Ladies and gentlemen, thank you for standing by. My name is Emma, your conference call operator. Welcome, and thanks for joining the BASF Analyst Conference Call Full Year and 4th Quarter 2018 Results. This presentation contains forward looking statements. These statements are based on current estimates and projections of the Board of Directors' Directors and currently available information.
Forward looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in Opportunities and Risks in Pages 123 to 130 of the BASF Report 2018. BASF 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 Stephan Gertbank, Head of Investor Relations. Please go ahead.
Good afternoon, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the full year and 4th full year 2018 results. On the call with me today are Martin Budermiller, Chairman of the Board of Executive Directors and Hans Immel, Chief Financial Officer. Martin will provide you with an overview of the results and update on the implementation of our corporate strategy and the outlook for 2019. In between, Frans will present the financial figures in detail.
Please be aware that we have already posted a speech on our website at brzf.com/fy2016. With this, I would like to hand things over to Martin.
Thanks, Stefan. Ladies and gentlemen, good afternoon, and thanks for joining us. Today, we will provide you with the 4th quarter and full year 2018 results, the outlook for 2019 and an update on the implementation of our corporate strategy. Overall, we are not satisfied with our performance in 2018. We expected much more at the beginning of the year.
However, global economic growth slowed in the course of 2018. Geopolitical development and trade conflict in particularly between the U. S. And China led to an increased uncertainty in an overall cautious market sentiment in the second half of the year. In the EU, GDP growth slowed to under 2%, mostly driven by weaker export demand.
And in Asia, the slowdown was pronounced, especially in China. As a result, demand from key customer industries, mainly automotive, was dampened. In 2018, global automotive industry recorded an 0.8% decline in growth compared to plus of 2.3% in prior year. In this environment, annual sales of EASF Group increased by 2% to €62,700,000,000 We implemented price increases in all segments and divisions. Volumes were up slightly compared to 2017.
Higher volumes in Functional Materials and Solutions and in Agricultural Solutions were partially offset by lower volumes in performance products and candidates. The outage at the citral plant, which began producing again in Q2 2018, particularly contributed to lower volumes in Performance Products. In addition, the several downstream businesses were negatively impacted by the lower water level of the River Rhine. In the Chemical segment, the volume effect on the long lasting drought in Central Europe was most pronounced. Currency effect amounted to minus 4% overall, while portfolio effects positively impacted sales by 1%.
EBIT before special items of the EASB Group decreased by 17% to €6,400,000,000 compared to the prior year. The decline is mainly attributable through the Chemical segment, which accounts for 2 thirds of the overall earnings decrease in 2018. In Europe and Asia, isocyanate margins fell sharply in the second half of twenty eighteen. Average steel sulfur margins declined in all regions in 2018, and they are lower than assumed in our planning. The exceptionally low water levels on the River Rhine weighted on earnings in chemicals and also other segments.
Overall, it led to a negative earnings impact of around €250,000,000 in 2018. Lower earnings in Functional Materials and Solutions, the segment that is most exposed to the automotive industry, Agricultural Solutions and Performance Products also contributed to the overall decline in EBIT before special items. As a consequence of late closing of the transaction with Bayer and the seasonality of the acquired seed business, earnings in agricultural solutions decreased considerably. The associated integrated costs also burdened the earnings development. Ladies and gentlemen, we are committed to our policy to increase the dividend per share every year.
A predictable and progressive dividend policy to return value to our shareholders is a top priority for us. At this year's Annual Shareholder Meeting, we will therefore propose to pay a dividend of €3.20 per share, an increase of €0.10 We are thus offering an attractive dividend yield of 5.3 percent based on the share price of €60.40 at the end of 2018. Looking at our long term development, BASF remains on its strategic path of profitable growth. I would like to again highlight our 6 areas of action to be the leading Terrigon company of our customers. We will intensify customer focus to accelerate growth.
We will sharpen our portfolio and strengthen for BUNT. We will transform our organization to be more agile and customer focused. We will focus capital allocation on organic growth. We will drive growth, particularly in China, the largest market of chemicals worldwide. And we will do this in a sustainable way by setting the tone in our CO2 neutral growth target.
We have adjusted our segment structure as of January 1, 2019. We now have 6 segments: chemicals, materials, industrial solutions, surface technologies, nutrition and care and agricultural solutions. We have done this to increase the transparency of our reporting and allow you to better benchmark us against competitors. To transform BASF into a more agile and customer focused organization, we act according to 3 driving principles: empowerment, differentiation, simplification. As of January 1, 2019, around 14,000 colleagues from R and D, Engineering and Maintenance, Supply Chain and Procurement have moved closer to our operating divisions.
The transfer in this first half went smoothly. The embedding process will be finalized by the end of the Q3 2019. By then, around 20,000 colleagues will have moved closer to our businesses and with this to our customers. Let me also give you an update on the announced M and A activities. At the end of January 2019, BASF and Solenis completed the transfer of BASF's paper and water chemicals business to Solenis.
As of February 1, 2019, the combined business is operating under the Solenis name. With pro form a sales of around €2,400,000,000 in 20.17 and approximately 5,200 employees, the combined company will provide an extended product portfolio for paper and water treatment customers. ESS holds a 49% share. 51% of the shares are held by funds managed by K. And Rice and Solenis Management.
Since closing, BASF accounts for its share in Solenis equity method. That includes its share of the company's net income in EBIT before special items for the group, supported under others. The disposal gain in the order of a low triple digit €1,000,000 amount will be reported as special income in the Industrial Solutions segment in the Q1 of 2019. At the end of September 2018, BASF and Letter 1 signed the agreement to merge their respective oil and gas businesses in the joint venture. We are currently going through the regulatory approval processes and to close the transaction in the first half of twenty nineteen.
The preparation of the integration and the approval processes in various countries are well on track. We expect that the IPO will take place in the second half of twenty twenty at the earliest. The exact timing will obviously depend on market conditions. On January 18, 2019, the EU Commission funded additional clearance for BASF to acquire Solvay's polyamide business. This approval is an important milestone for the transaction.
The merger control process turned out to be more complex than expected. In the EU approval process, BASF made commitments to address the competition concerns of the commission. This requires us to divest parts of the original transaction scope to a third party buyer, mainly manufacturing assets and innovation capabilities of Solvay's polyamide business in Europe. BASF will still achieve key strategic objectives from the acquisition and strengthen its polyamide 6.6 business significantly. Closing is expected in the second half of twenty nineteen after all remaining conditions have been fulfilled, including the sale of the remedy package to a third party.
As part of our active portfolio management, we are continuously evaluating whether our businesses can still realize their full potential within BASF or would perform even better in a different setup. In this context, we announced in October 2018 to evaluate strategic options for our Construction Chemical business. Currently, we are preparing the path out of the business and are structuring the M and A process. Our intention is to sign contractual agreements in the course of 2019. Furthermore, we are going to start the divestment process for our global treatment business.
CSF has a leading position in the treatment market. However, we also want to ensure the long term success of this business. The S. Pigments business offers a broad portfolio of color and effect segments as well as preparations. It generated sales of about €1,000,000,000 in 2018, has around 2,600 employees and is supplying more than 5,000,000 customers worldwide.
We strive to close the transaction by the end of 2020 at the latest. Let me now give you an update on our large investment projects intended to fuel future organic growth in Asia. In early January 2019, BASF and the government of the Guangdong province signed the framework and investment agreement, adding out further details of TSF's plan to establish a new food inside in Guangdong. Following the signing of the memorandum of understanding in July 2018, CSF selected the city of Zhenjiang as the location for a second food site in China. More than 9 square kilometers of land will be allocated for the project.
The city of Zhanjiang is located at the heart of Southwestern Guangdong province. The new site will benefit from Changjiang's natural resources, deepwater port and excellent transportation links to the industrial centers of Guangdong. In mid January 2019, BASF and Adani signed an MoU to evaluate a major joint investment in the acrylic value chain in India. The designated site would be located at Mundra Port in Gujarat. The feasibility study will be completed by the end of 2019.
According to the MoU, BASF and ADASANIN, Insani want to establish a joint venture with an investment totaling about €2,000,000,000 in which BASF would hold the majority. The investment would be BASF's largest in the country to date and comprise the development, construction and operation of several production plants. The products are predominantly for the Indian market to serve a wider range of local industries, including construction, automotive, and coatings, whose growing demand is currently supplied via imports. In line with BASF's carbon neutral growth strategy, the chemical side in Muntar would be the company's first CO2 neutral production site fueled by renewable energy. At the end of October 2018, BASF and Sinopec signed an MoU to further develop the partnership in upstream and downstream chemical production with the Nanjing for Bundtai in China.
Our joint venture via SFIDC will invest in a 50% stake to build another steam bunker with a capacity of 1,000,000 metric tons of ethylene per year. Cyanopet Young's heated tobacco chemicals will invest above 50%. The participation in a new steam cracker and the expansion of our joint venture underline the strong partnership between CYTOPEC and BASF and the commitment to our customers in China. We will also jointly explore the new business opportunities in China's 5th growing battery materials market. Already today, China is the largest chemical market worldwide and growing above the global market requires a strong participation in China's growth.
With our announced investment projects, we are well placed to further expand our already strong position in the region and accelerate our organic growth. And now, Hans, will give you more details regarding the business development in Q4 and the full year 2018. Yes.
Thank you, Martin. Good afternoon, ladies and gentlemen. Let me turn to the financial figures of BASF Group for Q4 2018 compared to the prior year quarter in more detail. Sales in the Q4 of 2018 increased by 2% to EUR 16,600,000,000 Prices were up by 2%, supported by Performance Products, Functional Materials and Solutions and Agricultural Solutions. Volumes decreased by 3%, mainly as a result of the low Rhine water levels and the supply limitation of important raw materials at the Lutke Sarta site.
The full year effects amounted to 3% and were related to the acquisition of Agricultural Solutions businesses from Bayer. Currency effects had no impact on sales overall. EBITDA before special items decreased from 35% to €1,500,000,000 EBITDA amounted to €1,300,000,000 compared to €2,300,000,000 in Q4 2017. EBIT before special items came in at €630,000,000 59% lower than in Q4 2017. Considerably lower earnings in chemicals and in agricultural solutions led to this decline.
In chemicals, lower margins in the isocyanates and cracker businesses were the main driver. In Agricultural Solutions, acquisition related expenses burdened the earnings development in the quarter. In Performance Products and Functional Materials and Solutions, we were able to increase earnings. Overall, earnings in Q4 2018 were negatively impacted by around €200,000,000 as a result of low water levels on the Rhine. Special items in EBIT amounted to minus €161,000,000 compared to €104,000,000 in Q4 2017.
Special charges were mainly related to the acquisition of Agricultural Solutions businesses from Bayer. EBIT decreased from €1,400,000,000 in Q4 2017 to €469,000,000 in Q4 2018. The tax rate was 25.1 percent. In the prior year quarter, we reported a negative tax rate due to the effect of corporate tax reforms mainly in the U. S.
And Belgium, which resulted in a onetime non cash deferred tax income of more than €400,000,000 Net income amounted to €348,000,000 compared to €1,500,000,000 in Q4 2017. Reported earnings per share decreased from €1.68 to €0.37 in Q4 2018. Adjusted EPS amounted to $0.66 compared to $1.29 in the prior year quarter. In the Q4 of 2018, operating cash flow increased by €366,000,000 to €1,600,000,000 The increase was driven by cash inflow from changes in net working capital of €123,000,000 compared to a cash outflow of €1,300,000,000 in 2017. Payments made for property, plant, equipment and intangible assets increased by €76,000,000 and amounted to €1,500,000,000 Free cash flow came in at €88,000,000
I will now quickly comment on the
full year 2018. Sales of BASF Group increased by 2% to €62,700,000,000 on account of higher prices, slightly higher volumes and positive portfolio effects. At €9,500,000,000 EBITDA before special items was 12% lower than in the prior year. EBITDA amounted to €9,200,000,000 compared to €10,800,000,000 in 2017. EBITDA for special items decreased from €7,600,000,000 to €6,400,000,000 In total, special items amounted to minus €320,000,000 compared to minus €58,000,000 a year ago.
EBIT decreased by 20% to €6,000,000,000 The tax rate increased from 18.7 percent to 21.5 percent for the reasons already explained. Net income amounted to €4,700,000,000 as compared to €6,100,000,000 in 2017. Income asset taxes from our discontinued oil and gas operations increased by 9% to €829,000,000 due to higher oil and gas prices and increased production volumes. Reported earnings per share decreased from €6.62 to €5.12 in 2018. Adjusted EPS were €5.87, €0.50 lower than in 2017.
Let's now turn to our full year cash flow. Cash flows from operating activities decreased from €8,800,000,000 to €7,900,000,000 This was mainly driven by lower net income. In 2018, changes in net working capital reduced the cash flow by only €530,000,000 compared to minus €1,200,000,000 17. Cash used in investing activities increased from €4,000,000,000 to €11,800,000,000 In 2018, net payments for acquisitions and divestitures amounted to around €7,300,000,000 mainly due to the acquisition of Agricultural Solutions Businesses from Bayer. In 2017, we had a minor cash inflow from divestitures.
Payments made for property, plant equipment and intangible assets decreased by €100,000,000 to €3,900,000,000 At €4,000,000,000 free cash flow remained strong and decreased by €744,000,000 compared to 2017 due to lower operating cash flow. Cash flows from financing activities amounted to minus €52,000,000 Changes in financial liabilities led to a net cash inflow of €3,000,000,000 mainly due to the issuance of U. S. Dollar commercial papers as well as bonds. In 2018, we paid €2,800,000 in dividends to the shareholders of BASF SE and €174,000,000 was paid to minority shareholders.
Turning to our balance sheet, at the end of 2018 compared to the year end 2017, total assets increased by €7,800,000,000 to €86,600,000,000 The acquisition of a range of businesses and assets from Bayer contributed more than €8,000,000,000 to this increase. Non current assets decreased by €4,300,000,000 mainly attributable to the reclassification of the fixed asset in our oil and gas business to current assets following the signing of the agreement to launch Interc Valencia. Current assets amounted to €43,200,000,000 compared to €31,100,000 at year end 2017. This increase is mainly attributable to the reporting of our oil and gas assets as a disposal group. Total liabilities increased by 6 point €4,000,000,000 to €50,400,000,000 Current liabilities were up by €8,400,000,000 to €23,300,000,000 primarily because of the reclassification of the non current liabilities and provisions of our oil and gas activities through liability of the disposal group.
Financial debt was up by €2,800,000,000 to €20,800,000,000 Net debt increased to €18,200,000,000 compared to €11,500,000,000 at the end of 2017. This is due to the financing of the acquisition from Bayer. Our equity ratio was 41.7% at the end of 2018. And with that, back to you, Martin, for the outlook.
With this, I come to the 2019 outlook for BASF Group. The global economy is visibly slowing down. At 2.8% for 2019, we assume that the global economy will grow 0.4 percentage points less in the 2018. In Europe, domestic and export demand are forecast to grow at a lower pace. For the U.
S, we still expect solid growth, but the benefits from the tax reform should be less pronounced than in 2018. Growth in the Asian emerging market is probably weakening slightly, in particular as a result of lower growth in China. Nonetheless, growth will remain high compared with the advanced economies. In South America, we predict the recovery in Brazil to continue, assuming that the newly elected president takes a liberal and reform oriented course for the economy. We anticipate global chemical production in this environment to grow at the previous year's level of 2.7%.
A slightly better growth rate in the advanced economies is offset by a somewhat lower development in the emerging markets. We assume an average exchange rate of $1.15 per euro and an average oil price of $70 per barrel Brent. Our outlook assumes that the trade conflict between the U. S. And trading partners will ease over the course of the year and that Brexit will not cause wider economic repercussions.
Furthermore, we assume that our customer industries will remain their growth trajectory. For the automotive industry, we expect a slight recovery following the decrease in production in 2018. Based on these macroeconomic and further assumptions, we provide the following outlook for the BASF Group. We anticipate slightly higher sales in 2019, largely as a result of volume growth and portfolio effects. EBIT before special items is targeted to be slightly above the 2018 level, however, at the lower end of the range.
ROCE is forecasted to be slightly above our cost of capital rate, but slightly below the 2018 level. It will be negatively impacted by the higher capital base due to the assets acquired today. Let me add that Q1 and Q2 twenty nineteen will be comparably weak quarters. Firstly, the first half of twenty eighteen will benefit still benefited from higher margins in isocyanates. That means comparables are tough.
Secondly, costs associated with the implementation of our strategy and a higher number of planned turnarounds compared to the first half of twenty eighteen will negatively impact earnings. The decisive factor to achieve our target for 2019 are an improved business performance, solid customer demand and first contributions from our excellence program in the second half of the year. This slide summarizes the outlook 2019 by segment. The slight increase in EBIT before special items largely reflects significantly higher contributions we expect from the Agricultural Solutions, Industrial Solutions, Surface Technologies and Nutrition and Care segment. We are forecasting a slight improvement in earnings in the Chemical segment.
The Materials segment in contrast we anticipate considerably lower EBIT for special items driven by a decline in margins in the isocyanates business. We also expect the earnings generated by other to be considerably below the prior year figure. In 2018, the release of provisions from the LTI program had a positive effect, which we do not expect in 2019. Additional information is available in the BASF report, which was published today. Ladies and gentlemen, let me conclude with our priorities for 2019.
Despite a more challenging macroeconomic environment, we will consistently implement our corporate strategy and transform BASF into a more customer focused and entrepreneurial company. Our commitment to R and D and sustainability is core and a major pillar for the future organic growth. Therefore, we will focus our R and D resources even more on growth businesses and increase our customer focus. In the first step, we moved R and D growth to our businesses to better align customer needs and R and D projects. During
our R
and D webcast on January 10, we presented 4 specific projects of our carbon management program to support our target of CO2 neutral growth until 2,030. In mid January, we co founded a global alliance of more than 30 companies to advance solutions that reduce and eliminate plastic waste in the environment, especially in the ocean. These examples show our commitment to sustainable development. We will continue our active portfolio pruning towards higher value and clearer focus. This is an ongoing task.
And one major portfolio change in 2019 will be the merger of Indushall and BIA. We will accelerate our excellence program announced in November. The target is to achieve an annual EBITDA contribution of €2,000,000,000 from 2021 and onwards. For 2019, we aim to achieve an EBITDA contribution of €500,000,000 For the implementation, we expect onetime costs of €800,000,000 in the period 2019 until 2021. This includes special charges in the mid triple digit €1,000,000 range.
Due to the accelerated implementation, a large share of the implementation costs will occur as early as 2019. These costs will reduce the EBITDA contribution in 2019 accordingly. The program does not cover our operations, but also includes expected benefits from digitalization and automatization. Furthermore, we include the expected efficiency gains from organizational changes and simplification measures in the program. At the same time, we will continue to invest in our organic growth.
Our corporate strategy is 1st and foremost a growth strategy. We are committed to implementing the defined strategic measures to achieve profitable and sustainable growth. And now we are glad to take your questions.
Ladies and gentlemen, I would now like to open the call for your questions. We will begin with Thomas Wrigglesworth from Citi and then followed by Andrew Stott and Christian Faitz. Now Thomas Wrigglesworth, please go ahead.
Thanks, Stefan, for your presentation. Two three questions, if I may. Firstly, on the announcement that you would divest pigments and perhaps kind of wrapping up the Construction Chemicals as well in that. Can you give us an update on where you are in the decision process around Construction Chemicals? And in shipments, can we assume that if you're looking for a sale that attempts with potentially put this into a JV have now behind us and that a sale is the only route?
And could you provide some framework just on these divestitures about how you're going to define value realization for shareholders Is there any price levels at which you just won't sell and you'll keep? And can you give us some framework? 2nd question, if I may. Just looking at the Q4, I was just wondering if there are any if you could define for me the onetime effects. Obviously, you've identified been inside the €200,000,000 from the Rhine.
Is that both from lower utilization rates and lower logistics? And is there are there any insurance payments that have been received that are included in EBIT pre in that Q4 EBIT number? Thank you.
That's a problem. It's a status on where we stand with
the construction and this process.
We are currently preparing the documents in the data room and then we will go into an open and clear auction process. We assume that it was the end of 2019, we came to a conclusion we know where we go. This will be very clearly
a straight sale of this business.
The sequence part that we did work today, we announced today is certainly in an earlier step. We have to now prepare all the documents. I think the timing is right for that. You're right, we have looked into different options. We came to the conclusion that this trade divestiture is the best option for this business.
With the portfolio pruning, we are going forward as to new strategy. It's very clear that this is no longer an innovation driven business, although slow growth and it is not that easy embedded in the subunits. So with this very clearly we think there could be better owners in environment to bring this business forward. With regard to the line impact, yes, most of what you what is €200,000,000 made up in Q4 is in fact the 2 things you mentioned. It is the reduction of or the reduced utilization rate of the plant.
And with this, the EBIT we could not capture and it is definitely also from the higher transportation costs because it could only bring about onethree of the volumes that are normally coming by ship to the road and that has significantly higher transportation costs. And these are the 2 major effects. Hans, you've got into Q1 onetime cost? If I got this
correctly, Thomas, your question was on insurance and other type of special items or special effects that we have in Q4. I don't have the exact figure on the insurance payments, but on the insurance, let me make a statement that what we received during the course of 2018 equals the damages that we had in the course of 2018. I hope that helps. And then as you have seen in the special items in particular, you see significant ramp up there. That's all related to the integration costs that we have for the businesses that we acquired from Bayer.
Okay. And just a follow-up on that. The current utilization rate at Ludwigshaven, is that the full rate?
I would not say to full rate, but it certainly recovered from the 4th quarter. It has also to do with the current business development, which is slower than average what we have. So this is on a reasonable level, but not in the highest level possible.
Okay. Very helpful. Thank you very much.
The second question or questions are from Andrew Stott, UBS. Please go ahead.
Yes. Hi, Martin. Hi, Hans. Couple of areas I wanted to focus on. Number 1 is guidance on Chemicals.
Just slightly surprised that you're guiding up for the Chemicals divisionals, obviously not the nonmonomer part. Is there something specific about 2019 for DSF? I just heard some fairly downbeat comments from Ninos last week, Dow 2 weeks ago, particularly around cost of margins. So is it the Intermediates business that gives you confidence, something specific in your particular sites? That's the first question.
Second question is on ag. It's sort of twofold. 1, can you give me the one off cost of integration in 2019 and also what you saw in Q4? And also, specifically one on glufosinate. It looks like glufosinate as a product has completely recovered in the last 12 months, I guess partly helped by glyphosate resistance issues.
I just wonder if you could confirm that's what you're seeing, the sort of data that we're relying on into Brazil. And so I'd love to hear your thoughts on glufosinate as you look into 'nineteen and generally across the Ag business. Sorry, long question.
Andrew, about the guidance for chemicals, just be aware that also the new segment, chemicals, from 1st January does not continue monomers. So the cyanide part is definitely in the materials segment. Indeed, cracker margins are stressed in the moment in all the regions, particularly I'll have very much in the U. S, which has to do with the additional ethylene capacities coming on stream over there. And however, the other businesses look rather well, and you're right, amines business, I think, is a very strong one.
But also PDO business is something which is ought to improve margin. So overall, I think have a good situation here except the cracker margins. I think all over the other part of the portfolio is relatively stable. And yes, on the
one time cost, Andrew, looking for the exact figures, I'll give you rough order of magnitude in Q4 for the ag business, roughly €100,000,000 and total including Q3, I'll be back to you in a second. Your second question was on lymphozunate. All I can tell you is that based on what we've seen there so far, we were quite satisfied with the business that we generated in Q4. And I can also tell you that the start in the New Year, So in January, it was pretty good. And now let me take a look here.
Total integration cost in 2018 order of magnitude 160,000,000 dollars and we are expecting in 2019 order of magnitude $100,000,000 more than that.
Perfect. Thank you very much, Hans. Thank you, Martin.
The next one is Christian Faitz, Kepler Cheuvreux. Your turn, Christian.
Two questions that I made. First of all, in your chemical activities, do you see any signs of the demand revolve in China after the end of the New Year celebrations sequentially? And then second, on ag again, partly covering Andrew's question. Can you give us an idea how the activities acquired from Bayer have developed in the quarter of Q4? And how do you see the economic demand picking up heading into the application season in the Northern Hemisphere right now?
Thank you.
So, Vincent, with respect to China, I think it's a little bit too early. We just crawled out of the Chinese New Year. It started relatively slow in China in January. But let me tell you also, I've been living there 10 years. And certainly, as Easter holidays and everything, Chinese New Year is always shifting a little bit.
Every time when it's early in the year, normally the period between years change and Chinese New Year is a relatively lousy slow moving period. This is also the case this year. So I think it's a little bit too early because we have to compare it also with last year. The Chinese year was later. So I would say I don't see a vigorous revitalization here of the business.
But let's give a little bit more time until we can compare the two periods for a longer time zone because otherwise, I think it is not really comparable.
I guess I'll ask the question at the Q1 level again, Q1 with the same level.
Sorry, again?
I guess I'll ask in late April again.
Yes. Okay. Okay. Yes. All right.
And then, Kjell, it may be useful to comment on the developments in Q1. Sorry. On the development of the Bayer business in Q4, fully in line with our expectations. We had expected negative contribution from that business. We had a negative contribution from that business.
That should not be a surprise. It's the slower part of when I look at it on the 2 halves of the year, much lower, much lower cost in that part of the year. And then going into 2019, that's going on the answer that I already gave to Andrew. Figures for January were actually a bit better than what we had expected. But as you and I know from following the ad business over many, many years, you can't judge it on the basis of 1 month.
You cannot even judge it on the basis of 1 quarter. For the Northern Hemisphere, we have to see how the business will develop in Q1 and in Q2. And that then will give us a proven fair view on the development. But so far, so good, I'm going to say.
Okay, great. Thank you very much.
The next questions are from first Patrick Lambert, then Tony Jones and then Marcus Meyer. We start with Patrick Lambert, MainFirst. Please go ahead.
Thanks, Stephanie. Thanks, everybody.
Two quick questions, I think, again on Ags. The question on prices, I said you have positive price at 6% I think on Q4. I just wanted to check that it's prices or it's mix and if you can talk about the regional development on prices on coal protection? Question number 1. And a question regarding oil, yes, on your annual report.
I see that the reserves in Europe were in the North Sea were pretty sharply down. Can you comment on that? Is that a worry or do you have enough with Acumor to continue the growth of production there?
Okay. Patrick, I have a good time. So I'll take your first question first. So, ag price development, overall, we had positive developments in all regions where it comes to prices, obviously, offset significantly by FX effects in South America, but the price front overall looks pretty satisfying. On your reserves question in oil and gas, overall, what we have is we expanded the ROG ratio from 10 years to 11 years.
That gives you an indication on what's happening overall in the portfolio. And we had an adjustment to reserves in the North Sea, in fact, in one of our Norwegian fields, and that had an impact on that specific region. But overall, as I said, reserves picture looks pretty good and RO PE ratio up by roughly 10%.
And you continue having the same type of production growth that you a few years ago that you presented to us, it should be the same type of production growth?
It should be the same type of production growth. Cannot exclude that once we formed the joint venture with DEA. And if you look in particular then then at the EA's portfolio and what's coming on screen there, that production will grow at a higher rate, if I've heard things correctly. And they put out press releases last week with respect to also their expectations on production growth. And if I compare that to, let's say, auto main to 3% to 4 percent in volume growth that we targeted on an annual basis, that is more and goes in the range of 750,000 to 800 1,000 barrels per day in the relatively near future.
The next question is from Tony Jones, Redburn.
I had a question back on guidance. Martin, maybe could you talk through what gives you the conviction for this improved trading to develop over the year apart from economic forecasts? Is it something more tangible like improved visibility or some new customer contracts? And so my question there is what underpins that guidance to recover strongly in the second half? And then second question, a little bit related.
You also said, Martin, much more positive on
the outlook for U. S. Growth and China tariffs and trade compared to when we met in December. Can you help us understand a little bit about what's changed since then?
Tony, I mean, I think the two things are a little bit connected. I mean, first of all, let me really say, we saw a slowdown in the China market environment, very especially with automotive, it's not only connected with China, but also globally, whereas many of the other markets where we are in don't really look depressing or pessimistic. So it's very much with China and automotive. I'd also say that in January, it started still negative on automotive. We talked about Chinese New Year already.
But I think if we look forward and we analyze all the data we have today, we come to the conclusion that the Chinese market growth is about the same as last year as by the way also for the industrial production. That however includes that for example in the automotive market globally, you had an 8% decline in January in number of parts produced. The projection for 2019 is a slight increase to 8.8%. If that does not materialize over the next month, then certainly the assumptions are not true. So in that respect, we clearly have a kind of a back loaded budget or planning, and we haven't really seen them in the second half, let's say, a lifting in the business activities.
Why is this the case? I think, 1st of all, it really has to do a lot with the trade issues between the U. S. And China, but also U. S.
And Europe. And what you can see, I think, both on the side of the Trump allocation and administration as well as on the Chinese side, I think they both sides feel the pain of a slowdown in the economy. And it looks like both companies at least try to de escalate and find some solution for the most pressing issues in the trade friction. That looks at least like and this is factored in our planning that this is going to improve over the next month. I don't think and this is with this, I'm still consistent with what I said earlier.
There will be some easing of economic problems. It does not solve the issues between the U. S. And China as such because I think the problems that you have as 2 superpowers and how they arrange themselves in the future of tomorrow is not settled and will not be settled over the next month. And we also had, as part of our guidance, still the belief that the pressure will not happen in a very disruptive way.
I think there will be last minute some easing in the sense that they might postpone it or whatever. But there are some assumptions which gives us with all what we hear and all the people we talk about, a little bit more optimistic about 2019. But as we said, not only for the base effects, the first two quarters will be comparably weak because the highest finance price, they compare to a very, very high end quarters in the past. But we will see whether this holds true on the economic side in the second half. So with all talking to our customers also besides the automotive industry, the outlook is not really super pessimistic.
It flows, yes, but it's not falling off the cliff. And this is why we come with this budget. And I hope after we always say we are super conservative, we are a little bit more optimistic for 2019.
Thank you.
And the shift also by the way, it comes along with the U. S. Growth. I think we still have a very positive consumer confidence And we still see high industrial activities, certainly a little bit less because the, let's say, the effect from the tax reform is vanishing a little bit. But overall, expectation for the U.
S. Is still very positive. Great. Thanks very much.
The next question is from Markus Mayer, Panaghen Villa. Please go ahead.
Yes, good afternoon. Thank you for taking my 3 questions. First one is on the guidance again. Last year,
you also gave guidance on reported EBIT,
this year, this was not in the guidance or at least
I have not found in the
presentation other material, maybe a word on this. And also, indication for CapEx for 2019 would
be very
helpful. Secondly, on your Catalysts business, which was, at least in revenue terms up 18% in Q4, could you speed up this very strong growth into the TGM effect and also the organic growth? And then lastly, on net working capital, maybe can
you quantify what was here the effect from below Rhine water levels as
you think that there might have been higher inventories than at year end due to this effect? And what do you expect how your inventories will develop then in the Q1 of 2019? And also how you see inventory levels as your customers? Do you think that the destocking of the second half of last year brought the customers to levels where it might be hard to destock further?
Markus, first point, we never guided on reported EBIT. Basically, we do on the EBIT cost of guidance, right? So the second is
At least that's right.
Let me comment on the other part. With regard to CapEx, guidance is €3,800,000,000 planned for 20 19 and €21,200,000,000 for the next 5 years. With regards to inventories, sure, if you have a slowdown in the economy and also with your sales, there is also a time when you might run into higher inventories. There was also inventory buildup on our side. And with regard to customer inventories, I don't think that we have over pronounced effects here.
You have generally towards the end of the year that your customers try to go into the new year with lower inventory. Let's also see now what the overall, let's say, sentiment on our customers side is. With what I said, if the economic activities go up, then also we will see a more positive side on the inventory. Certainly in a period where it's a little bit slow, I think everyone is cautious. We will certainly work on all the inventories.
We had also to do with some reliability topics we had in the past. And with cleaning that up, we can also operate with a little bit lower inventory. So this, I think, goes hand in hand between our own operations, the, let's say, overall sentiment on the market. I think this is what I have said to you, 3 parts.
Okay, Maarten. I take your question on maybe CapEx first. CapEx guidance for 2019 is €3,800,000,000 And for the time period, kind of 'nineteen through 'twenty three, it's a bit more than €21,000,000,000 And you'll find that hidden in the outlook. You then had a question on the development sales development, if I got that correctly, in our catalyst division and in particular on the precious metals trading sales, We've experienced significant increases there, both in Q4 and also in the full year 2018, full year 2018 figure, sales increased from 2,500,000,000 to roughly 3,200,000,000 euros and roundabout €300,000,000 of that increase are in Q4. That's not so much related to volumes.
It's more related to the price developments that we've seen in precious metals and there, in particular, to palladium, which I think hit a new record in the beginning of this week or yesterday at more than 1500. So quite a development there, and that clearly pushes up then also the sales. And I think with that, we've got your questions covered, I hope at least. Perfect. Thanks so much.
Okay. Since we have 6 more analysts on the line, I would ask you to limit your questions to only 1 or 2 at a time. We will now have Tidjane Spengler, then Laurence Alexander and then Sebastian Paje. Tidjane Spengler with ZEP Bank. Please go ahead.
Thank you, Stephanie. Good afternoon. I have two questions. One on the Rhine water levels. So if they reach similar low levels in H2 2019 compared to 2018, is this fully covered by the 2019 guidance?
And do you have plans at hand when we face a similar situation? And second question is about your joint venture in the paper and water business. So could you provide us with the historic net income figures of this business,
so which would help us
to model the equity contribution in 2019?
And are the sales and earnings of
the water and paper chem still part of the group
in 2018? So in the report,
Or are they already in the disposal group? So that was not changing so far.
Peter, there's nothing in the budget with regard to low water in the Rhine. So we expect we have right operations for 12 months in the year. Normally in the past, we had always a few days or a week or something like that where we could not took out the full amount of cooling water from the river or where we had maybe a few days where our ships cannot go. That is normally what we think after with our inventories. It was really very, very exceptional in this year's summer in all the 153 history.
So I think this is nothing that you have to factor into your business. With regard to the JV surveillance, please understand that we will not give you further details on the earnings of this business, but very clearly, they were part of the performance and bolt up segment this year. Okay. Thank you very much.
2nd part was on Salinas. I fear that we will not be able to provide you with the comps on a income basis. And we have Solene, our Water and Temperature Treatment business in the disposal group. But you still find it different than the type of accounting that we have to do for oil and gas because oil and gas is discontinued business. So that disappears But for the net profit, in the case of our water and paper treatment business, we still see this in the regular P and L despite the fact that it's part of the disposal group.
But I think I can tell you that the profit contribution is not overwhelmingly high.
Now the next question is from Laurence Alexander, Jefferies. Your turn. Good afternoon.
Can you give some perspective
on your R and D pipeline in ag? And I guess really can you frame it in terms of what level of peak sales do you like to have in the R and D pipeline to match
or to be to sustain the new ag business given the size?
Well, I think if you read the press release of this morning, I think basically all the information is in there. I think it is a very impressive peak sales of more than €6,000,000,000 It's basically doubled from €3,000,000,000 to €6,000,000 This is not only from our own products, but it certainly includes now all the business we have from the Bayer acquisition. I think this is a very impressive number here. On the other hand, I'd also say it is very impressive what we invest in R and D because the segment is now investing in 2019 or is projected to spend around €900,000,000 in R and D. And I think this shows very clearly, first of all, our commitment to the segment, but it shows also how innovative this business is.
And this was actually also the driver for the acquisition. If you read through this before I go through all this, I think you see we have a very good mix on one hand on really traditional crop protection products, but we have also now the seed products. And I think what is also very important, we have also business and innovation from the digital part in there. So I think it shows how comprehensive and full fledged our segment is. And we are very proud and happy about this because I think this is what fuels the segment and gives you a perspective about the future of that business.
And I think that BASF is here very, very well positioned in terms of innovation.
I guess just to be clear, is that pipeline, the $6,000,000,000 is that enough for BSF to outgrow the markets it operates in? Or is it really the right level to sustain the business?
I mean, you could see also the last years already on our traditional or legacy business, we had a very, very strong pipeline on the chemical side, which is actually one of the strongest in this industry. Now you see that this is basically more comprehensive by having also the season trades and digital part over there. And I think this is a full pocket of ammunition to also be very aggressive in this market. So I think we have a very good position here. And as always what we said, I think with the size of the business, we don't have any disadvantage not to reach any regional or local market.
And I think we always made this clear in the past, you might have a little bit of higher sales cost compared to one of the bigger competitors now. But the main determining factor in this business is always your innovation power, how much new stuff you can bring to the market. And I think in that respect, we absolutely do not have to hide in front of any of the other big merged competitors here. Thank you.
The next question is from Sebastian Bray, Gerenberg. Please go ahead.
Hello, good afternoon and thank you for taking my questions. I also have 2, please. The first is on the potential difference between adjusted EBIT and EBIT in 2019. Could you please give an overview of what exactly the special charges will be? And in particular, I'm interested in how much of the roughly €500,000,000 of integration costs going to be booked as special items?
And related to this
is where they for 2018? And are there any other areas that we should be aware of? That's my first question. And my second is on the other segment. Given that the profit growth is quite marginal for or guided to be quite marginal at EBIT adjusted level for 2019.
The moving parts from this could potentially make the difference between flat and modestly up for the year. Could you talk about how much oil and gas contribution you have put into other for 2019 and the other moving parts that could move the other contribution up or down? Thank you.
Yes, Sebastian. This is Hans. I'll start with your first question on the special items. So what do we expect there? You've seen our figures for 2018.
What we expect is roughly special items doubling in 2019. And the big contributors to that will be the integration costs from the Bayer acquisition and the other big fees will be the cost that we have related to the excellence program. And that in combination should lead to what I call bottling of special items in 2019 compared to 2018. On other, yes, you're right. From the point in time on that the Pinto Sandia joint venture is established, We will show the our part of the net profit of the joint venture in other as part of the equity consolidation that we attained there.
Be careful when you look at the net income of Wintershall in 2018. And please be mindful of the fact that 2019 will be the year of integration and also restructuring. You may have seen the announcement that we made there last week with respect to reduction of provisions, in particular, in Europe and in Norway. So please factor that in. And please also understand that I can't give you any specific number on what the oil and gas contribution is expected to be, not the least because it depends on the point in time where we close the transaction.
And then as you know, in other, we have a lot of moving pieces in there. We had a significant positive contribution, in other words, income coming from our long term incentive program, unfortunately, for, as we all think, the wrong reasons. It's share price related, as you know, and that provided significant income that obviously we do not foresee for 2019. We also had FX related positive effects, which we just can't forecast or estimate that way in 2019. So unfortunately, other will remain an area where also we at times need a little longer to fully grasp what has happened in other.
We tend to grasp it quickly, but sometimes the development such as in the area of share price and or currency is extremely difficult to forecast.
The
The next question is from Georgina Yamamoto, Goldman Sachs.
I have two questions, both on guidance and both follow ups. So the first one is on the outlook for the Chemicals division. I'm sure everybody on the line would appreciate a little bit more convincing on how you see that segment growing. Your comments earlier indicated that cracker margins were currently depressed and that the other components of the new division would be more stable. So if you can just help me figure out how that ends up being a net positive impact for 2019.
And then the second question is for Hans. Just to follow-up on Sebastian's question on the oil and gas unit contribution. I appreciate that you haven't given us a number. Is it fair to assume a 6 month EBIT contribution for whatever our own forecasts are for the oil and gas business and then subtract some costs associated with the
restructuring? Thank you.
Georgina, thanks for the question. I'll start with the oil and gas question. I mean, I can tell you that this is what we're doing internally. We're using 6 months. We're using the expected net income.
And in the expected net income, we are fully reflecting the kind of restructuring and integration costs that I've already addressed.
Georgina, I cannot add much more to this. I think, yes, the cracker margin situation, particularly in the U. S, is something on the real negative side. I think the volume side is positive. DDO margin, as I mentioned, is positive.
I think also the accretive value chain, which is a very important one for PSS has a better outlook. And then don't forget, we have a lot of specialty business, which is also contributing significantly, which is also has a rather good perspective to the future. So I think this oil and also I should maybe say oxo alcohol is a very stable part of the business. So overall, that is the conclusion we get by summing up which is a rather positive picture than a negative one in getting up negative and positive effects.
Okay. Thank you.
Okay. Given the time, I would really appreciate it if you prefer if we could limit your questions to only one at a time. We now have Andrea Heine from MainFirst then Peter Clark, Societe Generale and then Chetan Udeshi, JPMorgan. So we start with Andreas Heine, MainFirst.
Yes. Very briefly on the cost savings, you will get €500,000,000 you stated on the EBITDA level. How does that compare with the inflation of costs you have in the OpEx line? Maybe try the second one. Could you give any update what you might have earned with data being consolidated for full year?
The last number we have
was from 2016. Could you add anything
how that business has developed from 2016 to 2018, please?
Andreas, this is Hans. What I can give you on Bayer is unfortunately not more than saying that business overall has had a positive development. Just can't say more for relatively obvious reasons, which have to do with the contract. And your second question was on the €500,000,000 in targeted in target contribution from the excellence program in 2019 and how that compares to what I would call general inflation in the portfolio. Did I get that question correct?
Okay. Okay. So what we work with is in very broad and general terms, inflation figures order of magnitude of 2% to 3% per year, offset by a number of efficiency measures. And in this year, an additional significant contribution coming from the excellence program.
The next question is from Peter Clark, Societe Generale.
Sorry for sneaking 1 in. It's on the cash flow and this for Hans, probably quite simple, but obviously you're pointing to CapEx constrained, working capital constrained.
You've got more
cash outs, I presume, on restructuring efficiency. Just wondering about our free cash flow level.
I presume you're looking at
it lifting the level we saw last year, given the disease getting close to €3,000,000,000 And just to clarify, you haven't put
a number, have you, on
the incident shutdowns? Because I know the big plant's going down this year, the year on year effect on that. Thank you.
That is correct. We have not put a number on that. But starting end of Q1 and then in particular in Q2, the turnaround cost will be significantly higher than what we have experienced in the first half of twenty eighteen. And your question on cash flow again?
Yes. On the free cash flow, I presume you're looking at 2019 free cash flow being at least the level of 2018, given your revenues climbing up to the 3,000,000,000 mark in terms of payout?
Peter, as you know, we don't give specific guidance there. But you know BASF as a good, solid, strong free cash flow provider. And Martin and I are looking at each other, are nodding and saying that's we want to be in 2019 also.
Okay. The next question is from Chetan Udeshi, and then we have one final analyst in the queue, that's Charlie Webb. But now first, Chetan Udeshi, JPMorgan.
Yes. Hi. Two questions. I wanted to just send my clarification. So, you talked about $260,000,000 of integration costs.
Can you just clarify how much of that is part of EBIT before special items or are all of those costs part of special items? And same as a question for other special items associated with the 2,000,000,000 excellence program. How much of those costs will actually be part of the before special items? So that will be useful. And the second question, sorry, just coming back to the guidance.
I understand the optimism on second half, but would it be fair to say that you probably can pass on that optimism in terms of your internal forecast for second half given that clearly you might not want to have a situation where you're too optimistic? Thank you.
On the guidance again. We always claim to be so conservative. Now we're really a little bit more optimistic. And I think I mentioned this. I mean, the first thing is by the political, I think we expect from the macroeconomic environment that we have a relief on some of the country and I think like Brexit and like trade conflicts, which I think is also psychologically just really bringing some of the markets with a little bit more dynamics.
And then you should not underestimate then what I said earlier that we have then the task from the first half no longer in the second half. We have some of the costs start kicking in. So it is basically coming from both sides. It's coming from the market side that we are optimistic, but it's also coming from our own cleanup and restructuring work, which showing fruits. And this is why are optimistic about the second half.
This is all what I can say, and we repeated this. This is our best guess from today's point of view, and this is why we take some guidance.
Thank you. Cigar, on your question with respect to one time effects, how much of that is actually a special item? How much do we see in the underlying performance? I tend to work there with a rule of thumb and that is it's about 75% that goes into special item and 25% you will find in the underlying performance also. So in other words, 25% that roughly hits the EBIT before special items and 75% that goes to special items.
Thank you. Thank you.
We have a final question from Charlie Webb, Morgan Stanley. Please go ahead.
Thank you very much guys. Good luck, I might try to sneak 2 in. First off, on Catto's business, you talked quite positively in terms of its contribution at the end of the year. And also about I saw a few headlines around getting approvals in that business. So perhaps you could just give us a quick update where you are in that approval process, when you would expect to be on platforms and kind of the outlook for that business going forward?
And then secondly, just kind of the acquisitions, including in guidance, you helped us with the oil and gas. Perhaps just on the Bio business, I remember you suggesting previously that EBITDA was on a standalone basis to that business around 550,000,000. If you look at the PTA, the amortization, is it right to think that we're going to get a low triple 1,000,000 digit contribution in 'nineteen? Is that the right way to think about it? And likewise, PA66, I think, euros 200,000,000 of EBITDA in 2016.
Clearly, there's going to be some revenue structures. I guess we don't know what that is yet. But is that a single double digit contribution for 'nineteen in the guidance? Is that the right way to begin thinking about?
Just a question. Your first question was the cathode business, the battery materials or what was Yes, exactly. Okay. So I can only say, overall, that developed nicely in 2018. We don't publish single numbers for that business, but we just have to make this very clear again.
We are an established commercial player in this business. We have a lower double digit 30 digit million sales in this business. And particularly on the high energy materials, so the NCA for particularly, they are very well established players. With our own capacities in the U. S, and we have the Toda JV capacities in the U.
S. As well as in Japan. So we are producing and delivering materials to customers. What is the new spot now, which you may be proud about, is our European investment, which is a very important one. And stopping this business up, it's also a very important commitment to the European value chain, which you see a lot in the newspapers also with a lot of political support, I would say, to build this up.
And we will bring our contribution to this. And we are now preparing our investment in the first step in Finland and then the second step. So we are very well on track with this business.
Charlie, since this was actually the last question and then this will be the last answer on the EBIT contribution before special items of the Bayer business. I'll keep this very short, and I say this sounds more or less correct, what you assumed.
Okay. So ladies and gentlemen, this brings us to the end of our conference call. Today, we already provided you with the most relevant figures for our new segments. In the last week of March, we will publish a comprehensive restatement brochure with all the data you need to adapt your models before our Q1 2019 reporting on May 3. Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team.
Thank you very much for joining us today, and goodbye for now.