BASF SE (BASFY) Q1 2018 Results - Earnings Call Transcript

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

BASF SE ADR (OTCQX:BASFY) Q1 2018 Earnings Conference Call May 4, 2018 2:30 AM ET

Executives

Stefanie Wettberg - Senior Vice President of Investor Relations

Hans-Ulrich Engel - Chief Financial Officer

Marc Ehrhardt - President of Finance

Analysts

Paul Walsh - Morgan Stanley

Andrew Stott - UBS Ltd

Christian Faitz - Kepler Cheuvreux

Patrick Lambert - Raymond James & Associates, Inc.

Peter Spengler - DZ Bank AG

Neil Tyler - Redburn Partners LLP

Markus Mayer - Baader Helvea

Andreas Heine - MainFirst

Laurence Alexander - Jefferies Group LLC

Thomas Wrigglesworth - Citigroup

Sebastian Bray - Berenberg Bank

Chetan Udeshi - JPMorgan Chase & Co.

Peter Clark - Société Générale

Operator

Ladies and gentlemen, thank you for standing by. I'm Emma, your Chorus Call operator. Welcome and thank you for joining the BASF Analyst Conference Call First Quarter 2018 Results. 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 call contains forward-looking statements. These statements are based on current estimates and projections of the board of executive directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate.

Such risk factors include those discussed in the Opportunities and Risks Report from Pages 111 to 118 of the BASF Report 2017. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. And I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.

Stefanie Wettberg

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the first quarter of 2018.

Today's conference call is limited to one hour since our Annual Shareholders' Meeting starts right after this call. On the call with me today are Hans Engel, BASF's Chief Financial Officer and Marc Ehrhardt, President of the Finance Division. Hans will explain the financial performance of BASF Group in the first quarter, while Marc will present the segment results and the financial figures in more detail. Hans will conclude by providing BASF's outlook for 2018.

Please be aware that we have already posted the speech on our website at basf.com/Q12018. With this I would like to hand things over to Hans.

Hans-Ulrich Engel

Yeah, thank you, Steffi. Ladies and gentlemen, good morning and thank you for joining us. BASF had a good start to the year and finished the first quarter 2018 with slightly higher earnings compared to a strong prior year quarter. In most businesses, we implemented further price increases. However, strong currency headwinds, mainly due to the appreciation of the euro versus the U.S. dollar, more than offset these price increases. Sales volumes were up, driven by continued strong demand.

Production plant outages negatively impacted available volumes. Please also keep in mind that Q1 2018 had less working days than the prior year quarter.

Turning to BASF Group's financial figures for Q1 2018 compared to the prior year quarter in more detail. Sales in the first quarter of 2018 decreased by 1% to €16.6 billion. Prices were up by 5% and volumes increased by 2%. Currency effects were minus 8%. Overall, portfolio measures had no impact on sales.

EBITDA before special items came in at €3.4 billion compared to €3.5 billion in Q1 2017. EBITDA decreased by 2% and amounted to €3.4 billion. EBIT before special items increased by 2% to €2.5 billion in Q1 2018. Considerably higher earnings in Chemicals, Oil & Gas and Other more than compensated for lower earnings in Functional Materials & Solutions, Agricultural Solutions and Performance Products.

Special items in EBIT amounted to an income of €9 million compared to an expense of €6 million in Q1 2017. EBIT increased by 3% to €2.5 billion in Q1 2018. The tax rate was 24.7% compared to 22.9% in the same period last year. The increase was mainly driven by higher earnings contributions from high tax countries such as Norway.

Net income was slightly lower and came in at almost €1.7 billion in Q1 2018. Reported earnings per share decreased by 2% to €1.83 in Q1 2018. Adjusted EPS amounted to €1.93. This compares with €1.97 in the prior year quarter. In the first quarter of 2018, the operating cash flow increased by 48% and came in at €1.2 billion. At €604 million, free cash flow was up by €538 million compared to Q1 2017.

Let me briefly provide you with an update on our M&A activities. In September 2017, BASF and Solvay agreed on the purchase of Solvay's backward-integrated polyamide business by BASF. We aim for a closing of the transaction in Q3 2018. Preparations encompass the finalization of ancillary agreements and obtaining regulatory approvals such as merger clearances in several jurisdictions.

In October 2017, BASF signed an agreement to acquire significant parts of Bayer's seed and non-selective herbicide businesses. In April 2018, BASF agreed to purchase additional businesses and assets, which Bayer offered to divest in the context of its planned acquisition of Monsanto.

The expanded scope includes Bayer's entire vegetable seeds business, it's well established seed treatment business, the R&D platform for hybrid wheat and the complete digital farming platform. The transactions with Bayer complement BASF's crop protection business and biotechnology activities, adding new capabilities and opportunities for profitable growth and innovation. The all-cash purchase price for the combined acquisition is €7.6 billion, subject to certain adjustments at closing.

In 2016, the combined businesses generated sales of €2 billion and EBITDA of €550 million on the pro forma adjusted basis. All transactions remain subject to the closing of Bayer's acquisition of Monsanto, expected in the second quarter of 2018. BASF expects to close most of the acquisitions in Q2 2018, with the vegetable seeds business closing in the third quarter of 2018, of course, subject to the required regulatory approvals.

In December 2017, BASF and LetterOne signed a Letter of Intent to merge their respective oil and gas businesses. Currently, we are conducting a confirmatory due diligence and are negotiating definitive transaction agreement. If an agreement is reached, closing could be expected in the second half of 2018, subject as always to regulatory approvals.

This week, BASF and Solenis have signed an agreement to join forces by combining BASF's paper wet-end and water chemicals business with Solenis. Solenis is a global producer of specialty chemicals for water intensive industries. The combined business with pro forma sales of around €2.4 billion and around 5,000 employees in 2017, aims to deliver additional value for paper and water treatment customers.

The goal is to create a customer-focused global solutions provider for the industry. BASF will hold a 49% share of the combined entity that will operate under the Solenis name and be headquartered in Wilmington, Delaware, USA. 51% of the shares will be held by funds managed by CDR. Pending approval by the relevant authorities, closing is anticipated for the end of 2018 at the earliest.

I will now hand things over to Marc to give you some more details regarding the business development of our segments.

Marc Ehrhardt

Thank you, Hans. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment in the first quarter of 2018 compared with the first quarter of 2017. Sales in Chemicals increased slightly. Higher prices in all divisions, particularly in Monomers and Intermediates, compensated the significantly negative currency effects. Volume growth in the segment was slightly positive, driven by Petrochemicals as well as Intermediates.

Volume development in the Monomers division was hampered by plant shutdowns due to inclement weather in the U.S., natural gas curtailment in China and the planned turnaround of the TDI plant in Ludwigshafen.

EBIT before special items increased considerably from €958 million to €1.1 billion. This was driven by higher margins and volumes. In Petrochemicals, earnings were negatively impacted by weaker cracker margins in all regions.

On April 11, Yara and BASF inaugurated the new world-scale ammonia plant in Freeport, Texas, which will strengthen the production Verbund at the site. The new plant allows us to take advantage of world-scale production economics and attractive raw material prices.

Sales in Performance Products decreased by 6%, mainly due to negative currency effects. All divisions of the segment were able to increase prices. The planned - unplanned shutdown of the citral plant in Ludwigshafen and the respective force majeure declarations for citral and isoprenol-based aroma ingredients as well as for vitamin A, E and several carotenoid products resulted in a slightly negative volume development for the segment.

Citral imports from our new aroma ingredients complex in Kuantan, Malaysia, helped to partially reduce adverse impacts on our customers. Slightly negative portfolio effects were mainly related to the transfer of BASF's leather chemicals business to the Stahl Group. We raised prices, and adjusted for currency effects increased the average margin compared with the prior year quarter. EBIT before special items nevertheless declined slightly, largely as a result of the negative currency effects.

Sales in Functional Materials & Solutions decreased slightly, as higher prices, especially in the Catalysts division, and slightly higher volumes could not fully offset negative currency effects. Some of our businesses, primarily in Performance Materials, were negatively impacted by raw material shortages.

Margins declined as price increases could not fully compensate for higher raw material prices. Overall, fixed costs increased, partly due to maintenance work and new production plants coming on stream. As a result, EBIT before special items decreased significantly.

Sales in the Agricultural Solutions segment declined by 7% compared with Q1 2017. This was primarily attributable to negative currency effects in all regions. Sales were also reduced by slightly lower prices in North America in particular. By contrast, we increased sales volumes. Business development in the Northern Hemisphere was dampened by the long and cold winter.

In Europe, sales were down slightly on the prior year quarter, mainly as a result of negative currency effects. These could not be completely offset by slightly higher sales volumes, particularly in Eastern Europe. Sales in North America decreased considerably largely due to strongly negative currency effects. Slightly lower prices for herbicides in particular also contributed to the sales decline.

Sales rose considerably in Asia. Significantly higher sales volumes, especially in Japan and China, more than offset the negative currency effects. The region South America, Africa, Middle East saw slight sales growth, driven in particular by higher volumes of soy fungicides and sugarcane insecticides in Brazil. Sales were weighed down by negative currency effects.

EBIT before special items was considerably lower than in the first quarter of 2017. This was mainly attributable to negative currency effects and higher fixed costs in areas such as production and research.

Sales in Oil & Gas were up significantly mainly due to higher oil and gas prices and increased volumes. In Q1 2018, the average price of Brent crude was US$67 per barrel, US$13 higher than in the same period of 2017. In euro terms, the increase was €4 or 8%. Gas prices on the European spot markets were also significantly above the level of the prior year quarter. The combined price and currency effect was plus 3%. The volume increase of 11% was driven by higher production in Norway and higher trading volumes.

EBIT before special items increased considerably from €170 million to $365 million. This was largely attributable to a higher earnings contribution from Norway due to the lower depreciation as a result of higher reserves, as well as volumes growth. Higher oil and gas prices also contributed to the earnings increase. Net income in Oil & Gas increased from €140 million to $165 million.

EBIT before special items in Other improved from minus €250 million to minus $213 million. This was mainly driven by a swing related to our long-term incentive program. While earnings in Q1 2017 were negatively affected by an increase in provisions, Q1 2018 benefited from the release of provisions from the LTI program.

Let's now turn to our cash flow in the first quarter 2018. Cash provided by operating activities increased from €833 million to €1.2 billion in Q1 2018. This was primarily attributable to the lower level of cash tied up in net working capital, largely from receivables.

Cash used in investing activities decreased from €1.2 billion to €634 million in Q1 2018, mainly driven by the decline in additions to other financing-related receivables. In addition, payments made for property, plant, equipment and intangible assets were down by €140 million to €627 million.

At €604 million, free cash flow was up by €538 million compared to Q1 2017. Both the higher cash provided by operating activities and the lower payments for property, plant, equipment and intangible assets contributed to the increase. Cash provided by financing activities amounted to €201 million in Q1, 2018 compared to €831 million in the prior year quarter. The decline was largely a result of the lower net additions to financial and similar obligations.

And with that, back to Hans for the outlook.

Hans-Ulrich Engel

Yeah, thank you, Marc. We confirm our outlook 2018 for the BASF Group, as provided at the end of February. Based on our assumptions for the economic environment and taking into account the agreed transactions with Bayer and Solvay. We anticipate slightly higher sales in 2018, largely as a result of volume growth.

EBIT before special items is expected to be up slightly on the 2017 level. EBIT for the BASF Group is forecast to decline slightly in 2018. We anticipate special charges in the form of integration costs in connection with the agreed acquisitions.

We aim to once again earn a significant premium on our cost of capital in 2018. However, compared with the previous year, the BASF Group's EBIT after cost of capital will decrease considerably. This will mainly be due to lower EBIT, including M&A-related special charges, as well as the additional cost of capital from the planned acquisitions. And now, Marc and I are glad to take your questions.

Question-and-Answer Session

A - Stefanie Wettberg

Ladies and gentlemen, I would now like to open the call for your questions. [Operator Instructions] We will begin with Paul Walsh from Morgan Stanley. I will then ask Andrew Stott to ask his question, and followed by Christian Faitz. So, now first Paul Walsh, Morgan Stanley.

Paul Walsh

Thanks a lot Stefanie. Morning, Hans. Morning, Marc. Just two questions from my side. Could you just help me understand a little bit more the year-on-year dynamics in both Performance Products and the Functional business? It just seems you've had a very nice step-up in margin in PP. I'd just like to dig a bit deeper into that.

Similarly, for a relatively similar sales number in the Functional business year-on-year, there seems to be a sort of sizable decline in margin. Again, just to balance those two things, any insights you can give would be appreciated. And I'll leave it at that, please. Thank you.

Hans-Ulrich Engel

Yeah, Marc - sorry, Paul, this is Hans. Let me start with the question on Performance Products. Indeed, what you see is, on a currency adjusted basis, an overall nice improvement. We had price increases across the board in Performance Products. The raw material price increase was actually lower than what we had expected going into the quarter, so that certainly helped.

Overall, then if I add the impact of foreign exchange, we come out with better results in Q1, 2018 in Performance Products and what we had in Q1 2017, just to give you an indication there. Currently, we took a real hit in Q1, not only the U.S. dollar, it's basically all the other major currencies that we have in our portfolio. You've seen the 8% on the top line which equates to about €1.3 billion.

On an EBIT level we took a hit order of magnitude €300 million due to the appreciation of the euro. Functional Materials & Solutions, I think you and I talked last time when we saw each other about the fact that we have a monomers business with isocyanates and we have a downstream business in Performance Materials. And if I look at the improved results in the Chemicals segment, which are to a large extent driven by the improvement in isocyanates, but also in Caprolactam, that's where then our Performance Materials business takes a significant hit because they can't pass on the significant price increases that we're seeing in the isocyanate chain.

And that explains part of the earnings decrease that we have in Functional Materials & Solutions. But overall, in the isocyanates value chain, we have significant improvement.

We have in addition to that the currency hit which is equally significant as we've seen it in Performance Products. We got to keep that in mind. And the third bigger topic that we have, we had a turnaround of our styrene plant, which also hits the result of Performance Materials and these are the three key elements that lead to lower results, lower margin in Functional Materials & Solutions.

Paul Walsh

That's great. And just a quick second question. The D&A reduction in Oil & Gas, Hans, should we be saying that €200 million as the ongoing run-rate for D&A in Oil & Gas, please?

Hans-Ulrich Engel

We have a significant reduction in Oil & Gas in deprecation as a result of higher reserves, in particular in Norway. And you should continue to see that in the year 2018.

Paul Walsh

Thank you very much.

Hans-Ulrich Engel

Welcome.

Stefanie Wettberg

The next question is from Andrew Stott, UBS. Please go ahead.

Andrew Stott

Yeah, thanks, Steffi. Morning, Hans. Morning, Marc. So a couple of things I wanted to come on to. First of all, the guidance specifically for Ag for this year, if you think back to March, I guess, what's changed here's two important things. One, you've probably lost some pre-emergent business due to the weather, and now you've got to see the vegetable seeds assets on top. So when you think about those two influences, are you still thinking for this division that guidance is as we were, but with those two changes, so that's the first question.

The second question was just understanding where we are now with your polyurethanes capacity as we look out for this year and into 2019. So is Chongqing back on? Are you running at full production in China there? Do you expect that to - the natural gas issues to have gone away? And also, I think last time we met, you were talking about the reactor just arrived on site for the TDI facility in Ludwigshafen, so best guess is to sort of startup of the TDI facility? Thank you.

Hans-Ulrich Engel

Yeah, sure, Andrew. Let me start with the Ag guidance. The Ag guidance is unchanged. If we look at the historic business, we still expect a slight improvement in results compared to prior year. Weather was quite interesting in Northern Hemisphere in the first quarter, so we have a significantly delayed start into the season depending on where you are, which geography you look at.

We're talking about two to four weeks. Based on everything that I hear from the guys in the Ag business, they think that they can catch up. So as always we've got to look at the full season Northern Hemisphere, in other words the first half will give us then the answer to your question. But at this point in time, we don't see a need to change our guidance.

Chongqing, yes, natural gas supply started in the second half of March. So we're fully supplied again. We overcame the weather related issues, winter related issues that we had in the Gulf Coast. TDI, Ludwigshafen, the reactor is in place and we expect to start up in a few weeks.

Andrew Stott

Great. Thank you very much.

Hans-Ulrich Engel

You're welcome.

Stefanie Wettberg

And so, we will continue with Christian Faitz. He will be followed then by Christian from Patrick Lambert. So now, Christian Faitz, Kepler Cheuvreux.

Christian Faitz

Yes, thanks, Steffi, and good morning. Good morning, Hans. Good morning, Marc. Just two quick questions. Coming back to Ag, are you worried about any inventory levels in agro, given this, for delay, two to four week delay in the crop season i.e., are we talking about a shortened season maybe here, shortened application season?

And then second of all, can you please shed some more light on the weak EBIT performance in North America. There you state that all segments contributed negatively. I guess, part of it is ag/weather related. Can you please elucidate this? Thanks.

Hans-Ulrich Engel

Yeah, I start with the second question. Christian, good morning. In North America, we have three impacts that we need to consider, actually we have four. We have the weather-related issues, as everyone else, who experienced freezing temperatures in the Gulf Coast. Plants there are prepared to take hurricanes up to Level 4 and 5. But they are made - not made for freezing conditions and that's what we experienced; not only us, also our raw material suppliers. And that led to extended outages that we experienced in particular in our Freeport and Geismar sites. As you know these are the two Verbund sites that we have.

A second big impact that we have comes from currency. Look at what happened with the U.S. dollar, I think the U.S. dollar on average in Q1 2017 was at $1.06, and we were at $1.23 in the first quarter of this year. The third impact that we have are cracker margins, which are significantly lower in Q1 2018 than where they were in 2017. With that I have three. What was the fourth one that I had on my mind? So, outages, weather, Ag, big one you mentioned that one already and foreign exchange. These are the four explanations for the significant decline that we have in results in North America.

On Ag, overall, I'd say no significant issues with the distribution channels. I think end of the season, now looking at products on ground, in particular, in Brazil shouldn't be an issue there with all the measures that were taken in 2017.

North America, a compressed season may play a role and that could very well have an impact on the distribution channels, and the level of product in the channels. I cannot exclude that. We will see, what's going to happen there during the season. Europe, overall, looks okay, but for France, where we see relatively high levels in the distribution channel, Eastern Europe looks okay. Asia based on everything that I heard, no issues.

Christian Faitz

Okay. Many thanks. I wish you a short ATM [ph] and it would be good.

Hans-Ulrich Engel

Thank you very much. Highly appreciated.

Stefanie Wettberg

So now the next question is from Patrick Lambert, Raymond James. Please go ahead.

Patrick Lambert

Hi, good morning, Steffi. Good morning, Hans, Marc. Two quick questions, the first one is on citral and actually the EBIT on Performance Products. Was there any impact of any insurance payments due already to the force majeure and how do you see that panning out in Q2, Q3 in terms both of ramp up, and also insurance contributions?

And the second will be round Ags again. When I look at the potential size of the platform post the acquisitions, would you help us qualitatively and quantitatively possible to think about the synergies you can extract from both acquisitions - both in terms of R&D and also in terms of production, crop production? Thank you.

Hans-Ulrich Engel

Okay, Patrick. Your first question on citral. Yes, there is - we received an insurance payment. As always, this is an initial payment based on what you currently - what the insurers currently see. We expect a further payment, not yet clear whether that will come in Q2 or whether that will come in Q3, depends on when we will reach agreements with the insurers.

Give you an order of magnitude of the insurance situation and I give that to you on BASF Group level, since we are partially self-insured, and then figure something in the lower double-digit million range. A positive impact in the lower double-digit million range in Q1. And as I said, not yet clear whether there will be another positive impact coming from the insurance either in Q2 or in Q3.

Patrick Lambert

And in terms of volumes ramp up, how does it took?

Hans-Ulrich Engel

So significant hit, obviously, you see this - I think, volume declined order of magnitude 10%-plus in the operating division in Q1. We were able to bridge supply to our customers with quantities that came in from Kuantan, but nevertheless its 10%-plus volume decline. We're ramping up as we speak, so let's keep our fingers crossed that we are able to supply our customers as quickly as possible again.

On your Ag synergies question, actually that is - what we do is not the typical acquisition where you look at harvesting significant synergies, in particular, on the cost side. These are complementary businesses that we are acquiring and as a result of that, we look primarily - not to say exclusively, at growth synergies and not necessarily for cost synergies.

Patrick Lambert

Okay. Thank you.

Stefanie Wettberg

The next - yeah, sorry.

Patrick Lambert

Thank you.

Stefanie Wettberg

Okay. I would now ask Peter Spengler, DZ Bank to ask his questions. And the following ones in queue are Tony Jones and then Markus Mayer. So now Peter Spengler, DZ Bank. Please go ahead.

Peter Spengler

Good morning. Thank you for taking my questions. I have a follow-on question on the Bayer Crop Science business you acquired. Are there also facilities and lands you've acquired from Bayer in Germany and especially in the U.S.? And do you still own seeds business and sizable research experts and facilities, which you can add to the BASF business or it's basically that you buy the BASF business and keep it and add some experts from your side.

And the second question is on your joint venture with Solenis, you have minority position and you have, I think, three out of seven board members there. Your business was smaller. Is there a timeline or - to change this setting or is the current setting permanent in the future? Thank you.

Hans-Ulrich Engel

Okay. I'll tackle your Ag question, and Mark will then address your Solenis question. Ag, what we are acquiring are actually fully enabled businesses. They come with - they come - the first part of the transaction, five chemical production and formulation sites, 10 R&D sites; second part of the transaction, which is further seven research and development sites. And then, obviously, a lot of regional seed production and breeding facilities.

With respect to personnel out of the different parts of this deal, total number of employees, order of magnitude, 4,300 that come with the transaction. So you see fully enabled businesses, be it on the production site, be it R&D site, be it sales, marketing, breeding and seed production facilities. So what you need to run the business comes with these transactions. And with that to Solenis.

Marc Ehrhardt

Thank you, Peter. First and foremost what we want to do is create a customer focused global solutions provider for the paper and water treatment industry. So we've now gone the first step in creating this entity and we're fully focused in bringing those two businesses together, first. And you know that CD&R is a private equity firm. So at one point, we will look what the next steps are, but for now we're just concentrating on making sure that we set up this entity in a right way.

Peter Spengler

Okay. Thank you very much.

Stefanie Wettberg

The next question is from Tony Jones, Redburn. Please go ahead.

Neil Tyler

Good morning. It's actually Neil Tyler, Redburn. Morning, Steffi, Hans, Marc. Two from me, please. Firstly, on the cash flow, working capital development. The tightening of the working capital balance in the quarter. Can you share your thoughts on how much of the drop in receivables particularly is down to timing effects in a later sales perhaps in Ag and the like?

And then sticking with Ag for the second question, and I suppose further to Andrew's question earlier. The EBIT impact from acquiring those seasonal businesses mid-way through the year, presumably, I would assume would be negative for the second half of the year, because of the lack of sales in those last six months. Is that the right assumption to make? Thank you.

Hans-Ulrich Engel

I'll take your second one. And then Marc will answer the question on cash flow receivables and what he and his team have done in this area. On the EBIT impact your assumption is correct. Overall what we are expecting is a negative EBIT impact, A, due to the seasonality of the business and, B, as a result of the significant integration costs that we will have to book in 2018.

Neil Tyler

And the pre-integration cost still negative?

Hans-Ulrich Engel

Again, please.

Neil Tyler

Excluding the integration costs you would still expect a negative contribution?

Hans-Ulrich Engel

We would still expect because the seed season is more or less done for the crop protection product. And the seed treatment product's season in Northern Hemisphere, we will miss. That will be compensated for, by way of an adjustment of the purchase price obviously. But that you will not see in the P&L. You will see that in the balance sheet.

Neil Tyler

Okay. Thank you.

Hans-Ulrich Engel

Now, to the cash flow question, yes indeed, the - let's say, the delay in some Ag business played somewhat of a role. However, I think, what we've shown over the past year is a very, very concentrated management of our cash flow. We have instituted a series of measures to make sure that we accelerate our cash cycle and that then ends up also in the improvement of almost €1 billion in receivables.

Measures that we've taken for instance of cleanup in longstanding overdue. That we've systematically gone through all the regions and trying to get back. We've addressed issues like bank acceptance drafts in China to make sure that we accelerate the cash cycle. That are reported under receivables for the longest time. So it's a combination of both.

A little, slight delay in the uptick that we see in the first quarter due to the Northern Hemisphere Ag season, and the other is continued efforts to accelerate our cash cycle.

Neil Tyler

Excellent. Thank you very much.

Stefanie Wettberg

The next question comes from Markus Mayer, Baader Helvea. We will then after him have Andreas Heine, MainFirst. But now first Markus Mayer, please.

Markus Mayer

Hey, good, guys. Good morning. Two questions on the Ag as well. First one on this negative pricing effect in Ag, maybe I missed this answer. But can this mainly from product mix effect? That is basically my first question. And then second question on this acquired digital farming xarvio of Bayer. Did I understand it rightly, that you - that basically Bayer still has a license? And maybe you can shed some light how this works with this license.

And maybe also as I understood it so far this is kind of open data business, so how it does, kind of business and model works from this digital farming for you?

Hans-Ulrich Engel

Yeah, good morning, Markus. I'll take your first question on Ag. And indeed that is predominantly the impact that comes from product mix. And overall, slightly lower prices in North America, these are the two contributors, and with that to digital farming, I hand to Marc.

Marc Ehrhardt

Yeah, so I fully understand that with the dynamic of the discussion with regulators. So at the beginning we were to purchase a license to the digital farming platform that they had. But that then turn on to a full out divestment. So now we own the digital farming platform that Bayer built up. So we're really happy that that really accelerates also our efforts in that space and is a great outcome for us in the overall deal.

Markus Mayer

Okay. Thank you.

Stefanie Wettberg

So now, Andreas Heine, MainFirst. Please go ahead.

Andreas Heine

Yes, on Chemicals, please. If you look on that you most likely will have a much better availability of the high-margin plants in MDI and TDI. And on the dynamics we see in prices. What do you see going into the same quarter for Chemicals, which was at least in 2017, and in the first quarter, the main driver of your earnings?

And secondly, could you give a little bit - shed a little bit more light in the discussions you have with LetterOne on the oil and gas joint venture. I thought that the negotiations come to an end much earlier than they seem to do. What is the issue, why it takes that long to come to a final agreement, please?

Hans-Ulrich Engel

Okay. Morning, Andreas. First on your question on Chemicals, what do we currently see? I'll start with petrochemicals. I alluded already to significantly lower cracker margins, continued strong isocyanates prices, overall, a good price situation and margin situation in intermediates. Petrochemicals cracker margins, particularly North America, significantly below what we experienced in Q1 2017. I think since Q1 2017 there is roughly 3.5 million tons of C2 capacity that was added in North America.

That obviously has a significant impact on prices, but also on margins in what we call industrial petrochemicals, the acrylic acid, butyl, the oxos, actually good solid margin environment, good solid demand across or around the globe.

Isocyanates, we see what I would call a differentiated development by region. MDI prices have come down quite a bit in Asia and in particular in China. If you compare to end of Q3, early Q4, look like they peak there and have come down from that point. In Europe MDI price is slightly down compared to the highest that we have seen also there in end of Q3 early Q4. North America MDI, relatively stable.

But the question always with the new capacity, MDI capacity that is coming onstream, in particular the Sadara quantities that hit the market, what this will mean and how long we can actually enjoy this still very strong margin environment. TDI is relatively stable at a very high level. Looks like April prices will roll over into May, but also there the question, what the additional volumes that come on stream will do and they include then also our TDI plans in Ludwigshafen, so that maybe the quick outlook on Chemicals.

Overall, if I think Q1, Q2, we've seen - not only seen, we are, based on everything that I have seen in April, operating in an environment with respect to Chemicals that is very similar to what we've experienced in Q1 2018. On Oil & Gas, your question is why does it take longer?

Now, if I think about the fact that we've signed a Letter of Intent in early December and we're now at the beginning of May, I don't see a significant delay. What you have to factor in is that you need a consent from one of your partners in each and every geography that you are operating in, because in Oil & Gas, you're typically not alone. You're always in a consortium, in a joint venture; can provide data only once your partners have provided you with the necessary consent.

That actually took a bit longer than what we had expected in certain geographies, which then overall leads to what I would call a delay, but nothing where one needs to be concerned about. Both parties are well aware of what's happening in Oil & Gas and have done a number of transactions. And the lesson from that is it typically takes a little bit longer than what you tend to think in the world of - in the ambitious way that we typically think. Does that help?

Andreas Heine

Yes. A lot. Thank you very much.

Hans-Ulrich Engel

You're welcome.

Stefanie Wettberg

Okay. We have five more analysts in the queue and 15 minutes to go. So we will now have Laurence Alexander from Jefferies. Then followed by Thomas Wrigglesworth, Sebastian Bray, Chetan Udeshi and Peter Clark. So now Laurence Alexander from Jefferies. Please go ahead.

Laurence Alexander

Good morning. Just quickly, could you clarify little bit the margin pressure that you are seeing in Construction Chemicals and the degree to which you believe you either lost demand for the year or you saw demand get pushed into Q2? And then secondly, just more broadly across your downstream chemicals, so the Functional and Performance Products, have you seen any real slackening in underlying order trends or has everything been pretty consistent?

Hans-Ulrich Engel

Yup, on the EBIT [ph] margin pressure, we have what I would call two businesses, which are tend to be impacted by weather, one is the Ag business, the other is the Construction Chemicals business. So also there we've seen a late start to the season, both in commercial and in residential. And the expectation is that - and April has shown that to a certain extent the demand will pick up in Q2.

On Functional Materials & Solutions your question was, do you see a flattening somewhere. I'd say no. I mean, I just explained, what's happening in Construction Chemicals. We've seen slight growth in automotive, and we saw the two key industry, automotive and construction that we supply out of the Functional Materials & Solutions segment. So slight growth in automotive, a bit below what we are expecting for the full year, in particular, in North America, a slow - or slower start than what we had actually expected which may also be weather related.

But overall, demand patterns pretty much in line with what we thought we would see in 2018 and in line with what we explained earlier in the year, during our call in February. So in other words, no change.

Laurence Alexander

Okay. Thank you.

Stefanie Wettberg

The next question is from Thomas Wrigglesworth, Citi. Please go ahead.

Thomas Wrigglesworth

Good morning, everybody. Thanks very much. So, obviously, I know there are lot of puts and takes. But on Performance Products, it looks to me like we're seeing kind of pricing picking up over the last really kind of two to three quarters. Are you seeing - how are doing in terms of recouping the raw material impact that's coming through there? As we exit the first quarter and enter the second quarter, should we be anticipating further pricing acceleration, and is that being accepted by customers? That's my first question.

My second question is just a point of clarification. You kindly gave us the insurance numbers, but the insurance claims, is that purely citral in the quarter? Or are there MDI claims as well? If you could just clarify what the group insurance covers? Thank you.

Hans-Ulrich Engel

Yeah, okay. I will start with your insurance question. What I gave is the purely the impact that we have from citral with this low-double-digit million figure. On a group level, there is nothing in there for MDI the auditors that we had there in China due to natural gas curtailment. There is no insurance available. The weather related impact that we have does not fall under business interruption insurance, so there is nothing in for that. There is also nothing in for the North Harbor incident, where we are expecting also some time in Q2 and Q3 a final payment. So what I've given you is purely citral.

On Performance Products, as mentioned already, we have a margin improvement. If I adjust that for the FX impacts, which in other words, means that we were able to increase the prices above the raw material impacts that we had in Q1.

On the raw materials side, please always keep in mind we have in U.S. dollar terms, significant increases compared to Q1 of last year. But again currency adjusted for a company that reports in euros there is not much of an increase and we were able to compensate or even gain a little bit back compared to the situation that we were in - in particular in Q2 and Q3 of last year in Performance Products.

And price increases, there is a whole range of price increases that was announced in Q1. We'll see now during Q2, what will stick and what will not stick.

Thomas Wrigglesworth

Okay. Thanks very much.

Hans-Ulrich Engel

You're welcome.

Stefanie Wettberg

The next question is from Sebastian Bray, Berenberg. Please go ahead.

Sebastian Bray

Good morning, and thank you for taking my questions. I would have two, please. The first is on the agreement with Solenis. I just want to confirm, and apologies for being a bit simpler on this. Is the right approach to modeling this to simply deduct the related revenues from the Performance Products segment for BASF for 2019 onwards. And the second one is on a question of distribution of integration costs. I appreciate, it's a bit early, would you expect a significant proportion of these to fall into 2019, and will you try to book as many as possible upfront? Thank you.

Hans-Ulrich Engel

The second question, again that was on?

Sebastian Bray

Distribution costs - sorry, integration costs. Pardon me.

Hans-Ulrich Engel

The integration cost for which transaction?

Sebastian Bray

For most - well, what I'm trying to get at is that would you expect for the transactions that you have announced for Solvay for the Ag, for which one, for all of them to potentially move into 2019 relative of how much of this do you think will be in 2019 relative to 2018?

Hans-Ulrich Engel

Okay. On the latter one, it obviously depends on the point in time, where we closed. So let's take them one at a time. For the Ag transactions, we would expect to actually book a large chunk of integration cost already in 2018. There will be spillover into 2019, there's no question about that. It depends on the point in time at which we will sell inventories and then cycle the - what I call, purchase price allocation cost through our P&L.

On Solvay, we are expecting to close that transaction in Q3, which then would also mean that there would be a large chunk already in 2018. On - what else do we have? On Solenis, we are expecting a closing at the earliest in Q4. And that depends then really whether we will still be in a position to book something in Q4 of this year? Whatever we can, we will most probably book in the year, where we acquired.

What's important to keep in mind with respect to Solenis. In 2018, and in other words in Q2, we will have to put that business in a disposal group. As a result of that - and I have to tell you, Sebastian, that everyone around me is nodding. I think they are bit concerned that I got my reporting correct here. But apparently what I'm saying so far it's correct.

So there will be disposal group as of Q2, which then means the revenue as well as the results will be…

Marc Ehrhardt

[indiscernible].

Hans-Ulrich Engel

Pardon me.

Marc Ehrhardt

Stay where they are.

Hans-Ulrich Engel

In that case, stay where they are. Okay, in that case, I just hear stay where they are. And then from the point in time on where we close, we will then have an equity reporting which means then we will not show sales anymore for that business we will show our share of the net profits and that will be shown as part of the EBIT line.

Now everyone is nodding around me again, that seems to be correct.

Sebastian Bray

Sounds great. Thank you very much.

Stefanie Wettberg

Okay. Now we have Chetan Udeshi, JPMorgan. Please go ahead.

Chetan Udeshi

Yeah, hi. Two questions. Firstly on Performance Products, can you quantify what is the net negative impact you might have seen from the loss of production in the citral chain in Q1, because you had some insurance payments you benefited as you mentioned in the release from higher prices. And maybe you sold some volumes from inventory or your Malaysian plants. So the question I have is, should we be expecting a sequential, substantial improvement in Performance Products, once citral is up in running by end of this quarter or - so just to know the exact - or some sort of quantifying the impact in Q1 will be helpful for that.

And the second question was, in your Catalysts business, you mentioned the margin or earnings are down significantly, primarily because of FX. But even underlying it seems the margin was down. So can you explain what is happening in that business, given that the metal prices were more favorable, so that should have been - probably be a tailwind on margin as there? Thanks.

Hans-Ulrich Engel

Okay. So I'll do Performance Products, Marc will do Catalysts. On citral, as explained, we received a first insurance payment. Picture a - picture for the results in Performance Products, overall, a low-double-digit million negative impact after this net insurance payment.

Marc Ehrhardt

And onto your question on the Catalysts division, well, we're seeing very good business in - and remember we've got three or four areas as you saw in that division. We've got the chemical catalyst, refinery catalyst, that's one. Those are doing very well with volumes developing in the right direction. Battery materials is obviously going from a low level also looking good.

Trading, also with healthy numbers. Where we're seeing volumes coming down is in fact in the Mobile Emissions Catalysts business, there especially - and if you've been following the turmoil in the European sector, a lot of the OEMs are shuffling their platforms back and forth in the light-duty diesel segment. And that one - I mean, also if you know a number of components that are on diesel, exhaust treatment is almost fourfold of what you have in the light-duty gasoline. So, obviously then, if there is a shift in platforms that has an impact on our business.

Chetan Udeshi

Is it just a diesel share mix as an overall percentage of the sales or is it also because of some share gains between yourself and your competitors, which is impacting you more maybe at the moment?

Hans-Ulrich Engel

Well, it's a little bit more complicated in terms of that, because you usually win a platform three years before you implement. So here you've got a combination of both the actual sales of certain platforms is moving in a way different than what was maybe planned in the past, and what you did in the competition performance four years ago. So I think it's a little bit too complicated to sort that out. But I wouldn't say that we've lost market share in the short-term.

Chetan Udeshi

Okay. Thank you very much.

Stefanie Wettberg

So, now, the final question is from Peter Clark, Société Générale. Please go ahead.

Peter Clark

Yes, good morning. Thank you very much for that. Just coming back only at - you are talking functional solutions on the margin. You made it quite clear Performance Materials is particularly hard hit and I think you had fixed costs rising again in the first quarter. So the first question really is, is that the case, Performance Materials really makes that segment margin look a lot worse potentially?

And then in terms of the Coatings business, which has also been under a lot of pressure, particularly from raw materials. One of your major competitors on the auto side is pointing at potentially getting over the raw materials as they see it, or making a certain headway on it by the second half. Just wondering if the progression is similar to what we see in the markets, but going into the second-half that you are more confident that these margins can start stabilizing and turning on the coating side. So that's excluding the deco in Brazil. Thank you.

Hans-Ulrich Engel

Yeah, Peter, on your first question, indeed, Performance Materials for the reasons I mentioned earlier, they get the high raw material cost from the isocyanates, but also in the PA6 and PA66 value chains where we've seen significant increases, not only quarter-over-quarter but also Q4, compared with Q1. They can pass on part of that, but not all of it. That was one of the reasons, but if you look at the entire value chain, we are quite happy with the results that we are seeing there, in other words there's nice improvement.

Next thing that I already mentioned is that we had a turnaround of our styrene plant in Ludwigshafen also hitting Performance Materials. And then overall, the FX impact as already mentioned several times, so that's the explanation for Performance Materials in particular, but also explains to a large extent what's happening in Functional Materials & Solutions overall.

On the raw materials for coatings, I have to say, I am not yet sure what's going to happen there in the second-half of the year. Yes, we've seen that raw material price increases are much lower than what we experienced during the year 2018 on an ongoing basis, the foreign exchange helping there. But whether or not that could lead to a margin expansion in the second-half of the year, frankly, that's too early to tell.

Peter Clark

Okay. Thank you.

Hans-Ulrich Engel

Welcome.

Stefanie Wettberg

Ladies and gentlemen, this brings us to the end of our conference call. Martin Brudermüller and Hans Engel will report on our second quarter results on July 27, 2018. Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today and goodbye for now.

Operator

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.