[Stefanie Wettberg:]

Looking at the time, I think we have to speed up a little bit. . So now we have Tony Jones, Redburn.

[Tony Jones:]

I've got one question. Actually, I have two, but I'll go with one. For cash flow and capital allocation, with EBIT this year, the new guidance is going to be well over €7 billion. Are you thinking about returning any excess cash to shareholders in a sort of like peak earnings year? Or are you favoring growth investments and strategic M&A?

[Hans Engel:]

Maybe I'll take that, Tony. This is Hans. Great question. So first of all, let's bring the year home, number one. Number two, you know what our priorities are for cash and they have not changed a bit.

[Stefanie Wettberg:]

Short answers. And now we have Charlie Webb, Morgan Stanley.

[Charles Webb:]

Just the one for me then. As we look at the auto sector, maybe you can just provide us a bit more detail in terms of what you're seeing into the second half and in particular, how that relates to surface tech. Clearly, it seems regs are still very positive on the autocat side as well as precious metals obviously helping out in Q2. Just how do you see Surface Technology kind of through the second half of the year would be helpful.

[Martin Brudermuller:]

Yes, Charlie, maybe I'll take that one. I mean automotive, I think I said that already in February that the semiconductor issue is not an issue and a blip for 1 or 2 quarters, but it is a more long-term problem. And I think that has shown that I was right on that. We clearly reduced our number for assumption for cars produced. So we are currently thinking about 83 million units to be produced in this year. So that is definitely lower. We have however been surprised that the Q1 was stronger than anticipated. It's about 800,000 units. But that means, for the other 3 quarters, and this is actually a minus of 1.3 million units. So second half will be a little bit weaker, respective the opportunities. And that has nothing to do with demand because the demand is strong. You see also in the U.S., the inventory of cars is really, really low. You see also that the delivery times of the OEMs increased. So it is really a semiconductor shortage that really provides this framework not to produce more cars. I mean this overall move into e-mobility is very exciting because now more and more of the players are accelerating their plans to change from combustion to e-mobility, I think a very clear commitment. It's a proof point that we have been right with our assumptions for the battery materials. And I talked about that already. That's really very, very dynamic. But let me really say, here also, we have a lot of other projects that are connected with e-mobility because a lot of things are differently constructed in a car that has an electric powertrain. And overall, I think we mentioned that there's much more chemistry in terms of value in a car that is electrically driven than a combustion. So overall, that is really good news for a supplier like BASF. And let me give you one example. If you think about the different fluids you need in a car, you think if you don't have a combustion engine, you don't have to cool it anymore, then you need actually less. It's exactly the opposite. You need about 3 to 4x as much fluid to also cool the battery. So there's a lot of opportunity and a lot of the projects we have with even higher attention and faster execution than we thought. So overall, a quite challenging but also very interesting and dynamic development.

[Charles Webb:]

And just on Surface Technology in terms of the autocat business, obviously strong first half. Just wondering how that looks into the second half. How far are we along in that kind of regulation upgrades in Asia, in China?

[Martin Brudermuller:]

Yes. I mean, overall, I mean, still for the years to come, the combustion engines are the biggest -- the big numbers here. There is also Euro 7 and Euro -- China VII coming up for further intensifying regulation. That still drives innovation. We need new cat systems. We'd have to adapt. So I would say over the next years, that is still a good business.

[Stefanie Wettberg:]

Now we have Andreas Heine, Stifel. And then we have 3 more analysts in the line. That will be Peter Clark, Chetan Udeshi and Sebastian Bray. So now Andreas Heine, Stifel.

[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.

[Hans Engel:]

Yes, Andreas. This is Hans. I think your summary was great. FX needs to be taken into consideration for the business in the Southern hemisphere. Increased raw material prices have to be taken into the equation. And I think that will also be reflected in the pricing policy.

[Stefanie Wettberg:]

Now Peter Clark, Societe Generale.

[Peter Clark:]

I think you've sort of alluded to this, but it's the flip side of the super profitability upstream and looking at the lag effect, you're talking about downstream passing some of this stuff on. I know they're different imports, whatever. But if coatings, for an example, I mean, some of your peers are talking about peak impact of the inflation probably in terms of Q3 then stabilization from the winter and then perhaps gentle moderation on this as supply disruptions easing. I'm just thinking if your thoughts are similar to that and how it might impact some other businesses being squeezed at the moment as well.

[Hans Engel:]

Peter, this is Hans. Thanks for your question. I'd say, in general, we have a similar view. Martin just described what our expectations are for Q3, second half of the year, for prices in upstream. Coatings business typically a business where it also takes definitely longer than upstream to pass on the price increases. Demand overall is -- despite the semiconductor issues that we have, demand overall is good and strong, which is also reflected in the results of Q2 and the first half of the year, but there is definitely some work to be done on the price front.

[Martin Brudermuller:]

But just let's not get depressive now if we are at the peak, and we enjoy as long as we can do. And as I said, I mean, if you talk about normalization, this is not collapsing margins. And as long as the demand stays healthy, and that's what we can see also from the order entry and everything, I think there's no reason to -- for concern too much.

[Stefanie Wettberg:]

Okay. Now Chetan Udeshi, JPMorgan.

[Chetan Udeshi:]

Two quick questions. What just -- it seems you are alluding to maybe slight reduction in margins in the upstream businesses. So should we take that as a sort of guide for, let's say, what Q3 could be in terms of earnings, maybe a slight reduction from Q2 levels of, say, just around €2.4 billion? Or do you think there are some other factors we need to take into consideration when thinking about Q3 versus Q2? And secondly, can you remind us what are -- what is the existing sales and profitability of your cathode active materials business right now?

[Martin Brudermuller:]

Chetan, for the first one, I mean I think we alluded to it already. I mean it is a certain normalization. If you look on some of the margins, they are just not healthy in the moment. They are so high that you cannot expect that customers overall stay with that. And with a better supply, it is just immediately reacting to somehow go down. But as I said, it is still a margin in most of the lines, which is far above a normal average. It's still a very attractive margin. So -- and there is one element coming in, seasonality, in some areas and that's always factored in. And BASF pattern has that as well that in summer months, sometimes they draw a little bit less because some of the companies also shut down or reduce or whatever and goes down with the shift or something like that. And I think that is -- and then it's then also now, let's say, going in the same direction that is simply normalizing. But please consider that this is still very, very attractive margins in commodity areas. Please, Hans, you go to second.

[Hans Engel:]

On the battery materials business, Chetan, as you know, we don't provide the financials for our strategic business units. But what I can tell you is that this is a nicely growing business and it certainly grows in line with the overall growth that you see in electromobility.

[Stefanie Wettberg:]

Now the final, ideally, one question from Sebastian Bray, Berenberg.

[Sebastian Bray:]

This is on the battery materials business. What exactly was the purchase price for BASF paid for the 51% stake in the Shanshan materials business? Was it about $650 million? Why was this not disclosed? And just as a follow-up to this, what is the total organic CapEx investment that BASF will make in battery materials to reach the 160-kiloton by the end of 2022? The company has previously disclosed €400 million in Europe. How much on top of that will come to reach the 160 in total?

[Martin Brudermuller:]

Sebastian, maybe on the second one, with the battery materials on the investments. I mean we have currently our EDMI, that is the European investments, which is in execution, which will then be finalized next year, and all the other parts that are actually coming in now are coming in via China. So there is no other capacity expansion in the moment in the numbers from our side. And Hans, the secret about price.

[Hans Engel:]

Yes. I mean with respect to the price, we've given you what we can give you, following the agreements that we entered into. So I can tell you more than that, it is a mid-triple-digit-million figure. Sorry for that.

[Sebastian Bray:]

Was it a condition of the agreement that the price not be disclosed?

[Hans Engel:]

Pardon me?

[Sebastian Bray:]

Was it a condition of the agreement that you signed with the shareholders of Shanshan that the price not be disclosed?

[Hans Engel:]

These are the usual confidentiality rules that are in place and as a result of that, we haven't disclosed more than what we just said.

[Stefanie Wettberg:]

Ladies and gentlemen, this brings us to the end of our conference call. Let me take this opportunity to draw your attention to another virtual event we will offer on Monday, September 27, the BASF investor update scheduled to begin at 11