Ladies and gentlemen, thank you for standing by. I'm Emma, your Chorus Call operator. Welcome, and thank you for joining the BASF analyst conference call fourth quarter and full year 2017 results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd like to ask a question, you may press star followed by one. When preparing to ask your question, please ensure that your phone is unmuted locally. If any participant has difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. This conference call contains forward-looking statements. These statements are based on current estimates and projections of the board of executive directors and currently available information. Forward-looking statements are not guarantees of the future developments and the results outlined herein.
These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in the Opportunities and Risks report from pages 111-118 of the BASF report 2017. BASF does not assume any obligation to update the forward-looking statements contained in this conference call above and beyond the legal requirements. I would now like to turn the conference over to Stefanie Wettberg, 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 fourth quarter and full year 2017 results. With me on the call is Kurt Bock, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, BASF Chief Financial Officer. Kurt will explain the financial performance of BASF Group in the fourth quarter and the full year 2017, while Hans will present the segment results and financial figures of the fourth quarter in more detail. Kurt will conclude by providing BASF's outlook for 2018. Please be aware that we already posted the speech on our website at basf.com/fullyear2017, so FY 2017. Additional information can be found in the BASF Report 2017, published this morning. With this, I would like to hand things over to Kurt.
Thank you, Stephanie, and also a warm welcome from my side to our full year analyst call. Ladies and gentlemen, on January 18th, BASF announced preliminary figures for 2017 because earnings exceeded analyst estimates. That's the German law. Today, we will provide you with the detailed fourth quarter and full year 2017 results and the outlook for this year. In 2017, demand was at a good and healthy level in all regions. We achieved volume growth in all segments and significantly improved our profitability. With EUR 12.45 billion in EBITDA before special items and EUR 8.3 billion in EBIT before special items, we reached a high earnings level. Free cash flow increased by 34% and amounted to EUR 4.8 billion.
Our Verbund concept and long-term investments strategy once again showed its advantages as we captured value within BASF. EBIT before special items in our Chemicals business, which comprise the Chemicals, Performance Products, and Functional Materials and Solutions segments, improved by EUR 1.5 billion - EUR 7.3 billion. In Agricultural Solutions, we almost reached the earnings level of the prior year, despite the challenging market conditions for crop protection products. Earnings in Oil and Gas improved significantly, mainly as a result of higher oil and gas prices. At the shareholder meeting, we will propose to pay a dividend of EUR 3.10 per share, another increase of EUR 0.10 . Turning to the financial figures of BASF for Q4 compared to the prior year in more detail. Sales in the fourth quarter increased by 8% to EUR 16.1 billion.
Prices were up by 9% and volumes increased by 4%. Volumes in our Chemicals business rose by 5%. Negative currency effects increased to 5% overall, while portfolio measures in total had no impact on sales. EBITDA before special items increased by 27% to EUR 2.9 billion. EBITDA rose by 20% to EUR 3 billion. EBIT before special items came in at EUR 1.9 billion, 58% higher than the prior-year quarter. Considerably higher earnings in Chemicals, Agricultural Solutions, Oil & Gas, and in Other more than compensated for lower earnings in Functional Materials & Solutions and Performance Products. At EUR 1.4 billion, earnings in our Chemicals business increased by 8%. Special income and EBITDA rose to EUR 72 million compared to EUR 47 million last year.
In Q4, the reversal of impairment in oil and gas more than compensated special charges. EBIT increased from EUR 1.2 billion - EUR 1.9 billion. The tax rate was 6.6% compared to 26.5% in the same period last year. The reduction of the statutory US corporate tax rate from 35% - 21% resulted in a one-time non-cash deferred tax income of EUR 379 million. Net income more than doubled to EUR 1.5 billion compared to last year. Reported earnings per share increased by 124% to EUR 1.68. Adjusted EPS amounted to EUR 1.29. This compares with EUR 0.79 last year. In the fourth quarter of 2017, operating cash flow declined by EUR 689 million - EUR 1.2 billion.
This was, among other things, driven by a business-related increase in net working capital. Payments made for property, plant equipment and intangible assets increased by EUR 160 million and amounted to EUR 1.4 billion. Thus free cash flow came in at -EUR 202 million compared to EUR 647 million last year. Sales and earnings in Q4 and going into Q1 2018 were impacted by two factors which are beyond our control, currency changes and severe weather conditions. West China suffered from natural gas shortages related to cold weather, affecting our production there. Furthermore, we had to shut down plants on the US Gulf Coast due to freezing temperatures and the lack of raw material supply by our suppliers. We also had some operational issues in our plants.
We are doing our utmost to get those plants up again as fast as possible and are in close contact with our customers. I will now quickly comment on the full year 2017. You have seen the numbers, therefore rather short. Sales of BASF Group increased by 12% to EUR 64.5 billion on account of higher prices and volumes. The average price for Brent crude oil was $54 compared to $44 the year before. To offset higher raw material prices, we implemented numerous price increases. Overall, sales prices increased by 8%. For the full year, volumes were up by 4%. Volumes in Asia Pacific were up by 7%, particularly driven by China, where volumes increased by 8% compared to the prior year.
Currency effects amounted to -1% overall, while portfolio effects positively impact sales by 1%. At EUR 12.5 billion, EBITDA before special items was 21% higher than in prior year. EBITDA amounted to EUR 12.7 billion compared to EUR 10.5 billion in 2016. EBIT before special items increased from EUR 6.3 billion - EUR 8.3 billion. Higher earnings in chemicals, oil and gas and in other were the drivers. In total, special items amounted to +EUR 194 million compared to -EUR 34 million a year ago. EBIT increased by 36% to EUR 8.5 billion. The tax rate decreased from 21.1% - 18.6%, mainly due to the deferred tax income related to the changes in the U.S.
Net income exceeded the prior year level by 50% and reached EUR 6.1 billion. Reported earnings per share increased from EUR 4.42 - EUR 6.62. Adjusted EPS were EUR 6.44, EUR 1.61 above 2016. Operating cash flow increased from EUR 7.7 billion - EUR 8.8 billion. Thanks to higher net income and our capital expenditure discipline, free cash flow amounted to EUR 4.8 billion. This is an increase of 34%. Let's have a regional look. The global economy improved steadily in 2017. Both advanced economies and emerging markets grew significantly stronger than in 2016. In the following, I will comment on BASF regional results for the full year. In Europe, the economy gained momentum in almost all countries.
BASF EBIT in this region increased by 31% to EUR 4.7 billion, mainly due to higher earnings in chemicals and oil and gas. Market growth in the U.S. remained modest at the beginning of the year. However, it improved over the course of 2017. We were able to increase earnings in North America from EUR 1.1 billion - EUR 1.2 billion, despite weather-related outages in fall of 2017. In emerging markets in Asia, GDP growth was significantly higher than in the previous year. On the back of government investment incentives, the Chinese economy grew slightly faster. BASF business development reflected this. We experienced strong demand in Asia, especially in China, and we grew well above GDP. In 2017, EBIT in the region doubled and reached EUR 2.2 billion.
This was primarily due to higher average margins and volumes growth in all segments as we filled the production capacities we had built up over the past couple years. In South America, Brazil overcame the recession. The country's economy expanded due to higher agricultural exports and an increase in industrial production. However, BASF's earnings in the region South America, Africa, Middle East declined from EUR 432 million - EUR 335 million. The market situation for crop protection products in South America remained challenging for most of the year. However, in Q4, earnings in our ag business in Brazil improved considerably. Ladies and gentlemen, you know that we are committed to our dividend policy, which means we want to increase the dividend year-over-year or at least keep it stable.
At this year's shareholder meeting, we will propose to pay a dividend of EUR 3.10, an increase of EUR 0.10 . Based on the share price of the end of 2017, which was roughly EUR 92, we are offering an attractive dividend yield of 3.4%. Last year, we agreed on a couple of deals to further improve our portfolio. Aside from the partial exit from our leather chemicals business, the following transactions are noteworthy. In September, BASF and Solvay agreed on the purchase of Solvay's polyamide business, which is backward integrated. It will complement BASF's engineering plastics portfolio and expand our offerings for the transportation, construction, and consumer goods industries, especially in Asia. The price tag is EUR 1.6 billion.
We expect the closing in Q3 after regulatory approvals have been obtained. In October, BASF signed an agreement to acquire significant parts of Bayer's seed and non-selective herbicide businesses. The all-cash purchase price is EUR 5.9 billion, subject to certain adjustments at closing. The transaction will be an asset deal. The assets to be acquired include Bayer's global glufosinate-ammonium non-selective herbicide business, and its seed businesses for key row crops in select markets. The acquisition also includes Bayer's trait research and breeding capabilities for these crops and the LibertyLink trait and trademark. Since the regulatory approval process for the acquisition of Monsanto by Bayer has been extended, we now expect the closing of the transaction in the first half of 2018. With this acquisition, we are seizing the opportunity to add highly attractive assets in key row crops and key markets to our portfolio.
It will be a strategic complement to our successful crop protection business and our planned biotechnology activities. In December, BASF and LetterOne signed a letter of intent to merge their respective oil and gas businesses. We plan to operate the joint venture under the name Wintershall Dea. By combining these two German-based entities, BASF and LetterOne strive to create a basis for further profitable growth, optimize the portfolio of the combined business, and realize synergies. Wintershall Dea would have a significant growth potential and be one of the largest independent European exploration and production companies. In the medium term, both partners aim to list Wintershall Dea through an IPO. Currently, we are conducting a confirmatory due diligence and are negotiating definitive transaction agreements. Closing could be expected in the second half of 2018, subject to customary regulatory approvals.
On the next slide, you see a couple of investments which we have been making over the last 12 months, essentially in the field of the automotive industry and also in China, exemplifying our strong desire to grow their businesses further considerably. I will now hand things over to Hans who will give you some more details regarding the development of our segments. Hans?
Thank you, Kurt. Good afternoon, ladies and gentlemen. I will highlight the financial performance of each segment in the fourth quarter 2017 compared with the fourth quarter 2016, starting with chemicals. Sales in chemicals increased considerably. Significantly higher prices in all divisions and overall higher volumes were the main drivers for this development. Currency effects impacted sales negatively in all divisions. Sales in petrochemicals increased substantially in all major businesses and regions due to significantly higher volumes and prices. Our petrochemicals business in Europe also benefited from the fact that the North Harbor infrastructure at our Ludwigshafen site is fully operational again. In monomers, sales increased considerably. Significantly higher prices, especially for MDI and TDI, drove this growth.
Volumes in monomers declined slightly due in part to turnarounds and force majeure at our Chongqing plant caused by a natural gas supply shortage at our syngas supplier. Considerably higher sales in intermediates were driven by higher prices in all businesses and slightly higher volumes. In a continued favorable market environment, we were able to increase margins, especially for isocyanates, acids and polyalcohols, cracker products in Europe, and acrylic monomers. This resulted in an EBIT before special items of almost EUR 1.1 billion, which is more than EUR 400 million above the prior year quarter. All divisions contributed to this significant increase. Sales in performance products increased slightly. In all divisions, higher volumes more than compensated for negative currency effects. Overall, slightly higher prices were offset by negative portfolio effects, mainly from the transfer of BASF's leather chemical business. Sales in dispersions and pigments increased.
This primarily resulted from higher volumes, especially in the dispersions business in Europe and Asia Pacific, in electronic specialties and pigments. Prices improved slightly. In care chemicals, sales grew as well. This was driven by higher volumes, particularly in hygiene and personal care solutions, and slightly increased prices. In nutrition and health, sales remained on the level of Q4 2016. Volumes increased in animal nutrition and in pharmaceutical products. Following the force majeure declaration for citral and isoprene-based aroma ingredients, as well as for vitamin A, E, and several carotenoid products, customers ordered significant portions of their allocated volumes already in Q4 2017. We expect to restart the citral plant in Ludwigshafen end of March 2018. Sales in performance chemicals declined slightly. Considerably higher volumes could not compensate for negative currency and portfolio effects related to the transfer of the leather chemicals business to the Stahl Group.
The good volume development was predominantly driven by plastic additives and fuel and lubricant solutions. Ongoing sales price increases across the segment were not sufficient to compensate for significantly higher raw material prices, hence margins remained under pressure. Fixed costs increased in part due to the startup of new plants, like the aroma ingredients complex and the fuel and lubricant solutions plant, both in Kuantan, Malaysia. Due to the ongoing margin pressure in all divisions and the shutdown of the citral plant in Ludwigshafen, EBIT before special items of performance products declined significantly. Sales in functional materials and solutions grew significantly. Higher prices were the main driver. The acquisition of Chemetall also contributed to the sales increase. Volume grew on higher demand from our main customer industries. Currency effects had a significantly negative impact on sales.
On a divisional level, Catalysts delivered a slight sales increase in Q1 2017 due to higher prices. Despite growth in mobile emissions catalysts and battery materials, volumes decreased. This was due to lower precious metals trading volumes against the strong base of comparison. Sales generated by precious metal trading, however, increased from EUR 669 million in the prior year quarter to EUR 708 million because of considerably higher prices. Construction Chemicals reported higher volumes in all regions, most pronounced in Europe. The region South America, Africa, Middle East also reported solid growth despite challenges in Qatar. The Coatings Division saw a significant sales increase. The integration of the Chemetall business, which developed positively, was the main driver. Volumes grew slightly, driven by good demand for OEM coatings and refinish coatings. Prices were stable.
In Performance Materials, we were able to raise prices significantly and experience solid volume growth. The transportation segment showed the most pronounced volume growth, followed by the consumer segment. EBIT before special items in Functional Materials and Solutions decreased considerably due to lower earnings in all divisions. This mainly resulted from higher raw material and fixed costs. In particular, in our Performance Materials division, we could not fully pass on higher isocyanates prices. Sales in Agricultural Solutions increased by 4%. Significantly higher volumes more than offset negative currency and price effects. Volumes grew, particularly in the Americas, mainly due to higher herbicide sales in North America and higher fungicide sales in South America. Overall, EBIT before special items increased significantly from EUR 79 million - EUR 207 million in the fourth quarter of 2017.
This was mainly due to the higher volumes and improved margins. Lower fixed costs also contributed. In Europe, sales declined mainly due to lower volumes in the fungicide business. Sales in North America increased significantly, driven by higher volumes. In particular, our herbicide business in the U.S. performed very well, driven by our innovative herbicides, Engenia and Zidua. In South America, we were able to slightly increase our sales. As a result of shifting sales closer to the application, volumes were up significantly. Sales in Asia were flat. Higher volumes and prices were offset by negative currency effects. All major countries grew, except for Japan, where the market is facing high channel inventories. Despite continued challenging market conditions, full year 2017 sales increased by 2% to EUR 5.7 billion due to higher volumes.
At more than EUR 1 billion, EBIT before special items almost matched the previous year's level. The EBITDA margin reached 23%. Sales in oil and gas declined significantly, mainly due to an 18% decrease in volumes. In the prior year fourth quarter, we sold a full lifting from offshore Libya. In 2017, the lifting took place back in the second quarter. In addition, we produced less oil and gas in Norway. In 2018, new fields such as Maria in Norway will contribute to higher production levels. In Q4 2017, the average price of Brent crude was at $61 per barrel, $12 higher than the same period of 2016. Gas prices on the European spot markets were also above the level of the prior year quarter.
The combined price and currency effect was +11%. Overall, EBIT before special items increased considerably from EUR 163 million - EUR 260 million, mainly due to higher prices. In Q4 2017, special income amounted to EUR 176 million and was related to the necessary reversal of impairments in Norway and the Netherlands. Net income in oil and gas increased from EUR 182 million - EUR 318 million. In 2017, we doubled net income to EUR 719 million and again generated positive free cash flow in oil and gas. Now to other. EBIT before special items in other improved from -EUR 386 million to -EUR 38 million.
This was mainly driven by a swing of around EUR 190 million related to our long-term incentive program. While earnings in Q4 2016 were negatively affected by an increase in provisions, Q4 2017 benefited from the release of provisions for the LTI program. With that to the full-year cash flow. Cash provided by operating activities increased from EUR 7.7 billion - EUR 8.8 billion due to higher net income. In 2017, changes in net working capital reduced the cash flow by EUR 1.2 billion, mainly due to business-driven higher inventories and accounts receivable. In 2016, changes in net working capital led to a cash inflow of EUR 104 million. Cash use in investing activities decreased from EUR 6.5 billion - EUR 4 billion.
In 2016, net payments for acquisitions and divestitures amounted to EUR 2.2 billion, mainly due to the Chemetall acquisition. In 2017, we only had a minor cash inflow from acquisitions and divestitures. Payments made for property, plant, equipment, and intangible assets decreased by EUR 149 million - EUR 4 billion. At EUR 4.8 billion, free cash flow was up by EUR 1.2 billion compared to 2016. Cash provided by financing activities amounted to plus EUR 394 million in 2017. Changes in financial liabilities led to a net cash inflow of EUR 3.2 billion, mainly due to the issuance of bonds. We paid EUR 2.8 billion in dividends to the shareholders of BASF SE, and almost EUR 120 million were paid to minority shareholders. Finally, let's look at our balance sheet at the end of the year 2017 compared to year-end 2016.
Total assets increased by EUR 2.3 billion - EUR 78.8 billion due to higher cash and cash equivalents in preparation of the financing of the announced acquisitions. Non-current assets decreased by EUR 2.9 billion. Intangible assets decreased from EUR 15.2 billion - EUR 13.6 billion, especially due to currency effects. Tangible fixed assets decreased by EUR 1.2 billion - EUR 25.3 billion, also mainly driven by currency effects. Current assets amounted to EUR 31.1 billion compared to EUR 25.9 billion at year-end 2016 due to higher cash and cash equivalents. Inventories and accounts receivable increased slightly following the business growth in 2017. Total liabilities remained stable at around EUR 44 billion. Non-current liabilities increased by around EUR 520 million - EUR 29.1 billion. Lower provisions for pensions and civil obligations were more than offset by higher long-term financial debt following the issuance of bonds to finance, among other things, the announced acquisitions. Current liabilities decreased by EUR 437 million - EUR 14.9 billion.
Financial debt went up by EUR 1.7 billion - EUR 18 billion following the issuance of bonds. More importantly, net debt amounted to EUR 11.5 billion, a decrease of EUR 2.9 billion. Our equity ratio was at 44.1% at the end of 2017. With that, back to Kurt for the outlook.
Yeah, thank you, Hans. Now I try to give you a quick overview how we see 2018 developing. The outlook is slightly more complex because we have to make a couple of assumptions also with regard to the transactions which we have underway. Let's start with the economic assumptions. At 3%, we assume that the global economy will grow at almost the same rate as last year. We expect economic momentum in Europe to ease slightly. The U.S. will presumably grow slightly stronger. Asia Pacific will continue to grow, but we expect growth rates to slightly decline due to lower economic momentum in China. In South America, we assume a continuation of the slow recovery in Brazil and Argentina. We anticipate global chemical production to grow at 3.4% compared with 3.5% last year.
We expect a slightly weaker growth rate in the advanced economies, while growth in the emerging markets should pick up a bit. We assume an average exchange rate of $1.20 per euro and an average oil price of $65 per barrel Brent. Despite the generally favorable market environment, risks remain. Among others, rising interest rates in the U.S., a volatile US dollar/euro exchange rate, protectionist tendencies, and imbalances in China could negatively impact economic growth in 2018. Our outlook takes into account the agreed transaction with Bayer. Based on the timing of the acquisition, the seasonality of the businesses, and the anticipated integration cost, the transaction is likely to have a positive impact on sales and a negative impact on earnings for the Agricultural Solution segment and BASF Group in 2018.
This forecast also includes the intended acquisition of Solvay's integrated polyamide business in the third quarter. However, we do not expect this transaction to have any material effect on sales and earnings from a group point of view. We have not yet included the intended merger of our oil and gas activities with DEA. After the signing of definitive transaction agreements, the oil and gas segment's results would no longer be included in sales and EBIT for the BASF Group retroactively as of January first. Rather, they would be presented in the income before minority interest of the BASF Group as a separate item, namely income from discontinued operations. From the transaction closing date, we would presumably account for BASF's share of income before minority interest generated by the joint venture, Wintershall Dea, using the equity method and include this in EBIT for the BASF Group.
The gain from the change from full consolidation to the equity method would be shown in income before minority interest from discontinued operations. Based on the described assumptions for the economic environment and taking into account the agreed upon transactions with Bayer and Solvay, we provide the following outlook. We anticipate slightly higher sales in 2018, largely as a result of volume growth. EBIT before special items is expected to be up slightly on the 2017 level. EBIT for BASF Group is forecasted to decline slightly in 2018. We anticipate special charges in the form of integration costs in connection with the agreed acquisitions. We aim to once again earn a significant premium on our cost of capital. However, compared with the previous year, the BASF Group EBIT after cost of capital will decrease considerably.
This will mainly be due to lower EBIT, including M&A-related special charges, as well as the additional cost of capital from the planned acquisitions. We are planning total capital expenditures of around EUR 4 billion in 2018. For the period 2018 - 2022, we plan capital expenditures totaling EUR 19 billion. That is by and large the same number which we had foreseen last year for a five-year period. In the Oil and Gas segment, our currently planned investments for the next five years are forecast with around EUR 3.5 billion. If the merger of our oil and gas activities with DEA is consummated as intended, these capital expenditures will no longer be reported as investments by BASF. The next slide summarizes the outlook for 2018 for EBIT before special items by segment.
As described previously, EBIT before special items of BASF Group is expected to be up slightly on the 2017 level. This will be mainly driven by significantly higher contributions from the Performance Products, Functional Materials and Solutions, and Oil and Gas segments. We are forecasting a slight improvement in the earnings generated by Other. After an extraordinary result in 2017, we expect considerably lower EBIT before special items in the Chemicals segment, primarily as a result of lower margins. Due to the aforementioned specifics of the agreed transaction with Bayer, we anticipate a slight decrease in Agricultural Solutions. Excluding this transaction, we want to grow EBIT before special items in this segment slightly. Additional information is available, as Stefanie already said, in the annual report 2017 that was also published today. With that, we are happy to take your questions.
Yeah, ladies and gentlemen, I would now like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Given the slightly longer speech for the full year, please limit your questions to only two at a time so that everybody has a chance to ask his or her questions. Of course, you are welcome to rejoin the queue. We start with Andrew Stott from UBS. Please go ahead, Andrew.
Yeah, good morning, Stefanie, and morning, Kurt and Hans. Thanks for the questions. Just a couple. First of all, on the start to 2018, you said yourself, Kurt, it's more complex this year. I guess it's also complex because we've got the outages, not just citral, but also in Chongqing with MDI, and I think one or two other smaller ones. At this stage, can you give an idea of perhaps an EBIT impact? Also, how are you thinking around insurance proceeds? Indeed, were there any in Q4 in performance products for citral? Thank you. The second one is just coming back to guidance on ag for the year. Do I take it that you're sort of assuming now rather than booking nine months, you're probably gonna book closer to six months?
Is it really that the integration costs are gonna be fairly material? I wasn't quite sure as to the assumption within that. Thank you.
Yeah. Hi, Andrew. Thanks for the questions. I will take the first one, and Hans, the second one on integration costs. 2018, yes, it's a little bit more complex, also due to the outages, and I mentioned this in my speech, we have external factors which we cannot control. One, obviously and clearly magnitude was unexpected is the shortage of natural gas, for instance, in Chongqing, which is not operating as we speak, and this certainly has a double-digit EBIT impact quite clearly. We hope to be back in late February, early March, needs to be seen. Then we had freezing temperatures earlier this year in Q4 and on the US Gulf Coast. Also, some of our suppliers had issues that has impaired production volumes, and this is again a double-digit impact.
Volume growth overall in January has been good, as planned. It's too early to talk about February, still a couple of days to go, and you know that in some of our businesses, volumes come in rather late final days of the month, the sales are booked. So there is a bit of uncertainty. However, we look at the underlying economic drivers, underlying growth in all regions, most businesses of our customers, still positive about the outlook, and that I think justifies our intention to slightly improve last year's earnings. Performance Products and specifically citral, no insurance payment received in Q4 and too early to talk about Q1, actually, we are extremely busy in reinstalling capacity.
The reason why we have this situation is we had a relatively small incident, a small fire. However, it impacted the cabling of the citral plant, which basically means the entire plant is down. By the way, you can follow the rebuild in detail on our internet. There's a daily report about the progress which we are making. We are certainly aware that our customers are quite concerned about the situation. We do our utmost to provide as much product as possible also coming in from Kuantan, from Malaysia. But obviously there is a shortage for citral-related products, and this has an impact also on the bottom line in Q1. Integration cost plans.
If I get your question correctly, it was about the guidance that we're giving for the Agricultural Solutions segment. Now, what's happening there, as a result of the point in time at which we expect to acquire the business, most of the season will be already behind us. In other words, what we will experience in the year 2018 is predominantly cost and not so much revenue and income. As a result of that, and that's the key driver, we expect to see a slight decline in the earnings of the Agricultural Solutions business versus a slight increase that we would have seen without the acquisition. I hope this helps.
Thank you.
The next question comes from Paul Walsh, Morgan Stanley.
Sorry, it's actually Alix Chosson on the call for Paul. Just two questions from me, if you don't mind. The first question is: Could you just explain why you decided against a bigger dividend given the EPS growth that you achieved? Then the second question is in regards to your FY 2018 forecast statements. What are the assumptions behind the considerable decrease in the Chemicals EBIT for FY 2018? Thank you.
Yeah, thanks for your questions. Forecast for Chemicals segment, clearly we had earnings and margin improvements in 2017, which were way above what I would describe as normal cyclicality of those business supply, demand-driven, especially in isocyanates. We simply do not believe that this is going to repeat in 2018. It would be great if it were the case, but from today's point of view, the likelihood that we will stay below last year is higher than the likelihood that we stay above last year, much higher, actually. As you know, a considerable decrease means more than 10%, and that is certainly possible given the very high level of earnings in that segment. A dividend, obviously we discussed it internally quite a bit.
Should we change the steps from something like EUR 0.10 to 20%? There were even people out there who said, you know, that this is Kurt Bock's final year, and he should say goodbye and wave goodbye with a big dividend increase. That obviously is not happening. We have a clear policy in place that we said we wanna increase dividend year-over-year in a very predictable way. We have done this with one exception right after the financial crisis in 2009, which I think is fully understood. We have now a payout ratio, and you refer to that, which is below 50%, if you take that as a yardstick, which we do not really do. We also had years where our payout ratio was 75%.
For us, it's a steady-state, predictable cash return improvement is of importance, and we think this is something we should continue to do. Whether or if the board decides in the future to change the steps and to increase the magnitude needs to be seen, but for 2017, we just felt this to be the right thing to do.
Thank you.
Now we have Tony Jones from Redburn. Please go ahead. Tony, are you on the line? Obviously, he's not anymore. Might re-queue. We move on to Laurence Alexander from Jefferies. Please go ahead.
Good morning. I guess two questions. First, with the shift of the oil and gas segment to a JV, is there an opportunity to transfer some leverage to the JV, or how should we anticipate the balance sheet evolution for BASF? Secondly, for the chemicals business, do you anticipate over the medium term margins returning to the levels we saw earlier in the decade? Or do you think we're at a new level that, while down from 2017, is more sustainable?
Yeah. Hi. Hi Laurence. When you talk about the Chemicals business, you mean the Chemicals segment? The more cyclical-
Yes, yes. Sorry.
Upstream business. Okay. Very good question. Is this a new normal? Very hard to say. I mean, there is an underlying improvement. In our business, I think we have costs well under control. Supply, demand is healthy. Markets are growing for the time being. Yes, there is new capacity in some markets coming on stream, but will cyclicality disappear and volatility disappear? I doubt it. I think we will still see swings in earnings and margins. I don't know yet whether this will go back to the, let's say, very difficult levels which we had at some point in time. Not necessarily. We exited a couple of businesses where we felt uncomfortable, as you know. We maintain businesses like isocyanates, where we think we have a good market position, good technology and good cost position.
Our acrylic asset, just to give you another example, where we have an excellent cost position, where we, for instance, see room for improvement in 2018. You really have to go product by product, and there is not one chemical cycle anymore. It's really product-wise, and you have to be very specific. Some products might go up, margins go up, some might come down. On average, we believe for chemicals, for the segment, margins most likely will come down a bit. Certainly not to the level which you described. Then oil and gas leverage for the joint venture, but also the consequences for BASF Group.
Laurence, thanks for your question. Now let's go back quickly to what Kurt said earlier, where we are in the transaction. We are currently going through confirmatory due diligence. We have started discussion with LetterOne on financing of the joint venture. It would be premature to answer your question on whether or not there is potential to transfer some leverage to the joint venture company. It will be certainly financed, and that you can expect from us and also from LetterOne in a way that this company will be very competitive from the get-go. It will be positioned for growth and will be financed accordingly. What it means for BASF P&L, Kurt has explained that already. It will be at the point of signing.
It will be shown as a discontinued operation, so separate line, no more sales, separate line above the net profit line. From the point in time where we close, according to what's been discussed so far, it will be consolidated at equity. The assets and the debt that we show at this point in time will then be replaced by the financial participation that we have as BASF in the joint venture.
Thank you.
Moving on. Yeah, Laurence? Okay, we move on to Stephanie Bothwell from Bank of America Merrill Lynch.
Yes, thank you very much, and thanks for the opportunity to ask my two questions. Firstly, on new projects, away from the acquisitions that you've made, could you just walk us through which projects are expected to contribute positively to EBIT during 2018? Linked to the earlier question on oil and gas, can you just update us with a CapEx guide for 2018, 2019, whether we should expect any significant deviation given the oil and gas transaction? Thanks.
Stephanie, the EUR 3.5 billion for a five-year period, you can probably divide this by five and then come up with by and large the number for 2018, maybe slightly higher, that needs to be seen. Again, what is important in this context, as of signing a transaction agreement, those numbers will not be included anymore in the BASF Group accounts. It’s obviously still has a cash relevance, but as Hans said, the joint venture is supposed to be a standalone financed entity and should be able and capable to finance its own growth trajectory. New projects, we have a couple of new capacities coming on stream.
One is, which I already mentioned, is the Kuantan citral investment, obviously, which is now going into higher gear in 2018. We also just completed an MDI investment in our joint venture in Shanghai. This will also contribute to sales and cash flow and hopefully also earnings, given the level of margins in that business. We have a couple of smaller startups, and some of them I mentioned in my presentation, especially in the automotive industry. We want to continue to grow the business organically. I think 2017 has shown that this is paying off because we captured growth, especially in Asia and especially in China, because we had made a couple of major investments in the years before.
This is going to continue to provide growth for BASF going forward. I hope that answers your question.
It does. Thank you.
Welcome.
Now it's Andreas Heine from MainFirst. Please go ahead.
Yes, first I'd like to ask a question on the outlook. You said the clean EBIT should be up, but reported EBIT will be down. Is it then fair to assume, seeing that the difference between these two numbers, that we should look at this point and to an increase more in the range of 0%-5% rather than in the upper half? Secondly, also related to the outlook, if you look to what you said on the acquisition and the impact that might have on 2018 clean EBIT, then I would say that the acquisitions with Agro being in the negative and Solvay not being significant that the net of these two acquisitions is rather a loss than a positive contribution.
This was on the outlook, and maybe you can give also an update on where you are in the ramp up of the Kuantan citral plant or the whole complex. As far as I know, that should be as big as the Ludwigshafen one and should change then the tight market in citral if that plant could be ramped up quickly. Thank you.
Andreas, I will take your second question, and Hans will try to come to a conclusion what to say about the first one, which is a little bit more complex to answer. Kuantan, yes, we are in the ramp-up mode. This is working quite nicely. The size of the plants is comparable. That's correct. Obviously, with the incident here in Ludwigshafen, we had to change plants and tracks, so we will essentially ship everything as quickly as possible to Europe to fill our pipeline here and to make sure our customers get as much product as possible, meaning that some of the subsequent steps in Kuantan will be delayed slightly.
With the restart of citral at end of March, early April, I hope that things will go back to normal as quickly as possible. Now, Hans, Andreas wants to have more specifics on the outlook.
Yeah.
No numbers.
I can fully understand Andreas, but I think we'll simply stick to the guidance that we gave there, Andreas. What's important to understand is that when you compare EBIT in 2017 to the outlook that we're giving for 2018, please keep in mind that we had a considerable amount of positive special items there. Overall, total EUR 194 million for the year 2017 as a result of divestitures, but also as a result of reversing impairments for oil fields in Norway and in the Netherlands that we did in 2016, if I recall that correctly. That's important to keep that in mind.
Yes, as a result of the acquisitions that we've built into the outlook, i.e., the acquisition of the Bayer assets as well as Solvay, we've worked with what I would call preliminary integration figures, which due to the status of the two transactions, you will understand that we will not disclose anything there. That then overall leads to the difference in guidance that you duly noted in EBIT before special items and in EBIT.
Thank you.
Let me add, Andreas, we will certainly try to give you more detail in our call early May 5th. We hope to know much more by then. What is important, the seed business by definition is extremely seasonal. I mean, the major chunk of the business is done in Q1. If closing is not in Q1, obviously we don't have sales and earnings, but essentially we get all the cost for the remainder of the year. This is then later reflected in the purchase price adjustment, but obviously it has impact. The closing date really has impact on the forecast here. For that reason, we made it so specific talking about what we currently see as the most likely timeline.
The next question is from Laurent Favre, Evercore.
Yes. Good afternoon, everybody. Two questions, please. The first one is on capital allocation, and we've talked about it, I guess a bit earlier today on the dividends. You're guiding CapEx flat or down for the next five years, earnings up at least for next year. Not to mention the oil and gas potential releveraging. I'm just wondering, given what's happened to the dividends, could you consider complementing this progressive dividend with a buyback? And I think in the past you said you didn't want to do it without having the headroom to do a proper one. Could you consider now doing a buyback, given the under-leverage on the balance sheet? Then the second question is on Nanjing and the YPC JV.
It looks like now you've got a dividend of about EUR 200 million there as well. You are deleveraging. Should we expect Nanjing to become a source of dividend stream, or should we expect at some point in time to have significant investments there?
Thanks, Laurent, for the two questions. Nanjing, yes, we had good results. It's a 50/50 joint venture, as you know, and the order of magnitude is about EUR 230 million - EUR 240 million of earnings. It is obviously also a decision of whether we want to keep the money in the country or pay a dividend. That then relates to the second part of your question, any major investments foreseen. We have invested a bit over the last couple of years in Nanjing, and it's certainly a discussion, an ongoing discussion with Sinopec, whether more could be done. We have one startup coming up, which is 2020 neopentyl glycol. We have one startup in 2019, which is propionic acid.
A couple of things still going on in Nanjing. Overall, we are pretty satisfied with the development in our joint venture with Sinopec. Capital allocation in general, I mean, you know our priorities. We wanna grow the company in a profitable way, earning a premium cost of capital. We always said that buybacks financed via additional debt is not really what we wanna do. I know this is kind of a fashion in the United States, but we don't deem this to be really a very intelligent strategy for BASF. There were a lot of ifs in your question.
If there is a deleveraging due to oil and gas, if there is a continued relatively low investment at the level of depreciation, and if we have continued good business development, then we might become very cash rich, and then we have to think about what to do. I would be surprised, put it that way, if the management of BASF does not then take a shareholder interest into account. Talking about buybacks, we get different feedback from our investors quite clearly. Some like it, and some clearly dislike it. This is not a unified opinion whether buybacks are really the greatest thing on Earth. Again, if all the ifs work out as described, then I think we have a good problem to solve.
Thank you.
The next question is from Peter Clark, Société Générale. Please go ahead.
Yes, good afternoon. Thank you. Two questions. On the investment five-year outlook, the EUR 19 billion, obviously oil and gas is a little less than you had last year in there. But the other infrastructure R&D is up. I'm just wondering, is that more of a push in R&D, or is it just not allocated yet? And then the second question, it's an if question, this one. In Performance Products, you're guiding for this considerable increase in EBIT this year. I mean, that's always proved the most challenging of your segments to forecast. If raw materials were to stay pretty much where they are, when do you think you'll catch up with that margin squeeze you've had in terms of your pricing and also the work you're doing on the cost base?
Is it something you envisage in the second half of this year, or do you really need the raw material pressure to alleviate? Thank you.
Yeah. Thanks, Peter, for the questions. I'll leave the CapEx question to Hans and try to answer the Performance Product question. First of all, we clearly see a need to improve margins. Very bluntly put, I mean, we are not satisfied with the development in 2017. Obviously, citral then was another curveball which we did not expect to happen when we had our last call. The currency effect was frankly quite negative in Q4, and most likely this is going to continue going now into 2018. What we have seen on the raw material slash margin slash sales price front is a slight improvement, meaning the margin squeeze is diminished now. We're almost there, passing on raw material price increases to our customers, but we haven't yet seen the full effect.
For the complete year of 2017, the effect was still quite negative. We have put a couple of price increases overall into effect also on January first. Even if we, in some cases, might suffer a bit of a volume setback, we said this is now the point in time where we have to almost across the board increase prices, given the raw material cost position and underlying demand patterns in our markets. We have a couple of businesses, frankly, where essentially supply and demand driven and Performance Products also has some supply and demand driven products. Price adjustment is not feasible, but in others, we can implement and I would be surprised if this doesn't pay off now going into Q1 and Q2.
It is clearly an uphill battle, and frankly, with the benefit of hindsight, I'd say it always has taken longer than what we expected about a year ago. Please keep in mind also the raw material cost and the oil price increased relatively strongly late last year.
Yeah, Peter, with respect to your question on CapEx, the EUR 19 billion, there is hardly anything in there for CapEx in research and development. That is almost exclusively expensed. We have R&D expense in the order of magnitude of, let's say, round about two billion per year. Expect that to increase a bit as a result of the Bayer acquisition because that is a business that requires support through research and development. Please keep in mind that about what is it? A quarter of our entire research and development budget in the BASF Group is allocated to our ag solutions business. And that will increase a bit as a result of the Bayer acquisition. But again, in CapEx, there's hardly anything in there for R&D.
Three more analysts in the queue. We start now with Patrick Lambert, and will be followed by Sebastian Bray, and then Chetan Udeshi. Now first, Patrick Lambert, Raymond James, please go ahead.
Hi. Good afternoon, thanks for taking my two questions. The first one is related to the tax impact in the U.S. I think you gave us 2017 non-cash impact. If you could help us with the tax rate impact or actually cash flow impact on the tax reform, especially post the oil and gas accounting changes. The second question is just to confirm a calculation on cash flow from oil and gas, just to make sure that I'm doing the right math here. I find about EUR 650 million. Is that the correct number? That's it for me. Thanks.
I start with the second part of your second question, Patrick. The figure is about right. With respect to free cash flow, you are EUR 90 million short. To round figures, you're EUR 100 million short. The tax impact in the U.S., we've provided you with the non-cash impact that we had in 2017, roughly EUR 400 million. I think the exact figure is EUR 379 million for 2017. Now, to give you a figure going forward, I did the same that you are doing with our tax experts. They can tell me clearly that the corporate tax rate goes down by 14 percentage points.
All the other changes that you have, the assumptions that you need to make it extremely difficult. Our guidance with respect to the tax rate for the BASF Group would be in the mid-20s%. By the way, as in the past, oil and gas plays a bit of a role there because we would expect higher earnings there. As a result of that, typically a higher government takes or higher taxation there. As a result of that, mid-20s% is probably a good figure that you can use when you run your calculations.
We're still including oil and gas forecast, right?
That still includes oil and gas. As mentioned by Kurt earlier, we would not expect that transaction to close earlier than towards the end of Q3.
Thank you.
The next question is from Sebastian Bray, Berenberg. Please go ahead.
Hello, and thank you for taking my questions. I would have two, please. I appreciate it may be a bit early to say, but do you have any guidance on the potential impact of moving oil and gas out of the group on the tax rate and/or the returns profile in terms of returns on capital employed? A second question relating to CapEx projects. Are you going to start construction of your cathode materials facility in Europe this year? Thank you.
First question, Hans. Second question, I will try to answer. This is a joint effort. As you know, we are sitting down with Norilsk Nickel to secure the supply of cobalt, which is instrumental for the success of that entity. We are in the midst of what we call the planning and detailed engineering phase. Stay tuned. Yeah. Now on the tax rate without oil and gas, I'm sorry, Sebastian, but I need to be as fuzzy as in my prior answer. It's simply very difficult to predict number of assumptions you have to make. Where's the oil price? Where's the gas price? What will the earnings be like?
I think it is the best to stay at this point in time with the general guidance that we're giving for mid-20s% tax rate for the BASF Group. Oil and gas is an asset heavy business. You can look this up in our annual report. You see the asset base there of oil and gas, order of magnitude EUR 13 billion. That's not in the calculation anymore for returns. That should improve the return profile as an example on a return on capital employed basis overall.
Understood. Thank you very much.
The next question is from Chetan Udeshi, JPMorgan. Please go ahead.
Yeah. Hi. Thanks. You know, I had a question on margin and Performance Products and Functional Materials segments. You know, if you look at the year-on-year decline in the margin. I mean, the year-on-year decline in margin in both of those segments was much higher than what we actually saw in each of the past three quarters. So, I mean, I'm not sure why we are not seeing any, you know, impact of the price increases that were initiated right through 2017 in those two segments. That's number one. Do you think, you know, by Q1, Q2, like you said in the response to earlier question that by Q1, Q2 you should see improvement there.
When you say improvement, are we looking at the margins beginning to go up year on year? Or is it more like, you know, reducing the pace of decline in those two businesses? That's number one point. Number two point or number two question rather is, you know, maybe just a perception at the moment, but maybe you can give more color on, has BASF been unlucky over the last 12-18 months in terms of number of production issues that we've seen in different plants? Or you think just from a statistical perspective, you know, this is nothing much different than in the past? Thank you.
Oh, sorry. Thanks for the question, Chetan. I think I tried to explain it before. Both in Performance Products and Functional Materials and Solutions, margin pressure continued, yet we have been able to increase prices increasingly. The negative impact, quarter-over-quarter sequentially, quarter on quarter, has come down quite significantly. If that trajectory continues into Q1 and Q2, we should see positive rebound happening. What hit us, and I mentioned this as well, in Q4, is really the currency effect, which was quite negative actually for the first time in 2017, and this continues going into 2018. Purely raw material cost price increases, yes, I could use your word, the pace of decline has come down, but it has come down quite dramatically.
As I said, we also announced and implemented a couple of price increases early 2018, which should help in that respect. Production issues, given the size of BASF, there's always something which works perfectly, and there's also always something which doesn't really work as planned. We look very, very carefully at what we call unplanned outages. Obviously in Q4 the number has come up quite a bit. I mentioned the reason, external factors, weather-related, going also into Q1, supplier-related. Then we have one issue which is really citral, which is internal, an internal issue during the startup phase.
That is order of magnitude and number of incident that is not out of the normal other than we had this, I would say, quite unlucky combination of weather and raw material-related issues in Q4, Q1. What we have never had before, frankly, is that in China, frankly, we are being told, "Don't expect any natural gas supply full stop for the next couple of months, and don't even argue about it." That was a new experience, which obviously is also beyond our control.
We have another question, Markus Mayer from Baader Helvea. Given the time, I would ask you to really limit your question to one or two very short ones. Thank you.
Thank you very much. Again, on CapEx, maybe you can indicate the CapEx split. This is now more maintenance CapEx versus in the past. That's my first question. The last question is again on citral. I'm still struggling. You had, at least you stated you had pre-buying of the related products like vitamins, but at the same time these margins were down significantly. Can you indicate what would have been the underlying margin excluding this negative force majeure effect? Thank you.
Yeah, thanks for the question, Markus. I don't have the numbers at the tip of my finger with regard to underlying margins, and I don't think we would provide them. Anyway, with regard to CapEx, our CapEx by and large is not maintenance related. For instance, in Germany, we do not capitalize maintenance costs, but this is an expense which goes directly into P&L. Those numbers, maintenance spending of BASF, has not come down year-over-year. We keep this at a very high level. Reflecting on what we just talked about with regard to asset availability and what we call internally asset effectiveness, how we run our plants. Yes, that is probably what I can say about our CapEx spending.
A good chunk of that is actually growth driven, and then there's another chunk which is EHS related as always. The major piece of the spending is not maintenance related, but it's really growth driven.
Okay, perfect.
You're welcome.
Okay, we now have one final follow-up question from Laurent Favre, Evercore.
Pressure is on. It was really a very small one. In the CapEx guidance for the next years, the R&D infrastructure line has gone up about EUR 1 billion since the 2016 report. I was wondering what was that and whether that was related to the battery investment, 'cause a billion is quite significant. Thank you.
Laurent, as always with these five-year plans, you have almost 100% certainty of what's coming in year one. You have about 60% certainty and commitment for year two. From there on out, the numbers are significantly declining. We could have also addressed this other infrastructure R&D as simply other or not yet 100% specified. Does that help?
Makes sense.
Okay.
Makes sense. Thank you.
Thank you.
Okay. Ladies and gentlemen, this brings us to the end of our conference call on May 4. BASF will report on its first quarter 2018 results at 8:30 A.M. On the same day, our annual shareholders meeting will take place at the Rosengarten in Mannheim. Should you have any further questions, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and goodbye.