BASF (BASFY) Q1 2016 Results - Earnings Call Transcript

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BASF SE (OTCQX:BASFY) Q1 2016 Results Earnings Conference Call April 26, 2016 2:30 AM ET

Executives

Stefanie Wettberg - IR

Hans-Ulrich Engel - Chief Financial Officer

Marc Ehrhardt - President, Finance Division

Analysts

Paul Walsh - Morgan Stanley

James Knight - Exane

Christian Faitz - Kepler Cheuvreux

Jeremy Redenius - Bernstein

Lutz Grueten - Commerzbank

Peter Clark - Societe Generale

Andrew Benson - Citi

Tony Jones - Redburn

Andreas Heine - MainFirst

Patrick Lambert - Raymond James

Markus Mayer - Baader

Laurent Favre - Bank of America Merrill Lynch

Laurence Alexander - Jefferies

John Klein - Berenberg

Operator

Welcome and thank you for joining the BASF Analyst Conference Call Q1 2016. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

This presentation may contain forward-looking statements that are subject to risks and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. Forward-looking statements may include, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation and supply and demand.

BASF has based these forward-looking statements on its views and assumptions with respect to future events and financial performance. Actual financial performance could differ materially from that projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, reader should not put any undue reliance on these forward-looking statements.

The information contained in this presentation is subject to change without notice, and BASF does not undertake any duty to update the forward-looking statements and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations.

I would now like to turn the conference over to Stefanie Wettberg. Please go ahead.

Stefanie Wettberg

Good morning, ladies and gentlemen. Welcome to the BASF conference call on the first quarter of 2016. My name is Stefanie Wettberg. With me on the call today are Hans-Ulrich Engel, BASF’s Chief Financial Officer; and Marc Ehrhardt, President of the Finance Division. Hans will start with explaining the financial highlights and important milestones, then Marc will present the segment results of the first quarter, Hans will conclude with the outlook 2016. Afterwards, both gentlemen will be happy to take your questions.

Today’s conference call is limited to one hour, since our annual shareholders meeting starts right after this call. We already posted a longer version of the speech on our website at basf.com/share.

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

Hans-Ulrich Engel

Thank you very much, Stefanie. Good morning, ladies and gentlemen also from my side and welcome to our Q1 conference call.

Since the publication of our full year 2015 results end of February, the macroeconomic environment has not materially changed. It is characterized by low growth, high volatility and deflationary pressure from the low prices of oil and gas as well as other commodities. We continue to work on those areas we can directly influence. We have achieved further productivity improvements and remain focused on cost and cash management. We are implementing our three-year operational excellence program called DrivE. Compared with baseline 2015, it targets an annual earnings contribution of €1 billion as of the end of 2018.

The ongoing restructuring measures in the performance products segment are progressing well and are effective. We are confident to achieve the targeted run rate of €400 million in annual earnings contribution compared with baseline 2012 by the end of this year.

Let me now discuss BASF’s business performance in Q1 2016. The base for comparison is an operationally strong first quarter of 2015 in the chemicals business and in our agricultural solutions segment, which was primarily offset by high provisions for our long-term incentive LTI program in other. In Q1 2016, the demand trends we saw at the end of 2015 continued. In the first two months of the year, customers maintained a very cautious ordering approach. In March however, business picked up in many of our divisions.

Turning to the results compared to Q1 2015 in more detail, sales in the first quarter of 2016 decreased by 29% to €14.2 billion, driven by portfolio effects of minus 22%. This was mainly related to the asset swap with Gazprom, which we completed at the end of September 2015. The disposed gas trading and storage activities had accounted for €4.2 billion of sales in the prior-year quarter. In Q1 2016, prices declined by 6%, and we saw negative currency effects of minus 1%. Volumes were stable on Group level, with a slight increase in our chemicals business. The latter was mainly driven by strong demand in functional materials and solutions.

EBITDA declined by 3% to €2.8 billion overall. However, we saw an increase in the performance products and agricultural solutions segments. EBIT before special items came in 8% lower at €1.9 billion. Again, performance products and agricultural solutions developed positively, as did functional materials and solutions.

The earnings development on segment level in Q1 2016 is in line with our full year outlook. In the chemicals and oil and gas segments, earnings declined significantly, while in performance products, functional materials and solutions and agricultural solutions, EBIT before special items slightly increased. Earnings in other improved considerably. At around €1.9 billion EBIT was 6% lower. We incurred special items of minus €40 million mainly from restructuring measures.

Income taxes dropped by half and amounted to €258 million, the tax rate fell to 15.4% from 29.7% in the first quarter of 2015. This was triggered by lower earnings from highly taxed activities, in particular the oil and gas business in Norway. At €1.4 billion, net income rose by 18% compared with the prior-year quarter. Earnings per share increased to €1.51 in Q1 2016 versus €1.28 in the same period last year. Adjusted earnings per share were €1.64 compared with €1.43 in the prior-year quarter. Cash provided by operating activities was €1 billion in Q1 2016, a decrease of around €1.3 billion compared to the first quarter of 2015. Payments related to plant, property, equipment and intangible assets were reduced by almost €300 million to €1 billion as several major investment projects concluded.

Ladies and gentlemen, let me highlight a few milestones of Q1 2016. We have continued to strengthen our asset base. In Korla, China, the butanediol plant and the integrated PolyTHF complex was started up. It is operated by our joint venture partner Xinjiang Markor. We also announced plans to form new joint ventures and joint operations. Together with Avantium, we want to establish a joint venture for the production and marketing of FDCA. FDCA is produced from renewable resources and it is the essential chemical building block for the production of PEF, compared to conventional plastics like PET, PEF provides improved barrier properties for gases like carbon dioxide and oxygen. We intend to construct an FDCA production plant with capacity up to 50,000 metric tons per year at BASF’s Verbund site in Antwerp, Belgium. With Kolon Plastics, we agreed to establish a 50/50 joint operation in South Korea to manufacture POM, an engineering plastic used in industrial, transportation, construction and consumer markets. Operations are scheduled to start at Kolon’s site in Gimcheon, South Korea, in the second half of 2018, providing annual production capacity of 70,000 metric tons. Following the startup of this plant, we will discontinue the production of POM in Ludwigshafen. We continue to optimize our portfolio. As announced on April 22, we signed an agreement to sell our global polyolefin catalysts business to W.R. Grace & Co. We expect to close the transaction in the third quarter of 2016. In February, we agreed to sell our industrial coatings business to AkzoNobel for €475 million, the closing of this transaction is expected by the end of 2016.

On April 20, we announced our plan to acquire the assets of Guangdong Yinfan Chemistry in China. This transaction will allow BASF to establish a stronger automotive refinish coatings production footprint in China. It also broadens our portfolio by adding the Yinfan product line to our global brands. Our investments in research and development effectively support our future growth. We updated you in late February that the projected peak sales potential of product launches in agricultural solutions between 2015 and 2025 is €3 billion, compared to €2.3 billion between 2010 and 2020. This illustrates the strength of our crop protection pipeline. Together with the International Automotive Components Group, BASF has developed the first roof frame for cars that is entirely made of natural fiber. Our Acrodur 950 L binder ensures the necessary loading capacity and heat resistance of this lightweight component. This is just one example of the innovative solutions BASF is offering as the largest chemicals supplier to the automotive industry. In 2015, our sales to this industry were more than €10 billion, between 2007 and 2015, the annual compounded growth rate of BASF’s sales to the automotive industry, excluding precious metals and refinish coatings, was 6.7%. For comparison, in the same period, the number of vehicles produced increased by an average of 2.8% per year.

And now Marc Ehrhardt, the head of our finance division at BASF, will comment on the segments.

Marc Ehrhardt

Thank you, Hans, and good morning from my side, ladies and gentlemen. Sales in chemicals came in considerably lower in the first quarter of 2016. All divisions were impacted by the effects of lower raw material costs on prices. While we saw high margins in the previous year quarter, we experienced pressure in several businesses in Q1 2016 caused by oversupplied markets. Fixed costs increased, particularly due to the startup of plants. Overall, EBIT before special items decreased considerably. Sales in performance products declined significantly. A slight volume increase was more than offset by lower prices, portfolio effects from divestiture of several businesses, and currency headwinds. We were able to increase EBIT before special items by 6%, supported by successful restructuring measures and strict cost management, as well as higher volumes. Sales in functional materials and solutions decreased slightly. Good demand for the automotive and construction industries led to an increase in volumes. Prices decreased mainly to the lower precious metal prices. In addition, we experienced currency headwinds, EBIT before special items increased by 6%, supported by improved margins and higher volumes in performance materials and construction chemicals.

Sales in agricultural solutions came in significantly below Q1 2015. Volumes decreased, as channel inventories were high. Currency effects were negative. Higher prices could not offset these impacts. Despite the challenging market environment, we were able to slightly increase EBIT before special items. Our strict fixed cost management and improved margins contributed to this. Sales to customers in Europe almost reached the level of the prior-year quarter. Prices and volumes were higher, particularly for herbicides in Eastern Europe and for specialty crop fungicides in Southern Europe. This nearly compensated for lower fungicide volumes in Western Europe and negative currency effects.

Sales in North America declined considerably, especially in herbicides and fungicides. This was the result of high channel inventories and the cautious ordering behavior of our customers. Sales in Asia were considerably lower compared to prior-year quarter. Volumes decreased, mainly due to higher customer inventories, particularly in Japan and China. Sales in South America decreased significantly as a result of the lower volumes and negative currency effects. We experienced lower demand in Brazil, especially for insecticides and fungicides. High inventories and the challenging market environment for our customers in Brazil negatively impacted our business.

We will continue to strengthen our portfolio with innovative solutions in all indications. Recently, we submitted the regulatory dossier for a new active ingredient, Revysol, to the European Union. This fungicide is expected to become a new blockbuster. We are also working on the launch of a new insecticide, Inscalis. First registration dossiers have been submitted to the authorities in the US and Canada for use on a wide range of crops. We plan to introduce another insecticide active ingredient, Broflanilide, by the end of the decade.

Sales in oil and gas decreased significantly, mainly due to the missing contributions from the natural gas trading and storage business following the asset swap with Gazprom at the end of September 2015. In addition, lower oil and gas prices contributed to the drop and could not be offset by higher production volumes, especially from Norway. In the continuing oil and gas business, volumes grew by 12% compared to the first quarter of 2015, whereas price and currency effects were minus 27%. The average oil price of Brent crude in Q1 2016 was US$34 per barrel, compared to US$54 in the same period last year. Gas prices on the European spot markets also fell sharply compared to the prior-year quarter. Consequently, EBIT before special items declined from €437 million to €66 million.

Please keep in mind that throughout 2016 we will have lower earnings from our share in the Yuzhno Russkoye natural gas field. This year, the excess amounts received over the last 10 years will be offset by lower volumes, as contractually agreed with Gazprom. Net income in oil and gas decreased from €359 million to €47 million. Sales in other decreased to €477 million, mainly due to lower contributions from raw material trading. EBIT before special items improved to minus €219 million. This was mainly attributable to two factors. In Q1 2016, we released provisions from the long-term incentive program, while we incurred significant provisions in the same period of last year. Unlike the prior-year period, the currency result was slightly positive in Q1 2016. Special items in other amounted to minus €26 million, compared to minus €82 million in Q1 2015. The prior-year quarter included an employee bonus of around €100 million paid out in recognition of BASF’s 150th anniversary.

Let me now address the cash flow development. In Q1 2016, cash provided by operating activities was €1 billion, a decrease of around €1.3 billion. This was attributable to changes in the net working capital, which rose due to a seasonal increase in trade accounts receivable. The prior-year quarter significantly benefited from a reduction of inventories, especially in the gas storage business, which we have since divested. In addition, the operating cash flow in the first quarter of 2015 was supported by an increase in operating liabilities and provisions.

At €1.3 billion, cash used in investing activities was €244 million lower than the prior-year quarter. Payments related to tangible and intangible assets decreased by €277 million and amounted to €1 billion. This is only slightly above the level of depreciation. Free cash flow came in significantly lower than in the same period of 2015 and was €45 million. Financing activities led to a cash inflow of €2 billion, compared to an outflow of €400 million in Q1 2015. We used the currently favorable financing conditions to further optimize the financing costs of the BASF Group.

Finally, let’s look at our balance sheet. Compared to the end of 2015, total assets grew by €2.9 billion to €73.7 billion, mainly due to a higher cash position ahead of the dividend payout in May and a seasonally driven increase in trade accounts receivable. Long-term assets were slightly lower due to currency effects. They amounted to €45.6 billion. On the liability side, provisions for pension obligations increased by €2 billion, reflecting the lower interest rate environment. Short-term liabilities increased from €14.2 billion to €17.1 billion mainly caused by a higher utilization of our commercial paper program and the reclassification of bonds from long to short term. Financial debt rose by €1.6 billion to €16.8 billion. Net debt decreased by roughly €200 million to €12.8 billion. Our equity ratio remained at a healthy level and amounted to 42%.

And with that, back to you Hans for the outlook.

Hans-Ulrich Engel

Yes. Thank you, Marc. On the outlook, we can confirm our sales and earnings outlook for 2016 as provided to you at the end of February. Sales in 2016 will be considerably lower than prior year, due to the divestiture of the natural gas trading and storage activities as well as lower oil and gas prices. Excluding the effects of acquisitions and divestitures we continue to expect higher volumes in all segments, supported by our increased capacities.

We estimate EBIT before special items to be slightly below the previous year. Based on our oil and gas price scenario we will see a drastic reduction of our oil and gas earnings, which cannot be offset by higher earnings in our chemicals business and in the agricultural solutions segment. We also expect a slightly lower EBIT than in 2015. EBIT after cost of capital will be significantly below prior year, but we still expect to earn a premium on our cost of capital.

Our expectations for the global economic environment in 2016 remain unchanged. We continue to expect an average oil price of $40 per barrel Brent and an average exchange rate of $1.10 per euro. The global economy will presumably grow at a level approximating that of 2015. In the current volatile and challenging macroeconomic environment, we continue to regard our targets for 2016 as ambitious and particularly dependent on oil price developments. However, the Q1 results provide a good base to achieve these targets.

With that, I thank you for your attention, and we are now happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Stefanie Wettberg

I would like to open the call for your questions and ask you to please limit your questions to only one at a time, so that everybody has a chance to ask a question. The first question comes from Paul Walsh, Morgan Stanley. Please go ahead.

Paul Walsh

Good morning, guys. Thank you very much for taking my question. It’s a simple one, really. I think sales have obviously come down meaningfully year-on-year in the first quarter, but profits up. So if I look at the three downstream divisions, performance products, functional and agriculture, all reporting mid-single digit sales declines year on year, but conversely, all reporting single digit EBIT improvements year on year as well.

So my question is pretty simple. Within that framework, can you talk about where the margin beats have come from, i.e., how much do you think is down to lower raw material prices and can you keep it? How much is down to the fixed cost saving programs and how much is down to mix and disposals within that as well? So the question really is around the sustainability of the strong margins you’ve reported in the first quarter. Thanks very much.

Hans-Ulrich Engel

Yes. Hello, Paul. This is Hans. So, as you rightfully say, nice development with respect to the profits in the three segments, performance products, functional materials and solutions, and also in Ag. As you know, the market environment has been relatively difficult. When you think about -- in Q1, when you think about these three segments, they actually are dependent on raw materials to a lesser extent than our upstream chemicals segment. Raw materials and the decline in raw material pricing in Q1 may have helped in this situation a little bit, but I think we also see, and in particular see the self help measures that we started to implement in particular in performance products starting late 2012, early 2013. That’s one of the explanations for the good performance that we see in performance products.

When you think about functional materials and solutions, we actually had a situation with nice demand in the automotive industry also in Q1. And we see this reflected in particular in our OEM coatings business, but also in our emission catalyst business. We also had nice development overall in the construction industry, even in Asia and in particular in China, where we saw a more difficult environment in particular in the second half of 2015. And we saw an improved situation. That certainly helped in functional materials and solutions and we have an overall good margin situation in performance materials, also a division that caters to the construction industry and the automotive industry.

Ag is a slightly different story. There it is in particular innovative products that we launched recently. And in addition to that, it is self help measures, cost containment measures that we put in place starting early in 2015 and that show some results. To what extent this will be sustainable I’d say remains to be seen. As we said, what we have under our control, I think we managed the way you would expect us to manage it, and I think that’s also a good basis going forward.

Paul Walsh

That’s very clear. Thanks a lot, Hans.

Hans-Ulrich Engel

Sure.

Stefanie Wettberg

The next question is from James Knight, Exane. Please go ahead.

James Knight

Morning. Thanks for taking my question. So, looking at the volume side of that, understanding your comments, right, March seems to have been a big pickup from January and February. Predictable question, but has that momentum continued into April? And can you detect whether it’s a restocking related demand related to the oil price, or what do you think customer inventories are like at the moment? Thank you.

Hans-Ulrich Engel

Yes, James. Thanks for the question. As always, the restocking the destocking cycle, the inventories at our customers, very, very difficult to say where they actually are. They don’t share it with us to the full extent. I think we’ve explained a number of times that what we see is order behavior that is focused on orders with smaller lots, smaller quantities, more frequent. But then you see certain points in time where, in my words, the customer has to come back to the drinking hole, and we experienced that from week two on in March. Typically, the third month in a quarter over the last three to four years was the weakest month. Here again, we have a month, the last month in a quarter, where we see the strongest demand. There may be another explanation for the increase in demand that we’ve seen there from week two on in March, and that may have to do with the oil price development, and with that following raw material costs. When I checked this morning, the oil price was at $48. It’s not too long ago, i.e., the week of January 20, when we saw oil prices below $26. That may drive to a certain extent then also customer behavior.

Your question on what do we see in April, based on what we have so far, which are our daily sales figures, we obviously do not yet have the full analysis, i.e., volume figures and the like, but it looks like the good demand that we’ve seen in the second half of March continues also in April. And when I look at our order book; that also reflects that.

James Knight

Thank you.

Hans-Ulrich Engel

Sure.

Stefanie Wettberg

The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.

Christian Faitz

Yes. Good morning. Thanks for taking my two questions. First of all, are there any channel inventories outside of Brazil in agro? Can you please elucidate that a bit? I might have missed the Russian because I got thrown off the call. But North America and Europe, what’s the inventory situation like in agro? And then second of all, can you please explain the technicality of the Norwegian tax system that seems to be one of the key reasons why your group tax rate was at such a low level in Q1? Thank you.

Hans-Ulrich Engel

Yes. Christian, thanks for your two questions. Now, inventory situation, the relatively high channel inventories, not only in Brazil as mentioned by you, but also in North America. Europe seems to be a little better. But frankly, based on the recent weather development, which resembles more winter like developments, remains to be seen what’s going to happen in this season. I can tell you that the activity that we’ve seen over the last 10 days in Europe was certainly slower than what you usually would expect at this point in time in the season. So, again, also in North America, relatively high channel inventory.

Your second question, on the Norwegian tax situation, yes, in fact that is a key contributor, or that is the contributor to our very low tax rate of only 15.4% in Q1. What’s happening there, Norway taxes the hydrocarbon income at 78%. We had profits in Q1 2015. We don’t have profits in Norway in Q1 2016, as a result of the extremely low oil prices and also natural gas prices. In addition to that, there is a peculiarity that has to do with deferred taxes. The Norwegian krone has appreciated quite a bit between the end of 2015 and the end of March 2016, and that led to a reduction in deferred taxes; in other words, an accounting event that you see there, No cash impact, but it leads to -- in combination, to the significant reduction in our tax rate which otherwise would have been in the range as expected by you, which is in the mid to upper 20s.

Christian Faitz

Thanks very much. And I wish you a good and short AGM.

Hans-Ulrich Engel

Thank you very much.

Stefanie Wettberg

Okay. The next question comes from Jeremy Redenius, Bernstein.

Jeremy Redenius

Hi. Thanks for taking my question. Could you talk about the effects of a couple of things on the oil and gas earnings throughout the year? Firstly, I’m wondering if the Yuzhno Russkoye adjustment had impacted on Q1 and how do you expect that to play out throughout the year? And then secondly, we know that part of your gas sales at least in Europe are lagged six to nine months off the Western European spot price and I’m wondering, with gas prices falling even more in April, does that mean we are going to see considerably lower gas prices locked in for the rest of the year for this business? Thank you.

Hans-Ulrich Engel

Okay, Jeremy, happy to answer the questions. Now, the Yuzhno effect is one that we spread evenly over the quarters, so you will see the same impact there in Q2, 3 and 4 as you’ve seen it in Q1 of this year. On natural gas, the time lag, in fact, had a big impact in the past, at times where the majority of contracts were based on oil price formulas, let’s say five to six years ago. Over time, more and more of the contracts are market/spot price based. Yes, there could be an impact in the remaining oil price based portfolio, but that should be relatively small.

Jeremy Redenius

And so when you price off of gas price now, it’s pretty close to spot price then as opposed to spot price with a lag?

Hans-Ulrich Engel

Yes, majority.

Jeremy Redenius

Thank you very much.

Stefanie Wettberg

The next question comes from Lutz Grueten, Commerzbank.

Lutz Grueten

Yes. Hi. Good morning. Thanks for taking my question on the cash flow. I don’t want to be too picky on the quality cash flow, but just coming back to the effects on the working capital and the free cash flow just being 45 million after Q1, I understand that there was a one-off situation last year and there is a base effect, but it would be great to get also some grip on what you think the working capital will be in the second, third and fourth quarter. So the year-end working capital, should we assume that this will be similar to year-end 2015, or will there be other effects throughout the remaining quarters? Thank you.

Hans-Ulrich Engel

That is a pretty loaded question there, and I think we will take that maybe in three parts. Part one, I will address the high level cash flow, and then Marc will go into a bit more details. Part two, or part three then, after Marc, I will talk about the working capital in general. In cash flow, what you see there in general is what I call the new seasonality. As you know, we divested the gas trading and gas storage business, which had high cash usage at the point in time where we filled the storage capacity, i.e., Q3 and Q4, and then high cash inflows in Q1 when we sold most of the gas that is something that we need to factor in and I think I remember your question from last year’s call, which was will we be able to repeat cash flow development as we have seen it in Q1, and back then I think I said that will be very difficult and with the seasonality change that we have in the portfolio, you see the outcome of that and I think with that, Marc, if you’ll share a bit more light on cash flow development there?

Marc Ehrhardt

Sure. So as you’ve probably already seen, the effect comes from the change in net working capital. And as Hans has also said, you are going to see a new seasonality in our cash flow. You are going to have less inventory buildup from our gas storage business before the heating season and then obviously no release of those funds then as the winter draws to a close. What we do have in the first quarter is the seasonality and the increases in accounts receivables that will stay that’s when we go into the high season of our selling season in the ag business in the Northern Hemisphere, so that remains as is and if you just look at it from a very high level, we are now at a depreciation level between 900 million and 1 billion that came from our big investments that we have done. We have told you that we are going to reduce our CapEx, so that is going to come down from the level that you have seen in the past back to the normal level of investment, so that builds our [hindering] situation and then we have a lot of movements that should not be repeated in the net working capital, especially coming out of the movement in -- that we attribute to the release of funds or consumption of funds in long-term incentives. Those are all numbers that will not swing that way as you compare to 2015 and return to our normal level.

Hans-Ulrich Engel

Thanks, Marc. And then, Lutz, your third part that I wanted to address is inventory development. You saw us bringing down inventories quite a bit during the year of 2015. The balance sheet position was at 9.7 billion end of 2015. End of Q1, we are at 9.6 billion. Now, what is going to happen there, we told you that we are managing our working capital, and in particular our inventories, with a high focus. Shown that in 2015. What is going to happen there will also depend on what we will see with respect to raw material pricing. There is clearly a raw material impact in our inventories that helped us to bring the balance sheet position down in 2015. We will now have to see what is going to happen with raw material prices in 2016. But the clear target is to keep managing our working capital and our inventory in particular as stringently in 2016 as we have done that in 2015.

Lutz Grueten

Very helpful. Thanks and thanks for the reminder. Thank you.

Hans-Ulrich Engel

Sure.

Stefanie Wettberg

The next question comes from Peter Clark, Societe Generale.

Peter Clark

Good morning. Thank you for the question. It seems to be a step up in the portfolio focus in recent months and I’m just wondering, particularly downstream, obviously we have seen a few deals, particularly in functional solutions, I’m just wondering if that is something that we should expect this pace to continue. Obviously, there’s a fairly big portfolio, particularly in performance products, actually, but this focus and certainly some of the comments in the press has indicated that you seem more focused at looking at the portfolio. Thank you.

Hans-Ulrich Engel

Peter, thanks for your question. I would not say that we are more focused on our portfolio. I think we are always very focused on our portfolio. You saw us doing a number of what I would call these smaller type transactions in 2015. Our custom synthesis business which we divested comes to mind. Our paper hydrous kaolin business comes to mind. Our textile business comes to mind in 2015. And I’m sure with that three that we have a couple of smaller divestments done more in 2015.

Now, this year, we have the automotive refinish transaction in China, a smaller transaction but one that helps us to improve our footprint in automotive refinish significantly. We announced this week the divestiture of our polyolefin catalysts business to W.R. Grace, which is a transaction that follows the logic of, yes, we are a polyolefin catalyst producer, but we don’t produce polyolefins anymore ourselves. We divested that business a long time ago. So technology access there is not what others have and so that is what I would call a logical step we are making there. And then we are divesting our industrial coatings business to Akzo. Again, I would not say higher focus on portfolio; same focus that we always have, the same pruning of the portfolio that we always do and that you can expect us to also continue to do going forward.

Peter Clark

Okay. Thank you.

Stefanie Wettberg

Thanks. The next question comes from Andrew Benson, Citi.

Andrew Benson

Thanks very much. Could I perhaps be a little bit [competitive with] some of my peers? On the performance products side, can you give more detail on the performance and the outlook and perhaps a little bit of focus on coating chemicals SAP, vitamins and such like, just give us a little bit of help on how you see the outlook? And perhaps if I can try a second, are there any costs that have been absorbed within EBIT in the first quarter, so restructuring, startup costs, and could you just give us an update on what those are likely to be in the full year that are absorbed within your ongoing adjusted EBIT number?

Hans-Ulrich Engel

Okay. Why don’t I do this, and start with the startup cost question. On startup costs, we said at the February call that we have about the same order of magnitude of startup costs in 2016 as we had it in 2015. We also said that we saw the peak of startup costs with more than 100 million in Q4 of 2015, and from there we will see a gradual decline of startup costs during the course of the year 2016. So that, Andrew, should give you an idea on what is happening with respect to the startup costs. Performance product questions, vitamin always an interesting one, in particular vitamin E. What do we see with respect to vitamin E? We saw new lows during Q1. I think the average published price is, if I can recall that correctly in the €4.60 range, that is €4.60 per kilogram.

But we also saw a very interesting development towards the end of the quarter and going into the month of April, a significant increase in prices in particular in China. Apparently, a number of shutdowns there, announced as being of temporary nature and that has moved vitamin E prices up significantly. What is going to happen there remains to be seen. Remains to be seen whether the supply will come back or not. Frankly at this point in time, I don’t know.

The super absorbent business has become more competitive over the last 12 to 18 months. We see this. We see price pressure accordingly. We see margin pressure following that. But I can also tell you that SAP is a good business for BASF. We will launch in a relatively short time this -- or sell a commercial product, the SAVIVA product which we already showed you I think a year or one a half years ago in one of our meetings. And we think that will help us to stay in the SAP business where we are or even improve our situation.

Stefanie Wettberg

We have a few more participants in the queue. Therefore, please limit yourself to one question only. The next question comes from Tony Jones, Redburn.

Tony Jones

Morning, Hans. You had cleaner cost control in the quarter, and if I add up R&D and SG&A, it looks like that core OpEx was down about 4% year-on- year, so my question is how much of this could reoccur. So in this quarter could you may be split out how much came from currency effects and also what the total gross cost savings were in Q1? Thanks.

Hans-Ulrich Engel

Tony, I’m not sure that I can provide you with this detail right now. Maybe we will do this via the investor relations. But what I can tell you is that, yes there is a small impact on our cost improvement that is coming from foreign exchange. Actually, Q1 2016 is the first quarter since if I recall that correctly Q2 2014 where from a sales perspective we have currency headwinds, but that obviously then also comes with some support on the cost side. But that is relatively small compared to the impact that is coming from our various measure addressing fixed costs.

You are aware of the program that we have in performance products. You are aware of our Group -- BASF Group wide program which is called DrivE, and you clearly see the impacts of that. Yes, SG&A cost slightly down, R&D cost down by, if I recall correctly, 14 million in the quarter, and expect us to have a very firm grip on fixed cost development as we always have.

Stefanie Wettberg

The next question comes from Andreas Heine, MainFirst. Go ahead, please.

Andreas Heine

Yes. Thank you for taking my question. It’s basically on chemicals and the volume here. It was down 3%. And as you were referring to some customers starting to restock, which obviously would first happen in chemicals where you are closest to the oil price, and having in mind that all the startups you have done in the second half of last year should also add to the volume. So why is your volume down and not up and how is the ramp-up of these large big plants in this segment going?

Hans-Ulrich Engel

Yes, Thanks for the question Andreas. The overall minus 3% that we have in the chemicals segment it seems somewhat influenced by some what I would call special effects.

Number one then, on the volume side actually the biggest impact comes from running the splitter that we have in Port Arthur, the condensate splitter; then that feeds naphtha into the cracker or we sell it into the market in Port Arthur, huge volumes that run through that machine, which ran in Q1 of last year and didn’t run in Q1 of this year due to the fact that condensate prices, as a result of lower condensate production in the U.S. were not attractive enough to run the big machine there. That has an impact in the order of magnitude on the chemical segment of 1 percentage point. We then have -- it could be even slightly higher than that.

We then have caprolactam sales which used to go to third parties which we now consume internally, as a result of the startup of the new polyamide 6 plant in China. That is another impact on our volumes that we are showing here, because what we are showing is volumes to third parties. Taking out these effects, the volume growth in Q1 is flattish. We have one other major impact, and that is the big turnaround that we had at the Geismar site, Geismar site in the U.S. Every five years, it goes through a major turnaround where we are shutting down the entire site, down for this year, it was down for at least 55 or 60 days, and that also has a major impact then on volumes. Your question with respect to the new capacities, the new capacities that we started up, we grow into these capacities. There are positive contributions through volume development coming from these capacities, as could be expected. But overall, as mentioned already on our calls for Q3 and Q4 last year and our earnings call for the full year, we are growing into these capacities as a result of overall slower growth more slowly than what we had originally expected.

Stefanie Wettberg

The next question is from Patrick Lambert, Raymond James. Please go ahead.

Patrick Lambert

Good morning, everybody. Following Jeremy’s questions, I don’t know if you really answered the Russkoye restated adjustment. How should we take that into our model in terms of EBIT? Is it just the volumes of Russia contribution going down, as we put it, or especially now EBIT per se? And maybe I can should be a quick one. Could you comment on the same question as Andrew asked on chemicals volumes? If I look at USA in particular isocyanates, I think if I compare to your peers your volumes were slightly up in MDI but clearly below Huntsman and Covestro. Is it also because of internal use versus third party or some delays in ramp ups of some of the plants? Thanks.

Hans-Ulrich Engel

Now, first of all, your Yuzhno Russkoye question, put things in perspective. As a result of this make up year that we have, we get about half the volumes out of Yuzhno Russkoye compared to the prior year, so the prior year in 2016, and that then also has a significant EBIT impact and this EBIT impact is spread over the four quarters evenly. On the isocyanates, I’m not sure where you are getting this information from that our MDI and TDI volumes are developing below what we see at competitors. What is certainly correct is that we have an impact in Q1 as a result of the turnaround that we had in Geismar, as already mentioned. Geismar was down for almost two months. This is MDI capacity that we have in Geismar. This is also TDI capacity that we have in Geismar that was down over two months. Yes, that has an impact. But overall, I think this will even out during the course of the year, because others will also go through their turnaround cycles and, as I say that should then even out. And other than that, in monomers, we have the impact on volumes that comes from caprolactam, which we don’t sell to the market anymore, certain quantities of caprolactam which we now consume internally as a result of starting up of polyamide 6 plant in Shanghai.

Patrick Lambert

Would you quantify the Russkoye adjustment in Q1?

Hans-Ulrich Engel

I think I cannot, because that is subject to its covered by the confidentiality agreement that we have with Gazprom. Sorry.

Patrick Lambert

Okay.

Hans-Ulrich Engel

But it is let me help you there. It is significant. It is a lower triple digit million figure, just to help you there a little bit.

Patrick Lambert

Great. Thanks. For the full year or for the?

Hans-Ulrich Engel

For the full year.

Patrick Lambert

Okay.

Hans-Ulrich Engel

But, Patrick, no more questions.

Stefanie Wettberg

We have four more questions and not even 10 minutes to go, so please limit yourself to one question. Markus Mayer is next, from Baader.

Markus Mayer

Good morning. I’ve got a question on your chemical processing catalysts, and this is the polyolefin catalyst divestiture. Perhaps it was in this the fact that you approached Grace or basically sold this asset on an auction process, and this comment you made on the reason why you sold it. Should we also think that there might be further divestments in the various businesses, for example, the fine chemicals which you also said, the core business you sold recently? That is my question, basically.

Hans-Ulrich Engel

Okay. Why don’t I take your question on the polyolefin catalyst? This was not what I would call a full auction process. This is a highly competitive offer that we got from Grace. And if you look around and ask yourself the question how many potential buyers are there for a business like that, who would be best suited to buy that business, I think we found the perfect buyer for that business. Your second question is on -- could you do me a favor, Markus? That was --

Markus Mayer

Yes, sorry. Basically, with this what you said, why you sold polyolefin catalysts, as you are also no longer active in polyolefins, is this then also -- could we also think that you basically sold part of your fine chemical business and therefore your fine chemical catalysts might be divestment candidates, or basically are you just saying that now we are happy with our chemical processing catalysts and therefore you should not anymore expect any actions there?

Hans-Ulrich Engel

I think the answer to that is we are very happy with our chemical catalysts business. For this one here, for the polyolefin chemical catalysts, there is the rationale that I gave you. I don’t see that in other parts of the chemical catalysts portfolio.

Markus Mayer

Okay. Perfect.

Hans-Ulrich Engel

Sure.

Stefanie Wettberg

Okay. The next question comes from Laurent Favre, Bank of America Merrill Lynch.

Laurent Favre

Yes. Good morning. Thanks for taking my only question. Back to the M&A theme, I think that back when I was asking you two years ago or three years ago every time on conference calls, you were pointing to high valuations in the sector preventing you from having a look at M&A and focusing on organic CapEx. Obviously valuations have gone up since then, it’s been a seller’s market, you have been selling very well. So, I’m struggling to understand now the shift of tone, certainly in the press, for instance in the interview that we were sent last night via IR on the will to do M&A. So could you maybe just frame for us your thinking right now on acquisitions and especially ones that could be bigger than what we have seen on Pronova and et cetera? Thank you.

Hans-Ulrich Engel

On M&A, I think we have been very consistent there in what we said, and we didn’t only say it but we were also consistent in our actions. Now, is there a change in the tone? I know what quote that you are referring to, but I would not necessarily describe that as a change of tone. I think we always said that if there are interesting opportunities, we would certainly look at them. We put that in the context of our acquisition criteria and I think we came to the conclusion that at least bigger transactions than the one that you just described with Pronova Biopharma as an example, Becker Underwood, we did not see that would have, A, met our acquisition criteria, and would have, B, been seen as being attractive for BASF and I think you can assume that this will be the same also in the future.

Laurent Favre

Thank you. That’s very clear.

Stefanie Wettberg

The next question is from Laurence Alexander of Jefferies.

Laurence Alexander

Good morning. Hopefully a quick one. In terms of the portfolio shopping that you have been doing, to come back to one of the earlier questions, has your thinking changed around the sustainability of technology barriers to entry and therefore the need to have other competitive advantages, including vertical integration, to justify staying in businesses, or are you applying the same assumption but just a different set of growth assumptions and market dynamics?

Hans-Ulrich Engel

I think, Laurence, our approach and our criteria for acquisitions have not changed and I actually don’t see that they will change. You are absolutely right. The growth environment is slower than what we had expected three or four years back, but I don’t see that there is a need to change our acquisition criteria.

Laurence Alexander

Thank you.

Hans-Ulrich Engel

Sure.

Stefanie Wettberg

The next question is from John Klein, Berenberg.

John Klein

Yes. Hi. Good morning. Just a very quick one, I’m actually just looking for a quick comment on your view on acrylic acid. We have seen propylene prices rising in April. Can you hike acrylic acid prices? Will those price hikes stick, or would that just mean an import -- a raise in imports? Thank you.

Hans-Ulrich Engel

We see acrylic acid prices in cross country for quite some time now. Propylene prices increasing should provide us with the opportunity to increase prices. If I recall correctly, we announced price increases already. Whether or not they will stick, frankly, I do not know yet. Remains to be seen.

Stefanie Wettberg

With that, we answered all questions. There is one follow-up question. However, since the annual meeting really starts shortly, we would like to conclude this conference call and investor relations will take care of this one follow-up question. We will report on our second-quarter 2016 results on July 27, 2016, and after the summer break, BASF will host an analyst and investor event. We would like to invite you to attend our Roundtable Asia Pacific on September 23 in London. Next week, you will receive a text on it. Thank you for joining us. Should you have any further questions, please contact a member of the IR team and we will be happy to help you. Goodbye.

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