BASF SE Management Discusses Q3 2012 Results - Earnings Call Transcript

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 |  About: BASF SE ADR (BASFY)
by: SA Transcripts

BASF SE (OTCQX:BASFY) Q3 2012 Earnings Call October 25, 2012 5:00 AM ET

Executives

Magdalena Moll - Senior Vice President of Investor Relations

Kurt W. Bock - Chairman of the Board of Executive Directors

Hans-Ulrich Engel - Chief Financial Officer, Member of Board of Executive Directors, Chairman of BASF Corporation and Chief Executive Officer of BASF Corporation

Analysts

Andreas Heine - Barclays Capital, Research Division

Chris Counihan - Crédit Suisse AG, Research Division

Martin Roediger - CA Cheuvreux, Research Division

Tony Jones - Redburn Partners LLP, Research Division

Norbert Barth - Baader Bank AG, Research Division

Jaideep Pandya - Berenberg Bank, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

Neil C. Tyler - JP Morgan Chase & Co, Research Division

Christian Faitz - Macquarie Research

Paul Richard Walsh - Morgan Stanley, Research Division

Richard Logan - Goldman Sachs Group Inc., Research Division

Andrew Benson - Citigroup Inc, Research Division

Annett Weber - BHF-Bank Aktiengesellschaft, Research Division

Operator

Good morning, ladies and gentlemen. This is the Chorus Call conference operator. Welcome to the BASF Interim Report Third Quarter Results 2012. [Operator Instructions] The conference is being recorded. [Operator Instructions] This presentation includes forward-looking statements that are subject to risks and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. This presentation contains a number of forward-looking statements, including in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation and supply and demand. BASF has based these forward-looking statements on its views with respect to future events and financial performance. Actual financial performance of the entities described herein could differ materially from that projected in the forward-looking statements, due to the inherent uncertainty of estimates, forecasts and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, readers should not put undue reliance on any forward-looking statements.

Forward-looking statements represent estimates and assumptions only as of the date that they were made. The information contained in this presentation is subject to change without notice, and BASF does not undertake any duty to update the forward-looking statements and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations.

Ladies and gentlemen, at this time, I would now like to turn the conference over to Magdalena Moll, Head of Investor Relations. Please go ahead.

Magdalena Moll

Thank you, Jason, and good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our Third Quarter 2012 Conference Call. With our slowing global economic growth during the quarter, but BASF maintained good business performance. We increased sales by 8% to EUR 19 billion, and a EUR 2.1 billion EBIT before special items was up 5% from the level of the previous year. With me on the call today to explain the results are: Kurt Bock, our Chairman and Chief Executive Officer and Hans-Ulrich Engel, our Chief Financial Officer. Kurt will summarize the key financials, highlight important milestones and conclude with the outlook for the full year 2012. Hans will review the segment results of the third quarter in detail and afterwards, both gentlemen will be happy to take your questions. We have posted, as always, the charts and the speech, as well as the press documents on our website www.basf.com/share. And with this, I would like to hand over to Kurt.

Kurt W. Bock

Yes, thank you, Maggie, and ladies and gentlemen, good morning, and thank you for joining us as well. Times continue to be demanding, uncertainty remains high and we have not seen any improvement in global business sentiment. The European sovereign debt crisis and an economic weakening in China continue to dominate the headlines. Third quarter, China showed, once more, a lower growth which did not come as a surprise given the sluggish demand for chemicals we have seen since the end of last year.

Let me now show you how BASF has performed in this challenging environment. All in all, our business held up well in Q3, thanks to our diversified portfolio. We generated sales of EUR 19 billion, an increase of 8% compared to the same period of last year. Main driver of the higher volume primarily resulting from the higher production of crude oil. Positive currency effects more than offset lower prices.

While Oil & Gas and Agricultural Solutions posted another strong quarter, we saw a continuously weak development in our chemical activities. As demand softened in some areas, volumes in our chemical activities declined by 1%, and prices fell by 4% compared to Q3 2011. EBITDA amounted to EUR 2.8 billion, up by 4% versus the prior year quarter.

EBIT before special items rose by roughly, EUR 100 million to EUR 2.1 billion. The higher contribution from Oil & Gas, as well as our successful crop protection business were able to more than offset lower earnings in our chemical activities. Special items in EBIT of minus EUR 68 million resulted primarily from financial restructuring measures. The tax rate increased to 46% due to the resumption of the highly taxed oil production in Libya. As a result, net income dropped by EUR 246 million to EUR 946 million. Adjusted earnings per share decreased 22% to EUR 1.19.

Over the past 6 weeks, we announced several important measures to further optimize our portfolio, especially to strengthen our good performing Ag and Oil & Gas businesses. In September, we signed an agreement with Norwest Equity Partners to acquire Becker Underwood for a price of roughly, $1 billion. The company is a leading global provider of technologies for biological C2 treatment. With expected sales of $240 million for the fiscal year 2012 and a strong technology platform, the planned acquisition will further strengthen our global protection business, particularly, in the rapidly growing C2 treatment market. The purchase is subject to approval by the relevant authorities, and the closing of the transaction is expected by the end of this year.

In addition, we reinvest more than EUR 200 million in Germany and the United States to scale up production and formulation capacities for our successful fungicide F500 and Xemium. Beginning of October, we announced the restructuring of our Construction Chemicals division to strengthen the competitive -- competitiveness in Europe. We will adjust the business to declining markets, especially in Southern Europe and Great Britain, by downsizing our marketing and sales organization, as well as by reducing production capacities. In addition, we will enhance the overall efficiency and customer focus by improving business processes in Germany and Eastern Europe.

The planned measures will affect about 400 positions, including portfolio optimization. We will also put some smaller non-core activities up for sale. And at the beginning of this week, Statoil and BASF announced an asset swap which will increase our Oil & Gas production footprint in Norway, considerably. Wintershall will acquire equity in 3 producing fields from Statoil containing 2P reserves of around 100 million barrels of oil equivalent. Through this transaction, we will raise oil production in Norway from currently around 3,000 to almost 40,000 barrels per day. This will strongly contribute to Wintershall operating cash flow and EBIT. In return, Statoil will receive a 15% share in the development field Edvard Grieg and the financial compensation of $1.35 billion. A potential payment of up to $100 million will be made dependent on additional volumes from the development of the Vega field.

The collaboration also includes important technology oriented topics, such as joint research and projects on enhanced oil recovery and the development of unconventional deposits in Germany and also internationally. I'm now coming to the outlook.

For the fourth quarter of 2012, we do not anticipate an upturn in the global economy and also do not expect demand to pick up for our chemical activities. Prospects are clouded by continued uncertainty, especially in the Eurozone and by slower growth in Asia. We therefore, have adjusted some of our expectations for the global economy. For 2012, we now anticipate chemical production to grow at 2.9%, a reduction of 0.6% percentage points. Our assumptions for the Brent oil price per barrel and the dollar-euro exchange rates remain unchanged at $110 and EUR 1.3 respectively. We confirm our outlook for 2012. We aim to exceed the 2011 record levels in sales and income from operations before special items. Our forecast is supported by the continued crude oil production in Libya, and by our successful crop protection business.

In our chemical activities, earnings will not match the level of the previous year, even if earnings in Q4 might be above the relatively weak fourth quarter of last year.

Ladies and gentlemen, as you know, we continuously strive to strengthen our competitiveness and enhance our profitability. Our operation excellence program STEP which we announced at the end of last year is making good progress. By the end of 2015, it is expected to contribute around EUR 1 billion to earnings each year. STEP comprises couple of hundred projects that aim to lower cost and raise profit margins. With this, I will hand over to Hans.

Hans-Ulrich Engel

Thank you, Kurt. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment in more detail and focus on the respective business developments in comparison to the third quarter of 2011. Chemicals, sales increased significantly, mainly as a result of recent portfolio measures. Feedstock sales to Styrolution group companies and to the new owner of the divested fertilizer business contributed to the top line. In addition, higher volumes and currency tailwinds more than compensated for lower prices. EBIT before special items declined considerably compared to the strong prior year quarter, mainly due to lower margins, as well as planned and unplanned shutdowns. Sales in Petrochemicals increased. Slightly higher volumes, feedstock sales to Styrolution and positive currency effects more than offset the significant drop in selling prices. Demand for acrylics and cracker products further weakened in Europe and Asia. Higher raw material costs could not be fully passed on, putting margins under severe pressure. EBIT before special items was considerably lower due to weaker results, mainly from cracker products and acrylics, as well as unplanned shutdowns of the Port Arthur cracker.

In Inorganics, sales went up sharply. Main driver were feedstock sales to the new owner of the divested fertilizer business, which are now reported as third-party sales. Higher prices and volumes also contributed to sales growth. EBIT before special items increased primarily due to improved margins for inorganic base chemicals. Continued strong demand from important customer industries, such as Agrochemicals and Plastics, as well as positive currency effects, led to higher sales in Intermediates. Prices, however, declined and raw material cost increases could not be fully be passed on.

Due to scheduled plant shutdowns, EBIT before special items came in lower. Sales in Plastics increased driven by a positive business development in Polyurethanes and by favorable currency effects. EBIT before special items declined though mostly due to a weaker performance of polymer precursors.

In Performance Polymers, sales decreased slightly, as positive currency and portfolio effects did not fully compensate follow-up prices and volumes. Polyamide precursors, which were at record price levels in Q3 of last year, continue to suffer from weak demand and declining prices, in particular in Asia. In contrast, our Engineering Plastics business developed positively, thanks to healthy demand from the automotive industry. Earnings nevertheless fell sharply, primarily as a result of weaker margins for polyamide precursors.

Sales in Polyurethanes grew significantly. Demand from the automotive industry remained overall strong, in particular, in Asia and North America, while Europe developed slightly weaker. Sales for the construction industry were below the prior year quarter. The market for basic products was tight. As a consequence, we were able to increase volumes and prices for both TDI and MDI. EBIT before special items rose substantially.

Sales in Performance Products came in slightly above the prior year quarter. Lower prices and volumes were offset by positive currency effects. EBIT before special items was down, primarily as a result of higher cost for idle capacity and increased R&D expenses.

In Dispersions & Pigments, sales rose slightly, thanks to favorable currency effects. Volumes declined slightly. While the demand for resins and additives developed positively, we experienced softer demand for Dispersions & Pigments. Due to lower volumes for higher-margin pigments and higher fixed costs, EBIT before special items was significantly below the prior year quarter.

In Care Chemicals, sales did not reach the prior year level despite positive currency effects. A highly competitive market environment led to declining volumes and prices. In particular, the businesses with ingredients for personal care and home care remained weak. EBIT before special items decreased significantly.

Sales in Nutrition & Health improved due to positive currency effects and higher volumes. Demand improved in almost all businesses, while vitamin prices were under pressure. Increased raw material costs could, however, only partially be passed on to customers, resulting in lower margins. With higher fixed cost, EBIT before special items was considerably below the good level of last year's third quarter.

In Paper Chemicals, sales did not match the prior year quarter, mainly due to lower prices. Volumes declined slightly. As a result of operational and strategic measures, fixed costs were reduced and EBIT before special items went up. In Performance Chemicals, sales rose, thanks to positive currency effects. Volumes were lower as strong demand for oil field and mining chemicals could not fully compensate for weaker volumes in the Other businesses. Due to our value before volume strategy, EBIT before special items improved considerably.

Sales in Functional Solutions declined, mainly due to a lower contribution from precious metal trading. Currency tailwinds and portfolio measures could not fully offset this effect. Due to higher raw material costs, EBIT before special items came in lower. Catalyst sales declined primarily as a result of lower precious metal prices and trading volumes. At EUR 560 million, sales in precious metals trading were down by almost EUR 120 million versus the prior year quarter. We were able to further grow our business with mobile emission catalysts due to strong demand from the automotive industry. Positive currency effects, as well as the strengthened activities with battery materials also contributed to the top line. EBIT before special items did not reach the good level of Q3 2011, mostly as a result of high raw material costs.

Sales in Construction Chemicals grew, thanks to favorable currency effects. While the construction activity in Southern Europe stay depressed, our business in North America developed positively. Margins improved and EBIT before special items went up. In Coatings, sales rose as a result of higher volumes and prices, as well as currency tailwinds. Demand from the automotive industry remained strong in Asia and North America. We were able to increase our sales both in automotive OEM, and refinish Coatings. EBIT before special items was higher.

Agricultural Solutions had another very good quarter. Continued strong demand, led to a volume increase of 3%. Sales grew by 11% currency adjusted by 3%. Overall, prices were stable. The new season in South America started with a significantly higher sales than last year. Demand was strong in insecticides as well as fungicides. In North America, sales grew considerably, primarily driven by an excellent herbicide business. The drought in the Midwest in the United States only had a moderate impact on our business in 2012. The autumn business in Europe developed positively. Strong demand for fungicides and oilseed rape herbicides in Western Europe more than offset the negative impact from the dry weather conditions in Southern and Eastern Europe.

In Asia, sales declined, due to the delayed onset of the monsoon season in South Asia. China though, our business benefited from higher fungicide sales. EBIT before special items rose sharply and was a new record for the third quarter. Year-to-date earnings also posted a new record and reached for the first time, EUR 1 billion, thus topping the full year 2011 figure by almost EUR 200 million.

Sales in Oil & Gas grew strongly, mainly driven by higher volumes in Exploration & Production, due to the continuous production in Libya. As a result, EBIT before special items tripled compared to the prior year third quarter. Sales in Exploration & Production more than doubled, due to the higher volumes and prices. While in Q3 of last year, the oil production in Libya was suspended, we produced in our onshore concessions, on average, about 85,000 barrels of oil per day in this year's third quarter, significantly more than originally planned. The oil price increased in euro terms by roughly, EUR 7 to EUR 88 per barrel compared to the respective prior year quarter. Earnings grew sharply.

In Natural Gas Trading, sales grew considerably, driven by higher volumes on European spot trading markets. Earnings, however, declined compared to last year's quarter which had benefited from a onetime gain from contract adjustments with customers. Concessions, income from the OPAL pipeline could only partially offset this effect. Non-compensable taxes on oil production were EUR 492 million. Net income amounted to EUR 322 million, an increase of almost EUR 100 million versus Q3 of last year.

Other posted a decline in sales, largely as a result of the divestiture of our styrenics business, which was contributed to the Styrolution joint venture as of October 1, 2011. EBIT before special items declined significantly. In addition to the missing contribution from styrenics, higher provisions for the long-term incentive program, which was added from the significant share price increase, negatively impacted earnings. For your reference, in the third quarter of 2011, we had reported a reversal of provisions for the long-term incentive program which led to an earnings increase.

Let me now conclude with our cash flow. We generated again, a very strong operating cash flow in the first 9 months of EUR 5.2 billion, thereof, EUR 1.7 billion coming from the third quarter. In Q3, net working capital remained unchanged compared to midyear. In the first 9 months, we used EUR 2.1 billion in investing activities. CapEx amounted to EUR 2.8 billion, almost EUR 700 million more, than in the same period of 2011. Free cash flow reached EUR 2.4 billion in the first 9 months of this year, compared to EUR 2.9 billion in the same period of last year. At EUR 11 billion, net debt was at the level of the end of 2011, but decreased by EUR 600 million year-over-year. And with that, we are now happy to take your questions.

Question-and-Answer Session

Magdalena Moll

Thank you, Hans. And now, we, ladies and gentlemen, I would like to open the call for questions. [Operator Instructions]Jason is going to quickly reiterate the process. Please go ahead, Jason.

Operator

[Operator Instructions] The first question comes from Chris Counihan from -- first question comes from Andreas Heine from Barclays.

Andreas Heine - Barclays Capital, Research Division

Andreas Heine from Barcalys. Two questions. Then the first one, Performance Products. I'd like to understand more the sequential development in earnings. In the last 3 years, so this quarter 2011, third quarter and 2010, there was an earnings decline sequentially of 22%, 14% and 21%, and it was even weaker in the fourth quarter. So what I would like to understand is, whether the decline we have seen from the second to the third quarter is some kind of seasonal pattern, which goes on to an even weaker seasonal Q4 or whether this is an underlying trend that really has worsened? That's the first question. And the other one, the strong increase in Agro, basically, earnings have increased almost as much as sales have increased. Could you just shed some more light why the earnings were able to increase that strongly in this particular quarter?

Kurt W. Bock

Thank you, Andreas. I will take the first one on Performance Products and then Hans will try to answer the second one. The Performance Products, I think what you're asking is right perspective sequentially, because that will give you better idea about the business dynamics. And what happened between Q3 and Q2 is quite interesting. We have 5 divisions within that segment. Four of them were able to improve margins, which I think is quite amazing compared to Q2. One essentially stayed flat or slightly, very slightly negative. All of them, all of them had volumes declines. And you're right, part of that is seasonal, Q3 used to be a, let's say, summer quarter. Activity in Southern Europe is kind of down. But this year, it's a little bit different because actually, we had to fight very hard to bring up price. And when you look again at sales, sequentially, you see that the sales level is almost the same as the quarter before, which means we have brought up sales prices. We could not increase the volumes. We gave up on volumes and, essentially, we made some very conscious decisions to give up some share because the pricing from our point of view was not attractive, not reflecting the long-term value of those products. And this is what we call our value before volume strategy. So there was some conscious decision-making here, as we were more concerned about improving the margin situation which we, essentially, have achieved. We had a little bit of -- bigger effect in surfactants, essentially, in one division, which explains the situation for EM [ph]. But apart from that, I think it's really volumes down, a little bit more than seasonal to be expected because again, the conscious decision to give up some volumes here in order to bring up pricing again. And that, I think, pretty much explains what happened. In terms of cost development, maybe one sentence. We had slightly, higher fixed cost simply because of the lower utilization rates of our plants, and we had higher R&D costs in general, because this is as you know, are quite R&D intensive business and we also have some growth areas that we want to spend more. And with that, I would hand over to Hans.

Hans-Ulrich Engel

Yes, Andreas, your question on the AP earnings in Q3 throughout the year, Agricultural Solutions has enjoyed a very positive environment. If you look at soft commodity price development, they are record highs. That explains, I'd say, the overall development. We see increases in our business in all regions, and this is in the third quarter. Obviously, in particular, Southern Hemisphere and our business in Brazil. We see also the increases across the portfolios, so insecticides, fungicides and herbicides. Your question, specifically with respect to earnings, we have a special effect in that. In as far as we have license income that's related to our Clearfield technology, which we had in 2011 in the fourth quarter, which we now have in the third quarter of this year, and that explains in addition to the overall positive development throughout the year, the specific increase also then in Q3, if you compared to Q3 of last year.

Magdalena Moll

Then moving to the next question from Chris Counihan from Crédit Suisse.

Chris Counihan - Crédit Suisse AG, Research Division

Firstly, on the Plastics business. Just wondering if you could give us some sort of idea of the decline in earnings across the Performance Polymers, relative to the stronger Polyurethanes business. Any further, maybe color surrounding why that's happened and expectations for a recovery? And my second question, should we be expecting any plant shutdowns of note in Q4, obviously, some in Chemicals this quarter, but anything more than a seasonal impact that has already occurred or you're expecting to happen into Q4?

Kurt W. Bock

First, shutdowns, planned shutdowns. No, there's nothing exceptional in Q4. It's pretty much in line with what we have seen in previous year's quarter. So it doesn't really distort the overall picture. In Plastics, it's a mixed picture actually. Polyurethanes did quite well, essentially because we initiated a really broad-based price increase for all of our activities earlier this year which are holding up. There was a little bit of tightness in the TDI market, supported by maybe, also lower supply because there were some unplanned shutdowns in that particular industry. The Performance Polymers is a mixed picture. The engineering plastics piece did very well, actually. Where we do see weakness, and that is not, I think, a surprise because you follow the pricing also is caprolactam. Caprolactam had a record margin, absolute record margins in 2011, so we were pretty much aware that, that is not going to repeat itself this year, and that's exactly what's happened. Margins have come down quite dramatically. I have to say they are still at levels which, historically, are not too bad, actually they're quite good, but far below what we had seen last year. And that explains by and large, the effect in Performance Polymers.

Magdalena Moll

The next question comes from Martin Roediger with CA Chevreux.

Martin Roediger - CA Cheuvreux, Research Division

I would like to ask question on Care Chemicals. Earnings were considerably down in Q3 to your more competitive environment this date. In Q2, you had also some problems, but this was for a different reason, you named -- the cause as customer behavior. So my 3 questions -- or my question on Care Chemicals in 3 parts: Can you clarify if this is, again, the surfactants only for home care and person care? Secondly, is there a structural concern that means anything going wrong with Cognis? And thirdly, did you gave up your value before volume strategy in Care Chemicals, because now, we see selling prices coming under pressure. While in Q2, you said you gave up volumes on purpose because you were not willing to lower the prices?

Kurt W. Bock

I'll give it a try. I think I talked about value before volume. No, we don't give up, but for surfactants, precursor sales are basically market priced. And the simple question is for us, do we want to follow those or do we have better opportunities to sell at higher price somewhere else? So there was a slight shift in share, as I said before, in that particular business. The -- and this is put in -- in Care Chemicals, we really talk about care. The surfactants part of the business, that explains essentially, what happened. Structural changes with regard to the former Cognis? No, not at all. It's a very sound business. But here again, we had a record 2011, which actually went much better than we had expected when we acquired Cognis, far beyond our expectations. And we knew that, that probably would not be completely sustainable at that point in time, and so there's still slight correctional going on, on this year. What we do see is a little bit of caution in the respective customer industries. I mean, they also have some pressure from their markets, apparently, which means they are probably a little bit more cautious in terms of ordering patterns, supply-chain management, inventory levels, and that is something we have seen in Q3. And at the end of the quarter, there was a little bit of caution, because maybe they were a little bit uncertain about what's going on in their markets as well. That might have, let's say, an additional effect. But structurally, this is a very sound and good business for BASF.

Magdalena Moll

The next question comes from Tony Jones from Redburn.

Tony Jones - Redburn Partners LLP, Research Division

I wanted to ask about pricing in Chemicals. I was trying to think about how to, or what to do in terms of extrapolating the minus 9% you reported. Is it just as simple as the olefins prices being very weak in July, and now they've since recovered to a much higher level which were actually above last year, so they look better than Q4 last year, or is that not how to think about it? And should we be thinking that, that negative price trend continues through Q4 and maybe, into next year. Could you help, please?

Kurt W. Bock

Tony, as you know, our Chemicals segment is a mixed bag of very different activities, petrochemicals and organics. So it's difficult to give you a general answer, but we see pricing, in general, holding up where we have seen a little bit of margin squeeze was in acrylics. Frankly, apart from that, we see that Q4, and I said it before, Q4 is basically running at the level of what we have seen in Q3, both in capacity utilization, keeping in mind that December is always the fourth month, obviously, but also in terms of margin.

Magdalena Moll

Next question comes from Norbert Barth from Baader Bank.

Norbert Barth - Baader Bank AG, Research Division

Two questions also from my side. One is concerning still to the outlook statement, which you have not changed for the company despite you have taken down also a little bit, you have significant, also, expectations for industrial production and even more for chemical production. And can you explain a little bit the background? And the second question -- and also a part for the first question on, perhaps, on this China development because it looks that it even goes a little bit worse. And the second question related also a little bit going forward, especially delivering to the automobile sector. I think when we have met last time, situation has worsened, especially in Europe and in Germany, also now starting. And if you said that, especially the segments also in Q3 who delivered the automobile industry, did quite well, so what do we expect going forward in that segment?

Kurt W. Bock

Okay, thanks for the questions. I'll take the first 2 and then Hans will talk about the auto industry. I think we kept our outlook. And you asked late last year or earlier this year when we initiated the outlook and schedule, we want to improve both in terms of sales and earnings you asked, what does it mean? Does it include Oil & Gas? And we said, yes, obviously, it does include Oil & Gas. So apparently, the structure of our earnings today is a different one than what we had about a year ago. We have talked about this now several times, and we made also clear that we do not expect that our Chemicals business, which means excluding Oil & Gas and Ag will outperform last year's numbers. So overall, we kept the wording. But since you all follow us very, very closely, it has a slightly different quality than what we said earlier this year. And apparently, you see this also when you look at earnings after taxes, but we stick to our policy. We guide on earnings before special items and we will not change that. With regard to China, we see low growth, put it that way. Growth below the trends which we had experienced for now a couple of years. And so big question is now, when will growth resume its historic level. And I think that's simply, as you say, that we are to change now going on. Some people speculate on additional stimuli, which might happen. At the same time I think there's some structural weaknesses into China's economy, we all know about this. So for the time being we assume that for the next couple of quarters, we will -- that we will see this level of growth. We have a hard time to find out right now what could initiate all of a sudden a return to their historic levels. At the long-term, pattern is certainty still well, but it depends certainly on measures the Chinese leadership might take over the next couple of months when we will return to the past growth. And with that, I would hand over to Hans on automotive.

Hans-Ulrich Engel

Yes. On your automotive question, what do we see in the automotive market. Let's start with the global figures there. Last year, 77 million units, light vehicles. Our expectation is to see that increase to something in the range of 81 million, 82 million units light vehicles in the year 2012. If you look at it from a regional perspective, Europe overall being weaker, most probably with a decline in production, but then more than compensated by Asia, and in particular, North America, where, during the course of the year, the numbers for units built have moved up almost consistently and are right now forecasted to be in the range somewhere in the upper 14 million, so 14.7 million, 14.8 million units. And we can also clearly see that in our business, be it in the emission catalyst business or in the OEM Coatings business, Engineering Plastics, as well as polyurethanes, that automotive is growing globally.

Magdalena Moll

So the next question comes from Jaideep Pandya from Berenberg Bank.

Jaideep Pandya - Berenberg Bank, Research Division

A couple of questions. First, on acrylic acid. Could you just give us a bit more color what do you see in this market currently? I mean, I'm maybe asking in context of the accident that happened in Japan, and there were some news flow also that you had some production problems in Malaysia. That's the first question. And then just secondly, on Performance Products in general, I mean, could you give us a little bit more color in terms of how do you see this business progressing in a couple of years time in terms of margins? Because obviously, this segment have had a couple of big acquisitions which you have integrated, but I just want to understand what sort of margins can we expect in the next couple of years.

Kurt W. Bock

Yes, let's start with Performance Products. We don't guide on margins for specific segments. Obviously, I think we all know this. We have an overall target for EBITDA in absolute terms. Is there room for improvement, that is your question for Performance Products. Yes there is. Absolutely. I mean, we are still working on a couple of cost issues, we have a couple of operational issues as always and I think the expectations should be that margins will improve over time. This business, and I think I talked about this, is not completely independent from, let's say, business or economic cycles which we have seen right now this year, where growth came in a little bit lower than we had expected. Overall, it is a good contributor to our earnings. It has some areas where we have to focus a little bit more in restructuring. That is why for instance the Paper Chemicals business, which has improved quite nicely over the last 2, 3 years, but we are still not done with our homework in that respective area. Acrylic acid, yes you are right, there have been a couple of production, incident issues. One is a competitor in Japan, where our acrylic acid capacity in Malaysia came down. Looking into it, it's partially up again. This tightens the market a little bit. And what happens there normally in those situations, if there is a lack of supply in some areas that you are approached by those customers, whether you can help out, and that is certainly something which we try to do very hard because those customers are very important, very close to us, we do a lot [indiscernible] to support them in the situation like this. This is self-understood. It's not easy to do because we are running our capacities at extremely high levels. And now, with Malaysia, at lower capacity, it's a challenge, but we are able to do that, so our customers seem to be quite content.

Magdalena Moll

So the next question comes now from Laurence Alexander from Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Two questions. First, the seed treatment companies, like Becker Underwood, have been fairly aggressive in their claims for the yield gains they can deliver for fairly low R&D investments. And -- so does your acquisition of Becker indicate a shift away from wanting to allocate capital to genetic -- GMO-trade research? And then the second question is just on the refinery catalyst markets. We're starting to see large capacity additions by competitors. Do you need to follow suit in order to maintain your share?

Kurt W. Bock

I'll answer the question on seed treatment, and Hans on the refinery catalyst. First of all, let me say, it's a very good addition to our existing portfolio. It's a biological seed treatment. We have chemical seed treatment. We will form a new global business unit, which is very considerable size where we can combine the strengths of those particular businesses. We see it as a growth area. You have noticed that the share and the purchase price compared to sales seems to be quite high. Actually, I can assure you that the amount we are paying is absolutely in line with market practices, but it's based certainly on the assumption -- not just the assumption, but our expectation to grow this business considerably, and we will do so over the next couple of years. It does not mean -- if that is you your question, it does not mean that we will move away from GMO. These are different businesses. There might be a slight overlap. But what we call Functional Crop Care is not really affecting our GMO activities.

Hans-Ulrich Engel

Okay. On your question with respect to refinery catalysts. As you may know, we are in the area of FCC, fluid catalytic cracking catalysts. Do we have plans, specific plans, to increase our capacities other than, what I would call, the usual, running your plants better, debottlenecked? We don't have any specific plans. Could it be that we consider having smaller blending activities, blending facilities closer to where our customers are? Yes, that could be an option. But with respect to FCC capacities, we don't have any current plans to increase them.

Magdalena Moll

Now we're moving on with Neil Tyler from JPMorgan.

Neil C. Tyler - JP Morgan Chase & Co, Research Division

Just a couple, please. Within the margin impact in the Chemicals activity, you talked about 2 broader themes impacting year-on-year profit, plant shutdowns and weaker margins. I wondered if you could take a step back and look at those 2 themes and give us an indication of the relative magnitude of each in the -- to each other and in the year-on-year development? And secondly, just on cash flow for the quarter, obviously, a decline relates to the tracking the decline in profits, but in terms of CapEx, and the step up of that, the CapEx investments have seen year-on-year, can you give us some indication as to whether that is sort of lumpiness and the timeline of CapEx projects, or whether that's something we should use as a better run rate looking forward to 2013? And then, finally on Care Chemicals, just going back to that, and the recent management changes in that business, are they, in any way, in response to the past 6 months sort of developments, or is that actually independent of that?

Kurt W. Bock

I'd take the last one and the first one, and Hans will start with the cash flow.

Hans-Ulrich Engel

Yes, on the -- Neil, on the cash flow, you've seen that we've generated operating cash flow of EUR 1.7 billion in Q3 out of the EUR 5.2 billion total for the full year. We had investment in capital expenditure and in intangibles of roughly EUR 1.1 billion. That's fully in line with what we had planned and forecasted for this year. You will see that our overall CapEx expenditure will increase. I think what you're going to say something there for the longer-term and our overall plans, and that's reflected not only in Q3 with a EUR 1.1 billion. But also if you look full year or year-to-date with the EUR 2.8 billion that we spent [indiscernible], major projects there, such as the projects in Nanjing, the MDI project in Chongqing, the TDI project in Ludwigshafen, the acrylic complexes both in China and in South America. Plus then, what I would like -- what I would call the end of the infrastructure investments, major infrastructure investments in the gas distribution business resulting from the Nord Stream, our Nord Stream participation, i.e., pipeline OPAL, plus then the storage facility, Jemgum, all of that major CapEx projects that lead to higher CapEx in 2012 compared to 2011.

Kurt W. Bock

A comment to your 2 other questions, Care Chemicals, management changes, completely unrelated. I mean, this --we see improvement potential for Care Chemicals. And by the way, the management of Care Chemicals sees this improvement potential as well. And this is not just the experience of the last quarter, but understanding the underlying business dynamics in the markets. And we have looked at this since we have acquired major part of that business from Cognis and have initiated many, many measures to improve further on. And this is done by the current management team there. Within BASF always after 4, or 5 years, you move people around essentially into new positions. That has happened now. I would say almost accidentally, in the area of Care Chemicals as well. Chemical margins Q3, we saw pressure on cracker margins and acrylic. I think I talked about this. There is -- yes, there is an impact from the Port Arthur shutdown, and that impact is certainly considerable. I can tell you we're not completely happy about it because the startup of the facility took us a little bit longer than we had expected. I can't give you the precise numbers, but if the Port Arthur cracker had run more efficiently during Q3, the business or the result of Chemicals would have been definitely better. Yes, that is fair to say.

Neil C. Tyler - JP Morgan Chase & Co, Research Division

Okay. But certainly, the minor of the 2 impacts that you're comparing the 2?

Kurt W. Bock

I mean, when you compare now with previous year into this, reduction in Chemicals, earnings of something like EUR 160 million, I'd say, it's 1/3, 2/3, probably. Maybe you can do a little bit higher than 1/3 which is affected by the cracker shutdown.

Magdalena Moll

And now we come to Christian Faitz from Macquarie.

Christian Faitz - Macquarie Research

I have 2 questions, if I may. First of all, on Agro, have you received any feedback from U.S. wholesalers regarding potential channel inventory resulting from the drought conditions in the past season, obviously for 2013? And then in Functional Solutions, it strikes me that your 2 automotive-driven businesses, Catalyst and Coatings, showed a relatively diametrical performance. While catalyst saw a 10% sales decline, probably for a good part due to the lower precious metals rating; coatings were 10% up. Can you talk about automotive catalyst volumes in contrast to paints catered to the automotive industry?

Kurt W. Bock

Yes, we can. I propose that Hans starts with the automotive impact.

Hans-Ulrich Engel

Yes. Automotive impact, volume growth in both of the businesses that you are addressing. So both in Automotive Catalyst and as well as in OEM Coatings, we have volume increases. And as you rightly mentioned, the decrease that you see in the Catalyst business, that is primarily driven -- almost fully driven by the fact that the precious metal prices came down significantly. If you look Q3 last year to Q3 this year, that's explaining the decline there. Automotive Catalyst, not only volume increase but also a sales increase, so very similar there to what we see in our Coatings business.

Christian Faitz - Macquarie Research

May I add to that question, can you tell me what's the current trading additions...

Magdalena Moll

Christian, can you speak up a little. We can't hardly hear you.

Christian Faitz - Macquarie Research

Okay. I'm trying to speak as loud as possible. If I may add to that question, can you talk about current business conditions for the industry cutting capacities left and right?

Hans-Ulrich Engel

Can you repeat that question, please?

Christian Faitz - Macquarie Research

Yes, if I may add to that question, can you talk about current trading conditions in the automotive industry? Will the industry cutting capacities left and right?

Hans-Ulrich Engel

I tried to address that already with my earlier response to the question on the automotive industry overall. I think when you're seeing capacity being cut left and right, you'll look at it on a region by region basis. I can't see that happening in North America where the automotive industry, also in the beginning or middle of October, there is still quite positive. Europe, certainly, in a more difficult environment. And I said earlier that we see an overall decline with respect to volumes in Europe. But then again, in Asia, we see an increase, which in total, from our point of view, will lead to an increase in units produced in the order of magnitude of 5% to 6% on a full year basis for the year 2012.

Kurt W. Bock

And coming to agro, about the U.S. situation, U.S. drought, actually we had a very solid volume growth of something like 7%. And even at constant exchange rates, our sales growth was even higher, so we had price increases as well. And with regard to your channel inventories, I have a very good answer, which comes from one of our competitors, who said during their Q&A, I quote, "U.S. channel inventories, nothing to worry about." Which we support.

Magdalena Moll

So the next question comes from Paul Walsh.

Paul Richard Walsh - Morgan Stanley, Research Division

My first question relates really to looking into next year, even after Statoil deal, Becker Underwood, you've got STEP savings coming through. What else is there apart from the macro that you can do to drive underlying growth next year, i.e., what CapEx projects are coming through, and how you're thinking about M&A? And my second question is just on the Nutrition & Health segment. You talk about investments markets seeing weaker pricing? Can you just talk a little bit more around that? Typically, that's a more defensive part of your portfolio that's clearly coming under pressure, I wonder if you could give us a bit more insight into that, please?

Kurt W. Bock

Paul, it was very difficult to hear your questions. The audio was very, very bad. I'll try to answer correctly. I think you asked about next year M&A and CapEx?

Paul Richard Walsh - Morgan Stanley, Research Division

Yes. I think you've announced Statoil, Becker Underwood, you've got STEP savings underlying. Just thinking about what other things, excluding the macro, you can do to try and drive growth next year?

Kurt W. Bock

Okay. I mean, I think it's early to talk about next year. What we see right now is relatively flat development, flat growth. We have done a couple of acquisitions. You know our policy, I mean, we are very disciplined with regards to that. We saw both Becker Underwood and Statoil as very good opportunities, fitting with our strategic needs and financially attractive. I kind of rule out one of the other smaller acquisitions, but that's essentially -- in terms of CapEx, you see this year a slight increase in CapEx. That might continue into 2013. Again, it's too early to say because we are still in the budgeting process. But we have plenty of ideas, some are growth-driven, some are cost-driven. And our job right now is to prioritize the magnitude of projects which are presented by our divisions. And really, make sure that we do the most attractive ones. But it might mean that there's a slight increase in CapEx in 2013 compared to 2012. And in Nutrition & Health, I think you asked something about the underlying attractiveness of that industry, is this correct?

Paul Richard Walsh - Morgan Stanley, Research Division

It was -- your comments about weaker pricing and lower profitability year-on-year, can you talk a little bit more about the degree of pricing pressure? Did it accelerate in Q3? What are you seeing in vitamins markets right now?

Kurt W. Bock

Okay. So you're asking specifically about vitamins?

Paul Richard Walsh - Morgan Stanley, Research Division

Yes, please.

Kurt W. Bock

That's only minor part of all business, it's a major part of another company. We saw a little bit of weakness in vitamin E pricing, actually, and that has an effect on the bottom line as well. Vitamin E, as we all now, is a kind of cyclical demand supply driven as well, and that explains some part of the earnings development over the last 2, 3 quarters. Going into the chute[ph], it's hard to predict. We have seen also in the past, quite some surprises, sudden price increases, reductions. Underlying picture for us, I think is a good one. Nutrition and health industry is a growth industry for BASF, and we have increased our exposure with the acquisition of Cognis considerably and our breadth and depth portfolio as well.

Magdalena Moll

Now we're moving on to Richard Logan. [Operator Instructions] Richard?

Richard Logan - Goldman Sachs Group Inc., Research Division

I noticed a headline on Bloomberg, saying that you're potentially going to do some sort of deep dive into looking at shale gas opportunities. And I wondered, is that, I mean, just purely in the Oil & Gas area, or would you consider transporting ethane across from the U.S., akin, to what we're hearing, out of INEOS? And then secondly, on inventory positions, are you expecting to see destocking in towards the year end, or I mean, I think we've talked about this before, inventories being -- seemingly being at relatively low levels, you shouldn't see that destocking. I mean, really interested to get your opinion on that front.

Kurt W. Bock

Yes, thank you, Richard. Destocking, actually, what we saw the end of this quarter was, and in some areas, that people obviously had became very, very cautious, and refrained from just taking product and then came back right after 1st of October, so there seems to be a little bit of, let's say, a quarter end activity going on as well. We agree with your assessment. The level of inventory, in general, is quite low. We don't have a full picture as we have talked about before. That can be sudden surprises, but we don't see anybody who is right now, sitting on very high inventories quite contrary. Everybody is very cautious, which means if a pickup of demand, you could probably see also such in Chemicals demand happening pretty fast, which we have experienced in the past as well. [indiscernible] as I talked about this one when we have this in Bloomberg talk, they were asking, what are we doing here? And I was referring, essentially to the U.S. market. The question was about U.S. competitiveness, and I reminded them that BASF is a large chemical operator in the United States as well. We are now building a formic acid plant, which also needs natural gas, obviously, so we are participating in the shale gas advantages in North America as well. And certainly, I think you understand, Richard, that our job is also to look into potential other opportunities which we could envision, but I think it's far too early to talk about this in terms of investment, far too early. The other question -- other part of the question was, could we envision to ship ethane or LPG across LNG, across the pond? I don't think that's going to happen, frankly. I mean there is a little bit of a spot market here in Europe, but Europe still is predominantly supplied by pipelines. And as you are aware, we're also part of that business, which is kind of attractive for BASF as well. What we do need is a discussion in Europe, by the way, about shale gas in Europe because we do have shale gas reservoir deposits, and I think it's simply irresponsible to simply -- to declare that we don't need it and we don't want here in Europe, because it can be dealt with completely sustainable and responsible way also from an environmental point of view, and I think that is a discussion we have to have here in Europe.

Magdalena Moll

We're moving on with Andrew Benson. [Operator Instructions]

Andrew Benson - Citigroup Inc, Research Division

Can you just -- perhaps one quick. If you just talk about the balance of factors into the fourth quarter, and last year, there was fairly pervasive destocking. And so the business had a relatively difficult year end. This year, hopefully, stocks and system will be lower, you've got better currencies, but you've got a weaker underlying environment. So if you can compare and contrast just how the fourth quarter is likely to perform with those slightly different dynamics, I'd appreciate it.

Kurt W. Bock

Actually, we only give guidance on the full year and not on single quarters but so since this is now the last quarter, it's kind of difficult it seems to rush [ph]. What I said before, I think, is valid. I mean, we see a flat development going into Q4. We don't see an upturn in demand. It might happen, but right now, we don't have any indication that it should happen, and that is what we are preparing for essentially, flat development across the business volume wise, not talking about Oil & Gas, obviously, and Ag.

Andrew Benson - Citigroup Inc, Research Division

But it's up by sequential and year-on-year or -- well, when you're defining flat, are you saying sequentially flat or year-on-year?

Kurt W. Bock

Sequentially flat, yes, in terms of volumes. I mean, that is what we see. Keeping still in mind that the month of December, it's always a very short one for the entire industry, not just the chemical industry. And compared to last year's quarter, we had a relatively weak Q4 2011, which makes the baseline comparison a little bit easier. But again, sequentially, we are looking at volume wise, a flat development in Chemicals.

Magdalena Moll

We are coming to our last question now, and I apologize to all of those who didn't and weren't able to ask their question we will call you back after the call personally. But the last question comes from Annett Weber, BHF Bank.

Annett Weber - BHF-Bank Aktiengesellschaft, Research Division

I've just got a quick question on Oil & Gas, specifically on the production rate in Libya. The 85,000 barrels a day, is that a run rate that we have to assume for the next -- for Q4, in fact, or was this kind of artificially a bit inflated due to the capacity on the export pipelines?

Kurt W. Bock

No, it's something you can expect for Q4 as well.

Magdalena Moll

Okay, ladies and gentlemen, this brings us now to the end of our conference call. We will next report on our full year 2012 results on February 26, 2013, and I would like to ask you to mark this date already because it will probably be a event that we will have, together with you in Ludwigshafen. I would also like to use the occasion to invite you to our Agricultural Roundtable. You should have received the invitation by now, but this Roundtable will take place on November 12 in London. Our board member, Andreas Kreimeyer; and our 2 presidents, Markus Heldt and Peter Eckes, will take the opportunity to discuss our core protection and plant biotech activities with you. And we are very much looking forward to welcoming you to this event in London on November 12.

So thank you to all of you for joining us in this call this morning. Those who did not get the opportunity, we will call back in a minute. And should do you anyway have further questions, and also please do not hesitate to contact us. Thanks very much. We wish you good day, and goodbye.

Operator

Ladies and gentlemen, that does now conclude today's conference and you may replace your handsets. Thank you for joining and have a pleasant day. Goodbye.

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