Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome and thank you for joining the BASF Analyst Conference Call on the 2nd Quarter 2018 Results. Throughout today's recorded presentation, all participants will be in a listen only mode.
You.
This presentation contains forward looking statements. These statements are based on current estimates and projections the board of Executive Directors and currently available information. Forward looking statements are not guarantees 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 report from Page 111 to 118 of the BAF report 2017.
BAF does not assume any obligation to update the forward looking statements contained in this presentation, above and beyond the legal requirements. I would now like to turn the conference over to Stephanie Wettberg, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the second quarter of 2018. On me with the with me on the call today are Martin Buder Miller, Chairman of the Board of Executive Directors and Hans Engel, BASF's Chief Financial Officer. Martin will explain the financial performance of BASF Group in the second quarter and comment on recently announced investments and transactions While Hans will present the segment results and financial figures in more detail. Martin Butler Miller will conclude by providing BASF's outlook for 2018.
Please be aware that we already posted the speech on our website at BASF.com/q222018. With this, I would like to hand things over
In Q2 twenty eighteen, we raised sales prices in all segments. Volume development was solid supported by all segments except Performance Products, which was negatively impacted by the supply shortages in our CITROL value chain. Currency headwinds persisted. EBIT before special items of BASF Group increased by 5% compared to Q2 2017, and amounted to 1,000,000,000. We recorded strong earnings in the Chemical segment or bathed slightly below the prior year figure.
In the Oil And Gas segment, we considerably increased earnings while Agricultural Solutions And Performance Products slightly improved earnings. In Functional Materials And Solutions, the business remained challenging and earnings declined considerably. Turning to BASF Group's financial figures for Q2 2018 compared to the prior year quarter in more detail. Sales in the second quarter of 2018 increased slightly to 1,000,000,000. Volumes increased by 3% and prices were up to 6%.
Currency effects amounted to minus 6% mainly due to the appreciation of the euro versus the US dollar. Overall, portfolio measures had no impact on sales. EBITDA before special items and EBITDA were on the level of the prior year quarter figures at 1,000,000,000 and EUR 3,200,000,000, respectively. EBIT before special items increased by 5% to 1,000,000,000 in Q2 2018, mainly attributable to considerably higher earnings in oil and gas. Earnings in Agricultural Solutions and in Performance Products improved slightly.
With minus EUR 65,000,000, Special items in EBIT were related to restructuring and integration measures and were on a comparable level with Q2 2017. EBIT increased by 5 The tax rate increased from 22.1 percent to 27.1 percent. This increase was mainly driven by higher earning contributions from the high-tech countries, particularly in Norway. The new the net income almost reached the level of the prior year quarter and came in at 1,000,000,000. Reported earnings per share decreased by 1% to 1.61 in Q2 2018.
Adjusted EPS amounted to and this compares with in the prior year quarter. Cash flows from operating activities amounted to 1,000,000,000 in the second quarter of 2018, compared to 1000000000 in the prior year quarter. The decrease was largely driven by a negative swing in miscellaneous items and a lower cash flow from changes in network capital, networking capital. Free cash flow decreased from 1,000,000,000 to billion. Let me now briefly touch on our announcement of July 9.
ESF has entered into negotiations regarding the establishment of a Verbund side in the South Chinese province of Guangdong. BSF would be the 1st foreign company to use the opportunity to establish a full owned and operated for Boonsight including a steam cracker in China. What is the rationale behind this step? Well, we intend to further invest in China because the country with a world market share of around 40% is already today and even more so in the future, the key market for the chemical industry. If you aim to be the leading chemical company, which is BASF's ambition, you have to participate in this growth market.
Furthermore, the new Verbund side is an important step to participate in the ongoing opening up of the chemical industry in China. The total investment is estimated to reach upon up to USD 10,000,000,000 by completion of the project around 2030 with the first investments expected in 2021 at the earliest. The first plants could be completed by 2026 at the latest. Please keep in mind that the signing of the memorandum of understanding is only the first step. Many further steps will have to follow.
The immediate next step is the completion of a pre feasibility study. Today's conference call gives me also the opportunity to provide you with some further details on the transactions we agreed to with Bayer in October 2017 April 2018. We expect to close these transactions in August. By combining our existing drop protection business, biotechnology and digital farming activities with the new businesses and assets we purchase if we are purchasing from Bayer BSF will become an even stronger partner for farmers worldwide. The acquisition marks BASF's entry into the seed business.
In the future, we will have cotton and soybeans as well as vegetable seeds. We extend our herbicide portfolio by adding glufosinate ammonium based non selective herbicides. Our seed treatment offering will be strengthened by a leading portfolio in key markets in North And South America. And we will use our extended digital capabilities to further enhance our offerings for farmers. It is important to note that we do not only acquire fully enabled businesses and assets, but also very promising research projects that will amplify our innovation potential in Agricultural Solutions.
Furthermore, over the last decade, VSS plan science research has developed a strong trade library. In future, we will be able to commercialize these traits also through our own seed business. BASF now has an even more comprehensive portfolio for farmers in all key markets White. In North America, we will offer a very broad portfolio and will become a provider of integrated solutions. In South America, we will significantly enhance our offering The transaction marks our entry into the seed markets for vegetables, oil seed rape, and cotton.
In Asia, we enter the seed markets for vegetables and significantly enhance our herbicide portfolio. Farmers around the world will benefit from our more comprehensive and attractive offering with access to more tools to increase their yields, crop quality and profitability. On this slide here, chart number 7, we provide you with a pro form a overview on our new Agricultural Solutions segment. Based on 2017 figures, The combined business had sales of almost 1,000,000,000 and generated an EBITDA of 1,000,000,000. The acquisition enhances BASF's agricultural solution business in several aspects.
It significantly improves our position in the large markets in North And South America, where seeds, seed treatment solutions and non selective herbicides are additions to our existing portfolio. Let me also stress that we Our business model is and will continue to be innovation driven. We will keep R&D expenses at a high level because investing in innovation pays off in this industry. An attractive EBITDA margin of around 23% clearly demonstrates that. And finally, let me provide you with some insights on our integration plan.
We used the 9 months since the announcement in October last year to very clearly prepare for the integration. We now have a concept in place for the seamless transition and smooth onboarding of employees. We are very much looking forward to welcoming about 4500 highly experienced new colleagues to the BASF team. We are happy that particularly all beer buyer employees in the scope of the transactions accepted the offer to join BASF. The integration concept focuses on strengthening and developing the acquired businesses.
We want to ensure business continuity and a seamless transition for our customers. In our first step, we will create a new global business unit for seeds and traits. It will also include the vegetable seed business, which will be managed rather independently. The glufosinate ammonium business will be integrated into BASF's existing herbicide business. The next 3 to 4 months, we will be used for the so called discovery phase.
During this phase, we will also rely on the know how and the expertise of our new colleagues to further develop the strategy for our Agricultural Solutions business and fine tune our organizational setup. The structural integration will begin in January 2019. So let me summarize. This is an important step for BASF to significantly strengthen our portfolio of agricultural solutions for farmers. The market for crop protection products and seeds is highly attractive and provides a lot of opportunities.
I'm convinced that BASF is well positioned to further accelerate profitable growth in this segment. With an update on the further M and A activity as we recently announced. In December 2017, BASF and LetterOne signed a Letter of Intent to merge their respective oil and gas businesses. We aim for a signing of the contracts within the next week. If an agreement is reached, closing could be expected in Q2 in Q1 2019, subject to customary regulatory approvals and approvals of the mining authorities.
Beginning of May 2018, BASF and Solaine has signed an agreement to join forces by combining BASF's paper Wet End And Water Chemicals business with Solenis, a global producer of specialty chemicals for water intensive industries. Currently, necessary merger control filings are being prepared or have been submitted. Pending approval by the relevant authorities Closing is anticipated for the end of 2018 at the earliest. At the end of June 2018, the EU Commission informed BASF that it will continue to review the planned acquisition of Solvay's integrated polyamide business in an in-depth investigation. The EU Commission will gather and evaluate more data during this in-depth investigation and will likely take a decision in Q4 2018.
BASF will continue to respond to the concerns of the EU Commission and evaluate different scenarios. And with this, I will now hand over to Hans, and he will give you more details regarding the business development of our segments.
Yeah, thank you, Martin. Good morning, ladies and gentlemen. Let me summarize the financial performance of each segment in the second quarter of 2018 compared with the quarter of 2017. I start with chemicals. Sales in chemicals increased slightly.
Higher prices in all divisions, particularly in monomers and intermediates more than compensated for negative currency effects. Volume growth in the segment was slightly positive driven by petrochemicals and intermediates. EBIT before special items decreased slightly, but still came in at a high level of almost 1,000,000,000. Higher volumes and strong margins in monomers and intermediates could not fully compensate for overall higher fixed costs and lower cracker margins in all regions. Particularly in North America.
Sales in Performance Products declined slightly mainly due to negative currency effects. All divisions of the segment were able to increase prices. The unplanned shutdown of the CTile plant in Ludwig Safem and the respective force majeure declarations citrile, isopronol based aroma ingredients, vitamin A and E, as well as several carotenoid products, continue to negatively impact the segment's volume development. At the end of April, we restarted the CITROL plant, production is stable and on July 2nd, we were able to lift force majeure for vitamin A and E products in our animal nutrition business. Slightly negative portfolio effects were related to the transfer of BASF Leather And Chemicals business to the STAHL Group, and the divestment of a production site for paper dispersions in Austria.
An insurance payment related to the unplanned shutdown of the tile plant compensated for lower earnings contributions and force majeure related costs in the Nutrition And Health division. Overall, we could slightly increase EBIT before special items due to lower fixed costs and higher margins. Sales in Functional Materials And Solutions increased slightly. Higher prices and volumes more than offset negative currency effects. We were able to raise prices in all divisions, but construction chemicals In this division, prices were on a level which is the largest customer industry of the segment.
Fixed costs went up, in particular, due to the startup of new production plants For example, we continued to expand our offering in catalyst and coatings with assets in Shanghai and globally started up several plants in Performance Materials. High raw material costs put additional pressure on margins. Overall, this resulted in a significant decline in EBIT before special items compared to the prior year quarter. Sales in the Agricultural Solutions segment declined slightly compared to Q2 2017. This was attributable to strongly negative currency effects in all regions.
However, especially in South America and Asia, we were able to increase volumes. Sales prices were raised slightly. Sales in Europe decreased slightly as a result of negative currency effects. These could not be completely offset by higher volumes, particular for herbicides in Central And Eastern Europe. In North America, sales were considerably lower than in second quarter of 2017.
Sales were reduced by lower volumes, particularly of fundress size in Canada due to late start to the season and higher inventories at our customers. Negative currency effect also contributed to the decline in sales. We recorded considerable sales growth as well as a slight increase in prices Sales in the region, South America, Africa, Middle East rose considerably mainly due to higher volumes. Volume growth in Brazil was driven by fungicide and insecticides, while Argentina saw particularly strong increases in herbicide volumes. Significantly negative currency effects had an offsetting effect.
EBIT before special items was slightly higher than in the previous year quarter. Despite the negative currency effects, a more favorable product mix lifted our average margin. This more than compensated for the slight increase in fixed cost. Sales in oil and gas were up considerably, mainly due to higher oil and gas prices and increased volumes. In Q2 twenty eighteen, the average price of Brent Crude was US74 dollars per barrel, US24 dollars higher than in the same period of 2017.
In euro terms, the increase was gas prices on the European spot markets were also significantly above the level The volume increase of 5% was mainly driven by higher volumes in Norway. EBIT before special items increased considerably from 1000000 to 1000000. This was largely attributable to higher oil and gas prices. In Norway, we also saw volume growth and recorded lower depreciation as a result of higher reserves. Net income oil and gas increased from EUR 122,000,000 to EUR 151,000,000.
Now to Other, EBIT before special items in Other improved from minus EUR 151,000,000 to minus EUR134,000,000 in Q2 2018 due to lower contributions to provisions and an improved foreign currency result. Let me now turn to the cash flow development. In the first half of twenty eighteen, cash flows from operating activities decreased by EUR 347,000,000 to billion. This was largely due to a negative swing in miscellaneous items. The cash out flow related to changes in net working capital amounted to minus 1,000,000,000 compared to minus 1,000,000,000 in the first half of twenty seventeen.
At EUR 1,700,000,000, cash flows from investing activities were EUR 630,000,000 lower than in the first half of twenty seventeen, In the prior year period, the increase in other financial assets tied down higher amounts of cash than in 2018. Payment made for tangible and intangible assets decreased by 1,000,000 and amounted to 1,000,000,000. Free cash flow came in at 1000000000 compared to 1000000000 in the first half of twenty seventeen. Financing activities led to a cash outflow of EUR 518,000,000 compared to a cash outflow of 1,000,000 in the 1st 6 months of 2017. And with that, back to you Martin for the outlook.
Thanks, Hans. Global economic risks increased significantly over the course of the first half of twenty eighteen, driven by geopolitical developments and the trade conflict between the U. S. And China as well as between the U. S.
And Europe. We are monitoring these developments and the potential effects on our business very closely. At this time, however, our assessment of the global economic environment in 2018 remains unchanged with one exception. We increased the expected average oil price for 2018 from USD 65 per barrel to USD 70 per barrel. Based on our assumptions regarding the economic environment, we confirm our outlook 2018 for BASF Group as provided in February.
We anticipate a slight sales growth. EBIT before special items is expected to increase slightly, EBIT is forecast to decline slightly, and we expect to earn a significant premium on our cost of capital with a considerable decline in EBIT after cost of capital. This will be mainly due to the lower EBIT including M and A related special charges as well as the additional cost of capital from the agreed acquisitions. Please keep in mind that the intended merger of our oil and gas activities is the business of D'A Deutsch Elaghi and its subsidiaries is not taken into account of this outlook. Upon signing of the final transaction agreement, the Oil And Gas segment's earnings would no longer be included in sales and EBITDA for BASF Group retroactively as of January 1, 2018.
And now with this, Hans and I would be glad to take your questions.
Ladies and gentlemen, I would now like to open the call for your questions. Everybody has a chance to ask his or her question. Paul Wolschmang Stanley is the one to start. Please go ahead, Paul.
Yes, thanks a lot, Stephanie. Good morning, everybody, Martin Hans. Two questions from me would be, firstly, I think you mentioned there was a, an insurance payment for Citral in the second quarter. I wondered if you could just quantify that for me, and maybe you could just comment on how you see that business progressing now that the capacity is coming back up. I think some of the pricings come down.
So just to dig us some context around that, please. And secondly, Martin, you sort of mentioned the global economic risks had sort of escalated in the first half. I'm assuming not given your guidance is unchanged, but Are you seeing any evidence of that manifesting itself in your end industries, particularly interested in whether whether or not you're getting any feedback from the automotive space around production schedules and ordering patterns? Thanks very much.
So Hans will take the first one. I'll take the second one. Yes.
Good morning, Paul. On your, it's it's our insurance question. You will understand that we will not quantify this for you, but I give you the following explanation. What we what we received is compensating us for the additional costs that we have, as a result of the force majeure situation. So that when I compare to how we had budgeted the division, for Q2, that compensation that we received from the insurance leads us to being on budget.
Got it.
So, Paul, with respect to our statements here about the economic risk, I mean, you know that we have a certain visibility into the future. On one hand. But on the other hand, we all follow the news going on about the particular also about the trade frictions between the the U. S. And China and EU and U.
S. I mean, I think we got some relief maybe from the two gentlemen meeting that last days and maybe deescalated some further, tax on the car industry, which is certainly a very determining one for not only Europe's but certainly also for BASF because it's our largest customer industry. So far if we look on the first half year, actually the car production globally is pretty on exactly that was forecasted. So, we have some 97,000,000 cars projected and I think we have 48.5 more or less been produced in the first quarter of the year. We also do not currently get any signals or in the order pattern from the automotive industry, which would lead us to any corrections in this.
But as I said, we have also only a certain visibility on one hand and that is why we made these statements, but on the other hand, a very clear statement that we stay with our forecast. So, We see still on a global level, the automotive industry being strong and performing as expected.
That's very clear. Thanks a lot gentlemen.
The next question is from Andrew Stott, UBS. Please go ahead.
Thanks, Betty. Good morning, Martin and Hans. So I had 2 as well. The first one was really on the timing of turnaround, in margins in FMS. So I mean, I guess on Performance Materials And Construction, it's less of an issue because that'll be to some extent dictated by raw material trends, upstream.
I'm more thinking about your own, thoughts into 'nineteen and indeed second half on both Catalysts and coatings where EBIT was clearly well down in Q2. So just a roadmap on the turnaround potential for those 2. Second one was a much sort of different question, a high level question. I saw this week that the EU have decided to treat gene editing in the same regulatory context as GMO. I'm just wondering what that means for your newly assembled seeds and traits business?
Yes, Andrew. This is Hans. I'll take your first question on the margin turnaround that you asked about in Functional Materials And Solutions. When you look at the quarter over quarter developments that we have, we're obviously still faced with increasing raw material prices. You're well familiar with the fact that it takes the time it takes in order to pass these on.
Typically when raw material prices increase, you go through a phase of margin pressure. That was very pronounced in Q1 of this year when Functional Materials Solutions on a quarter over quarter basis. Q1, Q1 was down by $200,000,000 compared to prior year quarter. When you look now at Q2, it's $80,000,000 down. So margin compression continuing, but at a a lower degree than what we experienced in Q1.
In addition to that, we have, as you know, significant growth measures in Functional Materials And Solutions with a number of planned startups around the globe in Catalysts in coatings. In Performance Materials and also to a smaller extent in Construction Chemicals. That adds to the fixed cost at this point in time. And it does so pretty much in two ways, which is very typical in a situation where you grow business. On the one hand side, you have the additional fixed costs coming from the new plants, new employees that you have in there.
Additional depreciation. And you're also burdened with the cost of not fully utilizing the plan. So all that needs to be factored in. We see a trend of improvement in the Functional Materials And Solutions segment, and we expect this to continue in the second half of twenty eighteen. And once we have budgeted the year 2019, think we can give clearer guidance on that.
Andrew, with respect to CRISPA CAS and the ruling, the European high court has done. I mean, that has to be evaluated at the very end in detail what that really means. But on the other hand, very clear statement. This is a pretty revolutionary tool, additional tool for the whole biotech and genome editing technology. It is very it's a very precise tool to basically generate mutations.
And with this, it's also the expectations that in future, you can accelerate and make developments, cheaper. And in that respect, I think someone who runs a state of the art biotech platform has to use this technology. We have also taken a global license from the Broad Institute of MIT And Harvard. So, we are enabled and we have people who can use this instrument and it certainly planned and has to be used in our platform. And now with the new additions we have from the Bayer business, which will basically complement our platform from biotech and plant biotech on one hand, but also our enzyme activities and now the whole seed business, this will be a very important tool.
If it's really true what the Europeans have done here, then they have, again, basically given have green light for the precautionary principle and not evaluating on the same moment also the innovation principle, which means It's a pure risk based assessment and not a risk opportunity based 1 would be a pity for the European industry and the European scientific community because it will take away one other opportunity for innovation. For us as a company that would mean at the very end that such tools would be applied in our U. S. Operations. And you know that the plant biotech activities have been already in the past from BASF mainly being relocated from Germany to the U.
S. So as we run a global platform, that would mean that basically this application of these instruments would not be used in Europe and Germany. So overall, that will not impact us as a company too much, but, as a European, I'm worried about what that means to the Europeans and its innovation power.
Okay. Thank you very much.
The next question is from Thomas Wigglesworth Citi. Please go ahead.
Good morning, gentlemen, Stephanie. Thank you very much. Two questions, if I may. The first is, just a follow on as a record, could you try to quantify what you think the ramp up cost impact was in the second quarter. That would be very helpful.
And I'm wondering, just on the on the, both in Performance Products And In Functional Materials Solutions, what was the total cost increase that you seen year to date? And when do you think across both of those divisions, would you be able to fully offset both the cost increase for 2017 noting that Functional Materials Solutions was down, what, EUR 200,000,000 at EBIT and still seems to be down, in the first half as well. So when can we expect in both Performance Products And Functional Materials solutions margin offset? Thank you.
Yes, Thomas, I'll take your question on the ramp up costs So startup costs in Q2 and I give you BASF group, Q2 about a mid double digit million figure higher in Q2 for the group. Than in Q2 2017. And for Functional Materials And Solutions, it is a lower double digit million figure, that the cost, the startup cost is higher than in Q2 2017. So in other words, yes, growth comes at a cost. We see that at this point in time, but we have obviously the plan to use these capacities grow into them.
And at this point in time, it is a slight burden for the BASF group, and also slight burden for the Functional Materials And Solutions business.
Because a few more comments on 2 downstream segments. I mean, if you look on the Performance Products part, I think there we have not less much lesser cost issue than it was actually then a close issue. I mean, we had prices going up, but very much counterpotted by the FX impact. And if you do in the volume part here, I really have to say that this is basically totally, connected with the CITROL value chain outage. If you would not have had that, we would have had a positive volume development.
I think this is very important to say, so we are moving on the volume side and we're also moving on the price side. I would also expect that the FX impact in the second half of the year will go down because we are simply comparing ourselves to a more favorable basis in the second half. So that's on a PP part. On the FMS part, you see actually that really on the market related things, we went forward quite well 4% volume plus 6% prices So, we really move over there and that means we can increase prices, but on the other hand, we also can in the same moment raise volumes. We are here also lost more than half of that by the FX headwind.
And the other part is really connected with cost. And let me also say here that on the raw material costs, which impacted quite significantly on the coatings part, for example, where you have on one end a price pressure certainly from from the automotive companies, which you have to resist and you have to digest raw material price increases here. And let me connect that also with something you have might be never heard. For example, the shutdown of several suppliers in China due to environmental issues has taken out of the market some resin players more or less so quickly that you could not adapt it has led to a significant double digit increase of some resin prices which have which are raw material prices for the, coatings part. So you cannot raise prices that quickly in basically react in 1 quarter.
You heard also about the startup costs, which I think we are mentioned already by Hans. We have started some plants also in China. We have also ramped up our teams to get these volumes into the markets and that basically all counteracted to this. Let me also make one final comment which you cannot see. The combination in the value chain of the polyurethanes So the performance materials and the monomers division.
If you look on the total earnings of that value chain, it was 3 digit plus 1,000,000 plus in the first quarter and it's still a good double digit increase in EBIT in the second quarter. Which is, however, to a large extent, visible in the Mortimer's division and not in the polymers part because if you look on overall We had a 5% raw material increase and we passed over 4% on the market. And let me really say this again, and reiterate what handset certainly this development has to go on in the Q3 and the Q4 to pass this high raw material costs over to the number. But we always pointed out that the pricing model in this businesses is sometimes with contracts of 1, 2, 3 quarters. And it's not raw material formula related.
That means if you keep up the logic that you sell value and not connected with the raw material prices. You need some time to pass this over. You cannot go to the customer and say, now last month, my raw material increased. That's why I increased your price because then the opposite direction also goes very quickly. So overall, I think we diminish the difference in FMS also in comparison to Q2 in 2017 compared to the delta in Q1.
So I think we are on the right direction and it just takes more time. And it for that reason, these two segments have to contribute more on the pricing side in the coming half year. So I'll maybe leave it with these comments.
Thank you very much.
We have quite some analysts in the line. The next three ones will be Tony Joan and Christian Faitz, then Andreas Heine. So now please, Tony Jones, Redburn. Go ahead.
Thanks very much, Stefie. Good morning, gentlemen. Got 2. Going back to added costs, but this time in chemicals, you called out that fixed costs were up Could you tell us what that roughly was and maybe split it up into recurring and nonrecurring costs associated with shutdowns? And then secondly, on Ag Solutions, volumes were good.
You certainly point out there was better demand in Q2, particularly in Brazil. And are you able to split out the revenue growth into volume and price and perhaps talk about what actually is underlying demand, whether just this was a restocking after inventory was reduced in the channel year? Thank you.
So, fixed cost in Chemicals. I don't see a big effect here honestly spoken. There's always a little bit on turnarounds which shift from 1 quarter to the other. But we did not have a major startup over there in this in the quarter here. And it's roughly up not very significant manner over here.
So for the second question, about If you look a little bit here on the regional part, and you particularly interested in the South American part, then We had a very, very strong volume growth here, more than 70% volume growth and more or less almost a doubling in prices. 90% on prices sorry, sorry, sorry, sorry, wrong, volume almost doubled prices 14% plus but a headwind of the foreign exchange rate with the real of 35%. So, you see that I think we have positioned over there very well. Also, good starting platform basically from the last year where all these inventory effects were. And I think with this, we are very well doing in South America at that point of time.
Thanks very much. Thank you.
So now it's Christian Faitz from Kepler Cheuvreux.
Yes. Hello, Stefanie. Hello, gentlemen. I'll stick with the Maggie model, I interest ask one question. Coming back to agricultural solutions, Can you please give us an assessment of channel inventory actually in the Northern Hemisphere?
I'm asking this question, in particular, with a view on Europe, and the drought situation in other parts of the region, which in my view could have led to some channel inventory.
Yes. Christian, you're obviously well familiar with the industry. And the the situation that we are experiencing in the Northern Hemisphere this year is actually a challenging one. Thinking about Europe and in particular, Western Europe late start of the season, overall a compressed season. When we saw each other last time, I said, I'm not yet sure what's going to happen here, but by now, know that was a compressed season, and we didn't get as a result of the continued drought like conditions that we have right now.
We didn't get the disease pressure that you would actually hopeful from a business perspective towards the end of the season. So, our expectation, even though the, as you know, the final on the ground numbers are not yet out. Our expectation is that channels will be relatively full at the end of the season. And the same same provider there, not yet sure, but the same may be true for North America, where we've also experienced weather related, a very, very late start in particular in Canada. So overall, it's a challenging situation right now.
But then you look at our business, and you see that, yes, on a first half year basis, we are down. But Q2 over Q2, we are slightly up. And as Martin said, the indications for the season in the Southern Hemisphere for, in other words, Brazil and Argentina, in particular, at this point in time, look pretty good.
So now we'll have Andreas Heine in mind first with 1 or 2 questions. Following him, it will be Gunther Zechmann then Patrick Lambert. So now Andreas Heine, please go ahead.
Yes, one very brief one. And then a second one. I would like to know whether the trade research, which is currently put in the corporate line, will that now move to the agro in 2019 as you have, let's say, the full value train from seed and crop protection and also trade research with the buyer agribusiness. That's the first one. And the second one, I'd like to understand a little bit more what has changed in performance products and, function materials and solution.
In your outlook provided at the beginning of the year with the annual report, you expected these two segments to be up considerably, so more than 10%. Effectively, they were down 20% in the first half by 1,000,000. If it had been in line with your forecast, then it would be up 1,000,000. So 450,000,000 short, you were probably aware at that point when you made the outlook about the FX and the fixed costs. So is this difference of what you were expecting at the beginning of the year and what the outcome at least in the first half year is all related to the raw material cost increases which came then as kind of surprise in the first half?
Thank you.
So, Andreas, to the first one, the trade cost. I mean, I think I said it earlier, we have now to look into this discovery phase where we take 3 months to really understand in detail what's going on. But one thing is also clear, if we acquire in a segment of business for then they have also to carry the major part of research, because that is an integral part of the business. And overall, it complements the the skills and the competencies we have in the AirChem business very, very well. How we do it at the very end in all the detail, I cannot tell you there might be also a part which is let's say more forward looking, which we have to support by corporate skills up, then it could be supplemented at the part of that with the time horizon, let's say, which is more than 5 years or something that we partly carry something like this also on the corporate part because you know that we have about 20% of our research costs paid by corporate in order to ensure that we do not lose opportunities and capabilities in the long term buildup and that they are not sacrificed in the P and L or in the short term outlook.
So, we always balance this. How we exactly do this? We do this. We have to wait until we have the discovery phase. So with regard to the performance here again, yes, I mean, one thing is very clear.
If you look on the first half year, Chemicals performed better than expected. And certainly, PP and FMS performed behind expectations. We still say we and you know that we don't correct our guidance throughout the year, but what that means in confirming our guidance basically means that certainly FMS and PPE have to catch up in the second half year. And I think if you ask what is different, I think I mentioned already some parts raw material is certainly higher than I think we might have expected. And I said also, if you take for the performance materials alone we have expected a certain decline in the isocyanates, which is also visible, but it is much lower than we anticipated, but that also means, for example, that materials performance materials have a higher raw material basis in the first half year than they had expected.
And I mentioned earlier, overall in the chain, we still earn more, but it is mainly coming with the chemicals part, then it is attributed to the to the segment here. And I have to say I'm a bit more relaxed here because what counts for us is do we get the money in our pocket, whether it's the left or the right pocket is second, the important only for us. So I think there's a raw material part. There is maybe the one or the other resistance on the customer that price increase takes a little bit longer. There is certainly either 1 or the other business environment, which is differently.
I mean, the one where we have changed in ourselves and have constrained the industry was our C trial outages. I mean, that totally changed the market dynamics and also how people react and you know on the other hand, just to mention the second one, which is a super absorber business, which is a tough one, but which is has gotten even a little bit more tougher than better. So, I mean, you have at the very end, you have a composition of all that. And I would say it is really a combination of all that. It's what we said earlier.
It's fixed source increase. It's raw material increase. But it is also some dynamics in some of the market. So it is a I would not boil it down to only one factor. But, to conclude very clearly, both segments have to catch up in the 3rd and the 4th quarter.
Thanks.
So now it's Gunther Zechmann Bernstein. Please go ahead.
Good morning, everyone. Your Catalyst business grew quite strongly in the quarter, up 13%. That's including the currency headwinds. What drives the volumes there, please? And maybe you can rank order the automotive catalysts, the battery materials and the chemical catalysts?
Yes, Gunther, this is Hans. I'll take your question. We have as you say, 13% sales growth in Catalysts, all of that, we have about 7% volume growth. And we have a significant price growth, which to a certain extent is driven by precious metal prices and there in particular, by the price increases in in palladium. So overall, a very nice volume development and that is what counts are clearly offset again by by currency impacts.
If I look at the businesses and I start with the Automotive Catalysts business, that has, as you would expect in the current environment that has the one or the other challenge in light duty diesel in Europe, but then that's compensated. By light duty, gasoline, and overall, the automotive industry performs as we had affected it in the beginning of the year. So we see, on a volume basis, light vehicle grow by 2% for 2018. And we have our fair share of that growth in our automotive catalysts business. Chemical catalyst business and refinery catalyst business, both performing well and to expectations.
And as you know, our Battery Materials business is a business that's set for growth. We are targeting significant sales growth there year over year. And we support that by way of strong volume growth. So they are fully in line with expectations.
Can I just clarify within the Better Materials, which has the strongest growth? Is that mainly NCA? Driving that growth?
This is to a large extent that is NCA. Yes.
You very much.
We move on to Patrick Lambert, Raymond James. Following him, we will have Laurence Alexander and then Peter Clark. So now, Patrick Lambert, Raymond James.
Hi, Stacy. Thanks for taking my questions. Good morning, gentlemen. One quick question on the ramp up or startup cost. I think you commented on Q2.
Could you help us bridge H22 2018 versus H2 2017 in terms of the biggest chunk of startups, how it would phase into H3 2. And the second question, also, can you update us on your TDI ramp up in Ludwig's effort? Thank you.
So with regard to the TDI situation, you know that we had this, major period now to change the reactor and to build in and connect everything and overhaul the one or the other thing can inform you that the plan is up and running. It is running on all the steps, in the synthesis of TDI, it also produces in spec material. So, we are going to ramp and stabilize this up then to market needs. Just keep in mind that we still have our schwartz Heider Blonde running, which time, then we will shut down and then these volumes transfer to the Ludwigshafen plant. We run that, as you also know, in a global grid And I think I mentioned earlier that the TDI margins have a particular in Asia going down a bit.
So we are working to drive this whole thing from our side in a very balanced way to preserve value. And on the other hand, to take volume growth So we now ramp this up basically according to the market needs. So it is a very good situation on the TDI side in the moment. So, and I think the start question is being covered behind. Yes, I
gave you earlier already, Patrick, the figures for the BASF or the guidance for the BASF group for Q2. If I look at the first half of twenty eighteen, that is that is again a low triple digit 1,000,000 higher than what we had in the first half of 2017 and then the second half of twenty eighteen compared to the first half of twenty eighteen, that is slightly higher in the second half of twenty eighteen that was in the first half of twenty eighteen.
And this H2 'seventeen?
No, no, this is H2 'eighteen compared to H1 'eighteen. And H2H2 to H2 is, that is a That's also a low triple digit million figure higher when I compare second half to second half.
So higher in 'eighteen?
Higher in 'eighteen, correct.
Thank you.
So now we move to the U. S. Laurence Alexander from Jefferies. Please go ahead.
Hello. I guess 2 questions. 1, for the pro form a ag portfolio, can you give some perspective on benchmarks for the combined R and D pipeline, peak sales or NPV or however you think about it. And where digital ag or precision ag fits in that pipeline, and I'm thinking there in terms of the spend that you have. And then the second question is when you think about your steam cracker margins and your ability to capture dislocated feedstocks, how do the marine a regulation change at the end of the decade, how will that affect the steam cracker positions, for your business?
Laurence, I mean, concerning the pipeline consideration, I think it's really too early. We have to look into depths and certainly we did not buy a black box. We had certain information about that, in the due diligence but, and in the information we got for that package. But we have now to really look how that goes together. But the only thing I can tell you and you know that, that I think the pipeline of BASF's traditional business, our legacy business is formidable So it's really a great pipeline.
And all what we know, it should go very, very well together. And we are very happy because we get really 2500 excellent scientific people joining now our platform. When it comes to digital, I only can say at that point, we have a very nice, digital let's say kind of startup business and we get this Xavier platform from Bayer, which I think is also very respected in the market in terms of their capabilities. And I can only predict for the future. If you bring these two pieces together, we certainly can make something very nice out of it.
But also here, I mean, it's too early. We had read into to see about capabilities and approaches and how we bring this together. With regard to your question, I'm not sure whether I totally caught it, what you really asked for, but bunker fuel regulation. Is that what you wanted to know?
Correct. Yes.
I mean, I don't know really what the impact will be here. I cannot see really that it has an impact on our cracker business because at the very end, yes, most of our crackers are NAFTA driven. On one hand, we have, driven projects and partly also executed already of flexible feedstock here. And what you mean is basically how the usage in the shipping is basically, adding or changing let's say the availability and the pricing of the of the transportation sector and with that impact on, let's say, for us, that's really too early to say. I think there's a lot of activities going now on this LNG enablement for the ships, building even terminals, even Germany, we built here 1 for for the future, ship fuel, but I think it's really too early to that in numbers.
Please understand that. I cannot do that. Okay.
Given the time, we have to speed up a little bit. We will now have Peter Clark, Societe Generale, and then we still have Shetan Udeshi, Marcus Mayer and Martin Evans. We closed the queue with that and now it's Peter Clark Societe Generale.
Yes, good morning. I'll be very quick then. Two questions. The first one on the raw material pressure, you're making it very clear coatings is seeing acute pressure at the moment. That's likely to continue in the second half.
Just wondering your view on the Functional Solutions Materials And Solutions division segment, excluding coatings, do you think that margin could be up in the second half year on year? And then the second question, I realize you can't say much on the Solvay deal where we are at the moment. But I'm assuming you're still pretty confident you can address the commission concerns as we go through that process.
I mean, Peter, starting with the large one. We have now to look into detail what that means and it's a it's actually a 3 chapter exercise because the market is basically divided in 3 different layers. So it is about the precursors and it's about the polyamide and then it's about the engineering and we are now in the discussion with the EU what we have to do here. We are still confident that we find an arrangement that makes sense for us and it does not destroy value at the other part. It will delay now a little bit our time schedule But I think over the next months after the summer break, we will have intensive discussion with the EU Commission and then we will see how we go forward.
But I still very confident that we find a solution. With regard to your question about FMS and then excluding coding and what it for the rest at the very end. I would say for the whole segment, I can only repeat what I said. Yes, the margins have to go up. I mentioned, I mean, they have to catch up in Q3 and Q4.
They have to even work harder to accelerate their margin development and that is also including coatings because we have not now set the coatings is in the in a, let's say, a challenge situation because of raw material because they have also worked on to work on this. So it is true for the whole segment very clearly. Okay. Thank you.
The next question is from chetan Udeshi, JPMorgan. Please go ahead.
Yes, hi. Thanks. Just maybe quick two questions. First one is just looking at second half at this point, do you see a reason why the earnings growth, EBIT or EBITDA will be higher or lower versus first half? Is it just any puts and takes huge, probably you want to highlight on second half growth?
And second question is just on functional materials, again, I appreciate startup costs and raw material pressures. But at the same time, I think you also had some benefit as you pointed out from higher metal prices, which should have flown almost entirely in terms of EBIT contribution. You had a big jump in in catalyst sales, a big part of that was metal prices. So I'm still sort of struggling why the margin is still down so much despite the benefit from metal prices as well. Thank you.
I mean, on the comment for the second half, I mean, you said there is I think chemicals is ahead, but the downstream are having to catch up. We think if they do that job right, they have to to be able to manage this catch up? I mean, you said, can I mention anything particular? And maybe what I can mention is that the city drive plants are back So we have lifted the force majeure on the first step and now we basically piece after piece doing this. Then there are the the downstream products in the in the fragrance area.
And then there is also the human nutrition part, which then comes later. So we'll lift the force majeures going forward. And I think this will bring us back in this in the health and nutrition part. It's just one element because we have been basically very much hindled in that business to go forward, which had an impact on the whole portfolio, certainly. So if you look on the FMS part where you ask again, and I think we have given already some information.
I mean, the logic is in each of these businesses separately. I mean, if you mention precious metal. That is in cost that is carried through. I mean, if the level of palladium is higher, your pricing for the catalyst is higher, so that does really not really contribute much. It is a little bit on the trading side, but that is not, that's a, that huge lever.
So, and then on the construction part, That is still a relatively small business compared to the others also. But on the other hand, I think what we mentioned and what is the important driver in that segment is really automotive business. And we think automotive business is still in good shape and will be in good shape for the second half. And then we'll try, our businesses. So I think I cannot add much more to what we already said.
I think we are still in a good mood that the guys can catch up and will deliver in the second half.
Understood. Thank you very much.
So now it's Markus Mayer from BARDA Helvea. Please go ahead.
Yes, good morning. 2 questions remaining. Firstly, on your construction chemicals, it looks like the competitors at least in Switzerland, are occurring. You're still further there. Is this still due to your high Middle East business or do you think you might have to consolidate the market further to get critical scale.
And then the second question is on Northstream. Do you see any kind of impact from this political discussion on Nord Stream, or you also expect that this kind of discussion might fail as long as there are trade war discussions between U. S. And Europe faded. Thank you.
Yeah. I have, Marcus, I'll start with your question on Nord Stream in today's political environment, always difficult to predict what will happen tomorrow and where the political mood will swing to. I understood the comments after the Helsinki meeting in a way that there will be competition between pipeline gas from Russia and LNG. From the U. S.
At the at least this was, how it was positioned at the meeting. So I guess that's all that I can say with respect to that. Obviously, we're following closely the developments, but somehow the tone seems to change there on a daily on a daily basis. With respect to construction chemicals, you pointed in the right direction. As you know, we have a stronger footprint than our competitors in the Middle East and the Middle East has not yet recovered despite the fact that oil prices have gone up.
We have not seen an improvement in pricing and in conditions there. We have, if we think around the developments around the globe, We have seen good strong business development in Europe. We've seen good development also in North America, where also the thermotech acquisition that we did in Mexico last year is contributing But as I said, Middle East is pulling us down. And what is, what is strong in our portfolio is Asia Pacific. And if I compare, how we've done in Asia Pacific compared to our and let me just say most important competitors, we don't have to hide.
It's actually looking quite positive. Hope that helps.
Very good. Thank you.
So now we have the final question for Martin Evans, HSBC. Please go ahead.
Yes, thanks very much. Just a final question. I'm just trying to understand all the kind of moving parts here. And there's been a there's been numerous references to higher fixed costs through the quarter, plant turnarounds and start ups and so on, plus off the raw material pressures and the overall outcome in the second quarter was relatively flat at the earnings line or in fact slightly down. So is this essentially, we're entering a new albeit temporary phase of BASF being largely ex growth, while these investments are commissioned and so on, Or is this something more structural whereby potentially you're losing your competitive edge?
Because the second economically was a good quarter and yet you've reported profits that are down, and that's what I'm trying to understand the impact of sort of higher fixed costs in particular? Thanks.
Look, on one hand, you should think if a company is as broad and weak as ours, that somehow these effects level out because one is doing here and the other one is doing that time. Unfortunately, that's not always the case. So sometimes you have this stuff accumulating and then you have kinds of effects where you see something. I mean, mainly the startup costs and what we mentioned. I mean, there's also a lot of investment of plants, which at a certain moment, you start them up and you really have to step up in your fixed cost and then you have to fill these plants.
I mean, if I if we look really now, for example, in this, in the FMS segment, again, If you really look on what we, for example, talk about here, we have investments in the emission catalysts in China and in Poland. We have started their new plants. They add up fixed cost base. We have, basically, the startup is the battery blinds there in Japan, Mr. With the total activities, we mentioned that the SCA business, which is gross nicely, has also been catered by capacities.
We have to invest that. We have bought build up and started up a new plant in the coatings area in Shanghai. Because our automotive, 27,000,000 cars in China, we unfortunately enough paint a lot of them. So that means also we have to build the capacities for that. So It is just not all the time distributed regularly.
I mean, if you look on this, yes, we have all, and you know that I think fixed cost management is normally something which is somehow a brand of beer that we have over the years done that very well. And you also know from the equity story very nicely curve over 10 years that we really have been managing to grow sales and EBITDA quite significantly while we have kept fixed costs under control. So I think it is not an element, which we have to worry about. I think what it is what mentioned this once again, maybe also at the end that the businesses we have talked about, they have to look that they participate nicely in the growth and the volume growth because that is share and that is where we want to participate and they have to work on the margin and the price side. I think that is what we have to take our look on.
I'm not worried now that something under the fixed cost part is getting out of control. It's a future investment, which has now to be filled with business that pay for it. So I think that is what I would say there. So I don't see a worrying component that something goes out of control here. It is just normal future investments.
Ladies and gentlemen, this brings us to the end of our conference call. We will report on our 3rd quarter results on October 26, 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.
And you may disconnect your telephone.