Ladies and gentlemen, thank you for standing by. My name is Emma, your chorus call operator. Welcome and thank you for joining the BASF Analyst Conference Call full year 2016. 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 star followed by zero for operator assistance. This presentation contains forward-looking statements. These statements are based on current estimates and projections of BASF management and currently available information. Future 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 factors include those discussed in the Opportunities and Risks report from pages 111- 118 of the BASF Report 2016. We do not assume any obligation to update the forward-looking statements contained in this presentation. I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the fourth quarter and full year 2016 results. With me on the call today are Kurt Bock, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, Chief Financial Officer. Kurt will explain the financial performance of BASF Group in the fourth quarter and the full year 2016, while Hans Engel will present the segment results and financial figures of the fourth quarter in more detail. Kurt Bock will conclude by providing BASF's outlook for 2017. Please be aware that we already posted a longer version of the speech on our website at basf.com/fy2016. With this, I would like to hand over to Kurt Bock.
Yeah. Thank you, Steffi, and also welcome, ladies and gentlemen from my side. Welcome to our conference call, and thank you for joining us. Today, we will provide you with the fourth quarter and full year 2016 results and the outlook for 2017. Overall, the finish of 2016 was much better than the start. We gained considerable volume momentum in the course of 2016 and improved our earnings in the chemicals business year-over-year and every single quarter. We knew that earnings in oil and gas would be significantly below 2015 due to the lower oil price and gas prices as well as the asset swap. However, oil and gas achieved a positive free cash flow despite very difficult market circumstances. Markets developed pretty much as expected. In Europe, the market showed moderate growth.
However, the development differed substantially from country to country. In Asia, the upward trend since the end of Q1 continued in the fourth quarter. Economic growth in China was lower than in 2015, but slightly higher than we had expected at the beginning of last year. Market demand in North America grew at a slightly lower rate than we had assumed, especially in the first half of 2016. However, consumer confidence increased significantly in November and December. We saw continued positive momentum in the automotive and construction industries. The economic development in South America was again weak and business confidence continued to be low. Brazil remained in recession. Let me now address BASF business performance in Q4. Sales in Q4 increased by 7% to EUR 14.8 billion. This was mainly due to higher volumes.
For BASF Group as well as for our Chemicals business, which comprises the Chemicals, Performance Products and Functional Materials and Solutions segments, volumes rose by 6%. Sales prices increased slightly by 1%. Currency and portfolio effects were both flat. EBITDA before special items increased by 10% to EUR 2.3 billion. EBITDA rose by 31% to EUR 2.5 billion. Income from operations before special items came in at EUR 1.2 billion, 15% higher than last year. Considerably higher earnings in Chemicals, Functional Materials and Solutions and oil and gas more than compensated for lower earnings in gas and other. At EUR 1.3 billion, earnings in our chemical business increased by more than 50%. Special items in EBIT amounted to EUR +47 million .
The disposal gain following completion of the sale of our industrial coatings business more than compensated for expenses related to restructuring and other measures. In the prior year quarter, which was burdened by impairment charges in oil and gas, special items in EBIT amounted to EUR -698 million. EBIT increased from EUR 325 million- EUR 1.5 billion. Income taxes amounted to EUR 264 million compared with a tax income of almost EUR 250 million in the prior year quarter, resulting from the impairment charges in oil and gas and the dissolution of tax provisions. In Q4 2016, the tax rate was 26.5%. Net income doubled to EUR 689 million. Reported earnings per share increased by almost 40% to 75 euro cents.
Adjusted EPS amounted to EUR 0.79. This compares with EUR 1.01 in the prior year quarter. Operating cash flow increased by EUR 925 million- EUR 1.9 billion in Q4. Payments for property, plant, equipment and intangible assets were down by 14% and amounted to EUR 1.2 billion. Thus, free cash flow came in at EUR 647 million. Let me now briefly comment on the full year 2016. The global economy grew moderately in 2016 with regional differences. While growth in emerging markets was almost stable, growth in developed markets suffered from the dampening effect of the U.S. economy at the beginning of the year. Overall, growth of the global economy and chemical production matched our expectations for 2016. Sales of BASF Group declined by 18% to EUR 57.6 billion.
The divestiture of our gas trading and storage business at the end of September of 2015, as well as lower oil and gas prices, were the main reasons for this decline. During the first 9 months of 2015, the divested oil and gas activities generated sales of EUR 10.1 billion. The average price of Brent Crude in 2016 amounted to $44 compared to $52 in 2015. As a result of lower raw material prices, sales prices declined by 4%. At -1%, currency effects had a slightly negative impact. Volume dynamics increased over the course of 2016. For the full year, volumes were up by 2%. In our chemicals business, volumes increased by 4%.
Volumes in Asia were up by 5%, particularly driven by China, where volumes increased by 12% compared to the prior year. At EUR 10.3 billion, EBITDA before special items was 2% lower than prior year. EBITDA almost matched the level of the prior year and amounted to EUR 10.5 billion. EBIT before special items declined from EUR 6.7 billion- EUR 6.3 billion. Higher earnings in the chemicals business driven by performance products and functional materials and solutions were offset by lower earnings from oil and gas. Special items amounted to EUR -34 million compared with the EUR -491 million a year ago. In 2016, special income from several divestitures could compensate for expenses related to restructuring measures.
As a result, EBIT was on the previous year's level of EUR 6.3 billion. At EUR 1.1 billion, income taxes were around EUR 100 million lower. The tax rate decreased from 23%- 21%. Net income came in at EUR 4.1 billion compared to EUR 4 billion in 2015. Reported earnings per share increased from EUR 4.34- EUR 4.42. Adjusted EPS were EUR 4.83, EUR 0.17 below 2015. Operating cash flow decreased from a record high of EUR 9.4 billion- EUR 7.7 billion in 2016. As a result of our measures to reduce net working capital, operating cash flow in 2015 had significantly benefited from one-time effects.
Thanks to our strict capital expenditure discipline, free cash flow amounted to EUR 3.6 billion and was at the level of 2015. Ladies and gentlemen, we are committed to our policy to increase our dividend each year or at least maintain it at the previous year's level. We will propose to the shareholders meeting to pay out a dividend of EUR 3 per share, an increase of EUR 0.10 or 3.4%. Based on the share price of EUR 88 at the end of 2016, we are offering attractive dividend yield of 3.4%. We continue to invest in our future growth.
With the completion of several large projects, capital expenditures were reduced by EUR 1.3 billion- EUR 3.9 billion in 2016 compared to the EUR 4.2 billion forecast we had given one year ago. In our 2017-2021 CapEx plan, average annual capital expenditures will remain at the level of 2016. Let me highlight a few recent developments. On December fourteenth, we completed the acquisition of Albemarle's global surface treatment business, Chemetall. Through this acquisition, our coatings division expands its portfolio and becomes a complete solutions provider. BASF combines its know-how in chemistry and coatings applications with Chemetall's market-leading expertise in surface treatment. The combined business benefit from each other's global footprint, scale, and market access. Also, on the very same day, December 14, we completed the sale of our industrial coatings business to AkzoNobel.
The transaction included technologies, patents, trademarks, as well as the transfer of dedicated production sites. In November, we announced our plans to globally invest more than EUR 200 million in our plastic additives business during the next five years. Approximately half of the amount will be invested in Asia. With this investment, BASF will further strengthen its plastic additives business to meet the growing demand for antioxidants and light stabilizers. In mid-November, we announced our intention to increase the capacity of our North American MDI production. The capacity at our Verbund site in Geismar, Louisiana, will be increased in a stepwise manner from 300,000 metric tons per year to around 600,000 metric tons per year. I will now hand over to Hans, who will give you some more details regarding the development of our segments.
Yeah. Thank you, Kurt. Good afternoon, ladies and gentlemen. Let me highlight the financial performance of each segment in comparison with the fourth quarter of 2015. In Chemicals, sales increased considerably. This was driven by higher volumes and prices, reflecting the increase in raw material prices and partially tight markets. Margins went up, especially in isocyanates and cracker products. EBIT before special items more than doubled compared to a weak prior year quarter and came in at EUR 635 million. Special items of EUR -86 million were mainly related to restructuring measures, especially in the caprolactam value chain in Europe. Sales in Performance Products declined slightly. Volumes and prices were flat. Slightly positive currency effects could not compensate for negative portfolio effects. EBIT before special items rose considerably in the Nutrition & Health and Care Chemicals divisions.
Overall, EBIT before special items increased slightly, supported by improved margins. Sales in functional materials and solutions grew significantly, driven by higher volumes. Demand from the automotive industry remained high, while we saw only a slight volume increase in our construction-related businesses. Slightly lower prices negatively impacted sales. Volume growth and a favorable product mix and continued cost discipline contributed to the considerable increase in EBIT before special items. The Agricultural Solution segment continued to face challenging market conditions in the fourth quarter of 2016. Nevertheless, we were able to increase volumes and significantly grow sales. Lower prices were more than offset by positive currency effects, mainly from the appreciation of the Brazilian real. However, EBIT before special items decreased considerably due to higher fixed costs, partly resulting from new or expanded production facilities, for example, for the herbicide dicamba.
In Europe, sales fell due to lower volumes in the fungicide business as a result of slower demand, mainly in France. Sales increased considerably in North America, driven by higher volumes in our herbicide business. Despite the ongoing difficult macroeconomic environment in South America, we increased sales in the region. Higher volumes in fungicides boosted by our recent launch of the new fungicide, Xemium, were the main reason. Higher herbicide volumes and positive currency effects also contributed to the sales increase. We raised our sales in Asia thanks to sales growth in India, Japan, and China. Positive currency effects contributed. Despite the continuing low prices for crop commodity products and challenging market conditions, the Agricultural Solutions segment showed a solid performance in 2016. Full-year sales slightly decreased to EUR 5.6 billion due to lower volumes and currency headwinds.
At EUR 1.1 billion, EBIT before special items was on prior year level. The EBITDA margin reached 23.4% compared to 22.7% in 2015. Sales in oil and gas increased significantly due to higher volumes and prices. In Q4 2016, the average price of Brent crude was $49 per barrel, $5 higher than in the same period of 2015. Gas prices on the European spot markets were on the level of the prior year quarter. Volumes rose by 23%, in particular, due to higher production in Libya, Norway, Russia, and Argentina. In the fourth quarter, we had a full offshore lifting in Libya, while in the same period of last year, we only incurred a shared lifting. The combined price and currency effect was +3%.
Overall, EBIT before special items increased from EUR 127 million- EUR 163 million, supported by higher volumes and prices as well as strict cost management. Net income in Oil and Gas increased from EUR -184 million to EUR +182 million. Last year's net income was burdened by the asset impairments already mentioned. As targeted, we were able to generate a positive free cash flow in Oil and Gas in 2016. We get to Other. EBIT before special items in Other declined to EUR -386 million, down from EUR -114 million. This was mainly driven by a swing of around EUR 200 million related to our long-term incentive program.
While earnings in Q4 2016 were negatively affected by an increase in provisions, the prior year quarter benefited from the release of provisions for the LTI program. With that, to our full year cash flow. In line with our expectations, cash provided by operating activities decreased from a record high of EUR 9.4 billion- EUR 7.7 billion. In 2015, the operating cash flow significantly benefited from the one-time effect caused by our measures to reduce net working capital. In 2016, changes in net working capital led to a cash inflow of EUR 104 million compared to EUR 1.3 billion in 2015. Cash used in investing activities increased from EUR 5.2 billion- EUR 6.5 billion, mainly as a result of the Chemetall acquisition.
Payments made for property, plant equipment, and intangible assets decreased by EUR 1.7 billion- EUR 4.1 billion. At EUR 3.6 billion, free cash flow matched the high level of 2015. Cash used in financing activities amounted to EUR 2.2 billion in 2016. We paid EUR 2.7 billion in dividends to our shareholders. Around EUR 100 million were paid to minority shareholders in 2016 compared to about EUR 230 million in 2015. Finally, let's take a look at our balance sheet. Total assets increased by EUR 5.7 billion- EUR 76.5 billion, mainly as a result of the acquisition of Chemetall. Long-term assets were up by EUR 4.3 billion.
Intangible assets increased from EUR 12.5 billion- EUR 15.2 billion, especially due to the Chemetall transaction. The value of tangible fixed assets increased by EUR 1.2 billion- EUR 26.4 billion, driven by additions to property, plant, and equipment related to our investment projects and due to currency effects. Short-term assets amounted to EUR 26 billion compared to EUR 24.6 billion at year-end 2015. While inventories were almost stable, accounts receivable increased by EUR 1.4 billion, mainly due to higher sales in Q4 2016, as well as currency effects. On the liability side, long-term debt increased by EUR 3.6 billion- EUR 28.6 billion. This was particularly attributable to higher provisions for pensions and similar obligations.
As a result of the lower interest rates, they increased by EUR 1.9 billion compared to December 31, 2015. Compared to September 30, 2016, however, provisions for pensions and similar obligations were down by EUR 1.7 billion. Financial debt increased by around EUR 1.1 billion- EUR 16.3 billion, following the issuance of bonds to finance, among other things, the acquisition of Chemetall. Net debt amounted to EUR 14.4 billion, an increase of EUR 1.5 billion compared to year-end 2015. The net debt to EBITDA ratio is at 1.4. Our equity ratio remained at a healthy level of 42.6% at the end of 2016. With that, I turn it back to you, Kurt.
Thank you, Hans. Let me now come to our expectations for 2017. As always, I will explain our assumptions for the macroeconomic environment, BASF's priorities, and our outlook for sales and earnings. Let me start with the macroeconomic assumptions for 2017. We expect the volatile macroeconomic environment to persist and regard political risks to be higher than last year. With 2.3%, we assume that the global economy will grow at the same rate as last year. We expect that growth in Europe will slow down compared to last year. Growth in the U.S. will likely increase slightly. Asia Pacific will continue to grow, however, we expect growth rates to slightly decline due to lower economic momentum in China. In South America, recessions in Brazil and Argentina will likely come to an end.
We anticipate global chemical production to grow at 3.4%, and that's the same rate as last year. We assume an average oil price of $55 per barrel and an average exchange rate of $1.05 per euro. Given the uncertain macroeconomic and political environment, we will continue to focus our efforts on areas we can directly influence. Our priorities remain unchanged. Our commitment to research and development is core to our strategy. Innovation will contribute to the achievement of our growth targets. R&D expenditures will remain on the high level of prior years. We target to increase efficiency and effectiveness of our R&D activities. We are also evaluating applying new technologies to accelerate the development process and realize new ideas for a sustainable future. Investments will further support our organic growth.
We target to maintain the 2016 CapEx level also this year. For the next five year period, 2017- 2021, we plan total investments of EUR 19 billion. We constantly evaluate M&A opportunities and prune measures to further optimize our portfolio. Our M&A criteria remain unchanged. We will continue to strongly focus on cost discipline and operational excellence, and thus on self-help measures. In 2015, we have initiated our operational excellence program DrivE. With this program, we want to achieve additional earnings contributions of around EUR 1 billion from the end of 2018 on. The earnings impact from the end of 2016 amounted to EUR 350 million. Our restructuring program in Performance Products is on track to achieve the targeted earnings contribution of EUR 500 million by the end of this year.
At the end of last year, we have reached roughly EUR 400 million already. Based on those assumptions and for the economic environment and our priorities, we provide the following outlook. We expect BASF Group sales to grow considerably in 2017. This will be supported by slightly higher sales in Performance Products segment and by considerable increases in the other segments. To make it quite clear, growing considerably in sales means above 5%. We want to slightly raise EBIT before special items compared with 2016. We anticipate considerably higher contributions from the Oil & Gas segment. In the Performance Products, Functional Materials & Solutions and Agricultural Solutions segments, we assume EBIT before special items will be slightly higher, while the contribution from the Chemicals segment should match the prior year level.
Slight increase means, by the way, up to 10% improvement. BASF Group EBIT is also expected to grow slightly in 2017. A significantly higher contribution from the Oil and Gas segment and slight increases in the Chemicals, Performance Products, and Agriculture Solutions segments are expected to more than offset the slight decline in the Functional Materials and Solutions segment. In 2016, that segment contained special income from divestitures. We strive to once again earn a significant premium on our cost of capital. However, BASF Group EBIT after cost of capital will probably decrease due to higher cost of capital, mostly from the acquisition of Chemetall at the end of last year. So far, the momentum in Q4 and Q1 has been good and healthy.
We are quite confident that BASF will have a good first quarter 2017. The last slide summarizes our forecast for the development of EBIT before special items for the segments. As mentioned before, all segments are up. Chemicals reflects a certain uncertainty and volatility and also the base effect of very strong earnings in Q4 of last year. As always, additional information is available in the BASF report 2016 that was published today. Now Hans and I are glad to take your questions.
I would like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. 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. The first question comes from James Knight of Exane. Please go ahead.
Afternoon. Yes, thanks for taking my questions. There are a couple around the Chemicals segment outlook for 2017. You just talked about the uncertainty and volatility. Also, we can see obviously the year ended very strongly and probably started very strongly. With the guidance of flat EBIT, clearly you're pointing to some normalization through the year, probably in the second half. How concentrated is that risk, or is it more of a general concern, perhaps what's happening in China, perhaps about U.S. capacity coming on stream? I guess the second part, looking more specifically, I note in the annual report in the outlook statement, you talk about strong competitive pressures in products including isocyanates.
I mean, how much of a potential normalization of MDI and TDI in the second half from superheated levels at the moment do you fear or is baked into that outlook? Thank you.
Yeah. Hi, James. Thank you for that question. I think Chemicals is the most critical segment in terms of providing guidance here. What we said is we want to match last year's level. Quite clearly, that is almost impossible mathematically because it really means ±1%. We all know that in Chemicals, given the volatility and supply and demand dynamics, there is a certain unpredictability. Our goal is certainly to have earnings higher and above last year's level. However, as you said, we have a certain base effect from a very, very strong Q4. Q4 saw good results in Petrochemicals, but also in what we call monomers. Monomers is, in this case, especially isocyanates. Your question is, how concentrated is this really?
Clearly in isocyanates we have enjoyed, I think that's the right word. We have enjoyed very, very good margins in Q4. This continues going into Q1, but frankly, it's very, very hard to predict whether this will continue in the second half of 2017. Against that background, I think, we chose to have this from your point of view most likely little bit too cautious a statement, earnings at last year's level. Nobody actually knows what's going to happen in the second half of this year. There is new capacity coming on stream. So far demand is healthy, continues to be healthy, and Petrochemicals and monomers run very nicely. In Intermediates, the third division of that segment, we have a couple of issues. One is, the margins in BDO are weak.
Maybe they are bottoming out, but they are weak and not really satisfying. Secondly, we have a couple of turnarounds coming up, especially in that segment in 2017, which might also play a role. This is by and large our explanation.
Just a quick follow-up. Do you have any view on the likely phasing of the new crackers due on stream in the U.S.? Are you assuming there's any delay into 2018?
That is very hard to say because in most cases, these announcements are made on very short notice, and we have no special insight or special view on that one. As you know, we run one cracker in Port Arthur, and that is essentially our exposure to the cracker business. That cracker again is predominantly for captive use.
Cool. Yeah. Thank you very much.
You're welcome.
The next question comes from Paul Walsh, Morgan Stanley.
Yeah. Thanks very much. Afternoon, guys. Thanks for taking my two questions. The first one's on China, Kurt. You know, I don't know if my math is correct. I think you said volumes grew in China by about 12% last year, and if my memory serves me correctly, it's about a EUR 5.6 billion business for you. When I run the math, it's really a sense checking thing, it feels like China represents about half of the incremental volume growth that you saw last year, both over the year as a whole and obviously the acceleration in the second half. I wanted to know if that math resonates with you, number one, and, you know, where do you see the up or downside risks to repeating that in 2017?
My second question, just to come back to the polyurethanes chain, I'm sorry for that. I know it's only one of your many businesses, but would you concede that the outage situation last year helped boost profits? You know, assuming everything runs, what are your views on MDI and TDI? Are those markets in balance? Are they oversupplied? Are they undersupplied? Because we're getting different messages depending on who we speak to on that. Thank you.
Yeah. Hi, Paul. Thanks for your questions. China, yes, we had a very positive growth development. We have a strong and big exposure through the automotive industry, and automotive industry developed very nicely last year. We are a little bit more cautious with regard to automotive growth in China for 2017, but it will continue to grow, which is important, and we most likely will also be able to increase our share, which is even more important. I'm just trying to do the math in my head. Yes, it does play an important role, 12% on roughly 10% of sales. Does it really translate into half of our volume growth? I would say most likely it is a lower share than what you had calculated here.
It plays an important role and certainly going forward, Asia is supposed to continue to be a growth engine for BASF. Polyurethanes, yes, there have been outages last year, including BASF and TDI, as you know. We have been able to use our global network, production network to deliver to our customers, and we continue to run our operations in Schwarzheide in the eastern part of Germany, thus mitigating the effect. It is very difficult to predict what's going to happen in that industry because there is a certain likelihood that you will have trips and capacity is not available. We have seen this again and again across all competitors. There are better years and worse years with regard to this type of asset, what we call asset availability.
Our goal is certainly to improve in that respect. We also know that new capacity will come on stream over the course.
Yeah.
Of this year. We don't know the timing, the exact timing. I have no insight on that one. Overall, the markets are growing nicely. Growth is essentially above GDP 1-2 percentage points, which is not too bad. Clearly this is a supply/demand-driven business, and that is one reason why we have been so cautious with regard to guiding for chemical earnings in 2017.
Understood. Just quickly, is TDI Ludwigshafen and MDI Chongqing, are they both now back in line with expectations or, are you still seeing some reduced output at those facilities?
MDI Chongqing is developing as expected. We cannot run at full capacity because we have constraints on the raw material side. One of our partners has a bottleneck, and we are working on that one, but it was a very positive, good growth story in 2016. Our TDI plant in Ludwigshafen is still idle as we speak. We have to do some repair work. We want to bring it back within the next couple of weeks, and for the time being, we are bridging with volumes from our plant in Schwarzheide.
Thank you very much.
You're welcome.
Now it will be first Andreas Heine, then Andrew Benson, and then Jeremy Redenius. Now Andreas Heine, MainFirst. Please go ahead.
Yes, I'd like to ask also on the outlook. If I take your sensitivity for the US dollar and your outlook for the US dollar and the same for the oil price and the sensitivity, if I add Chemetall consolidation and take the normalization of the gas production at Yuzhno-Russkoye into consideration, I would end up already with these factors to almost EUR 800 million, which is already more than a double-digit increase. That does not take into consideration that the other line most likely will normalize and that the impact on the interruptions you had in Q4 from the fire in Ludwigshafen had also most likely an impact mainly in 2016.
Could we have a little bit why these factors are not enough to make you optimistic enough that the earnings increase double digit?
Okay, Andreas, I know you want to hear from me 10 reasons why everything you said is not correct, right?
Yeah.
I think what you have done here is fair and not unrealistic. You have to put probabilities behind some of those events. What we are doing here is essentially that we are saying we have very limited visibility with regard to the second half of 2017. I think actually nobody really knows what's going to happen. I mentioned in my little speech the geopolitical risk and external factors, all of this might happen. For those reasons, we just thought it prudent to guide the way we have done. Once again, I said during my little speech, this means up to 10%, and then if you take the 10%, you are not that far from the EUR 800 million you had mentioned.
There is a certain level of, yeah, uncertainty, as you all know.
It's basically that with a slight increase, you look more to the really upper end of this range, so the 10%. Is that fair?
That is a correct statement, yes.
Okay. The next question comes from Andrew Benson, Citi.
Yeah. Thanks very much for that. Perhaps just to grill you a little bit more on taking off from Andreas' questions. You've got the EUR 150 million of costs which occurred in 2016 with Gazprom, which won't recur. We talked about a couple of hundred million of startup costs last year. Presumably that's kinda gonna be down as well with your cost reductions and the potentially who knows what, but the long-term incentive plans. If you assumed then that you know market conditions you know continue, and I know there's you know geopolitical risks, but there's always risks in everything.
If you think the current trends continue, what sort of upside could you be talking about into the second half? Or are you just giving that forecast simply to be cautious in the event that things got more difficult? That's the first question. Then, the second, on the oil and gas, can you just remind us when the Achimov Gas production starts to have an impact? Thanks.
Yeah. Hi, Andrew. Thanks for the question. If I would just go by the Q1 and what we see right now, the momentum also in terms of volume, there might be a reason to be a little bit more optimistic for the entire year. Again, I'm coming back to what I said earlier on, and we don't know what's going to happen in the second half of 2017. For that reason, we simply think this is a prudent forecast from today's point of view. Yes, there's always a possibility that all things move in the right direction and everything develops nicely. Experience also tells us you will always get hit from one side or the other and sometimes in an unexpected way. I think this kind of uncertainty we try to incorporate in our forecast.
Hans, you wanna talk on Achimov Gas?
Sure. Achimov Gas 1A, Andrew, fully in line with what we said, currently producing out of 80+ wells. Field being developed, target to be reached in the first half of 2018, will be 110 wells. Perfectly in line with what we had planned there. I assume, when you ask Achimov, you may also include in your question, 4A and 5A. On that, current plans are start up in the first half of 2020. That is a change from what we said originally, because originally, we expected this to start up towards the end of 2018. There is a slight shift there, taking into consideration market developments.
The next question is from Jeremy Redenius, Bernstein. Please go ahead.
Yeah. Hi, it's Jeremy Redenius. Thanks for taking the questions. Firstly, looking at cash flow in the fourth quarter, specifically before changes in working capital, it looked actually relatively weak in Q4, down quite a bit year-over-year. I'm wondering if there's anything in particular that was holding back the cash flow before changes in working capital compared to the EBITDA development in the quarter. Then secondly, you made a comment about Europe slowing in your outlook for 2017. I'm curious to hear more detail behind that. Are there particular geographies within Europe that concern you or any particular end markets that you see slowing down? Thank you.
Yeah. Hi, Jeremy. Maybe I start with the macro question and then Hans can still sort out the cash flow answer. To be a little bit more precise, we expect something like 1.3% growth in Europe. That compares pretty much with 1.5% consensus. So you might say we are a little bit more conservative. This reflects a certain uneasiness about what we see in some countries, retail spending slowing down in the U.K. There are certainly risks in southern parts of Europe. Maybe we are here on the conservative side, maybe not. So far the start of the year and the economic indicators we see going into 2017 would underline a slightly stronger development, but again, early development in 2017.
Jeremy, I'm not so sure that I'm seeing the same developments that you are seeing. Our Q4 cash flow, operating cash flow, if I look at this, that doubled compared to Q4 of the prior year. If I look at free cash flow, we were negative in Q4 of last year, and we were positive to the tune of EUR 650 million in the fourth quarter of this year. Overall, I thought that looked from a cash flow perspective, pretty good.
Just to clarify, I was looking at before changes in working capital specifically. It looked like it went from EUR 680 million free cash flow before working capital last year to about EUR 150 million this year. There's a big working capital inflow, I guess, or outflow last year, a cash release last year that boosted last year's figures.
Let me take a closer look there, and I'll get back to you.
Okay, great. Thank you very much.
Okay. The next question comes from Laurence Alexander, Jefferies.
Good afternoon. First of all, just a housekeeping question. How are you thinking about D&A and also the amortization that you'll be excluding from adjusted EPS in 2017? Secondly, on the oil and gas, can you give updated thoughts about reserve growth, both, you know, potential for partnerships in Iran, any thoughts there? Also just more broadly, how you're thinking about reserve growth for the oil and gas business.
I think both questions go to Hans. Depreciation, amortization, adjustment for adjusted EPS in 2017. I don't think we have an idea in 2017, what's going to happen there specifically, and then oil and gas reserve growth in Iran.
Okay. On the oil and gas reserve growth, can you do me a favor? Can you quickly repeat your questions? Because I was still on Jeremy's question with respect to the cash flow. If you help me there quickly again.
Can you just give an update on how you're thinking about oil and gas growth on growing the reserves over the next several years? There's been, I guess, some headlines about discussions with Iran, but also just the broader landscape.
Yeah. Okay. On the reserves, we are currently at an R/P ratio of 10 years, so that's exactly where we wanna be. We wanna be in this range of 8-10 years with respect to 1P reserves. We have a nice position there, as already alluded to, with respect to Achimov 4A and 5A, which is currently in the development stage, which means that there should be nice additions coming there. Looking at our overall oil and gas prices in 2015 and 2016, we've reduced exploration work to a certain extent, so not too much to be added there in the year 2017.
Expect us to keep this range of 8-10 years, which we feel very comfortable with. Your Iran question, that was also on oil and gas in Iran? Yeah. So what do we do there? In April of last year, we signed an MOU. We are in very early stages of looking at data, mere desktop analysis that we're doing at this point in time, and it remains to be seen what will happen there.
Laurence, with regard to adjusted EPS, we don't foresee any changes with regard to a depreciation optimization compared to last year.
Thank you.
You're welcome.
Okay. The next question comes from Martin Rödiger, Kepler Cheuvreux. Please go ahead.
Yes, thanks for taking my question. First, on the regional development, I saw that EBIT in Germany as well as North America decreased substantially in Q4. Is the reason the long-term incentive program, or in respect to Germany, is there a significant impact from the accident in Ludwigshafen the reason for this strong decrease? The second question is on Care Chemicals. Can you provide us with an update about the competitive situation in superabsorbents? Do you see some light at the end of the tunnel? How do you make progress with your new technology in superabsorbents? Thanks.
Hans, you wanna start and then I do Care Chemicals?
Yeah, sure. I'll start with Germany. You exactly hit the reasons. One is the long-term incentive program that sits almost exclusively at that point in time, at year-end, on the books in Germany. The second is then obviously also the impact from the incident that we had in the North Harbor, that impacted the results of Q4. These are the two explanations there. You also asked with respect to North America.
North America, the decline in results there is driven by the decline in cracker margin that we've experienced in 2016, and then also in particular in the fourth quarter of 2016, where actually the cracker margins, if you compare with Europe and Asia, were the lowest in the U.S., compared to the other two regions, while they were still quite strong in Q4 of the year 2015.
Martin, with regard to Care Chemicals and more specifically, superabsorbents, this has been a pretty nasty development over the last two years. Margins have come down. There is obviously oversupply. Customers have become extremely price-sensitive given supply-demand situation. There is still good underlying growth in terms of 3%-5%. However, there's simply too much capacity available, and we clearly see this also in our numbers, and you can also see it in the volume development of the Performance Products segment in Q4, which was a slight decline, which was essentially only due to superabsorbents. It had quite some impact. Our path forward, I think we have described, and you mentioned this. This is a different technology, we call it SAVIVA. It's droplet polymerization.
These pellets have a higher capacity to absorb fluids, much faster also. Customers want it. We are building a plant in Antwerp. The plant is a swing plant, so we can do both the old and the new quality. The new quality is, as I said, interesting, but at these prices, which is a really interesting development, at these prices now also based on relatively low propylene prices, again, price sensitivity of customers is extremely high, and it's easy, technology advances also in terms of branding and how you position this, but it will take some time to phase these new products into the market.
Thanks.
Welcome.
Okay. The next question is from Tony Jones, Redburn. After that, it will be Peter Clark, Société Générale . Now Tony Jones, please go ahead.
Oh, good afternoon. Thanks for taking my questions. I've got two. The first one is on capital allocation. So it looks like your CapEx guidance for the next four years is about EUR half a billion lower than guidance in 2016. It also looks like the capital allocation to chemicals is reducing, whereas you're allocating more into the specialty divisions. Can you talk a little bit about whether this is a sustained trend and how you see the potential returns on organic growth versus acquisitions? Then secondly, just a short question on Chemetall and guidance. Can you confirm if that's all going to be absorbed into functional solutions? If that's right, then my simple math suggests that your guidance for 2017 implies your base business doesn't grow at all and potentially could contract. Why is that? Thank you.
Yeah. Thank you, Tony, for your questions. I think capital allocation first, yes, you're correct. We have reduced the five-year plan by EUR 0.5 billion- EUR 19 billion, and there is a slight shift from chemicals to the downstream businesses. This reflects current knowledge. Obviously, these plans are updated every year. From today's point of view, this looks sensible and sufficient to fuel organic growth for BASF. At the same time, it also brings capital spending closer to depreciation levels, which is one of our targets. That would also then free up funds for instance, M&A, which always has been one tool for us. We have done a little bit in 2016 with Chemetall. It needs to be seen whether we find additional targets which are worthwhile to spend money for.
This is all speculation at this point in time, but we are certainly interested to add businesses which fit strategically and create value for our shareholders. With regard to Chemetall, I'm not aware that Functional Materials and Solutions would only grow due to consolidation effects. I think our goal is to grow the underlying business as well. That should work out quite nicely. That's the way we see it. Certainly these businesses want to grow. That has been our budget discussion late last year.
Okay. Thanks. I might come back on that because I see the guidance implying a different EBIT growth, but maybe I'm using some wrong assumptions. I'll come back later. Thank you.
Okay, now it's Peter Clark, Société Générale, please.
Yes, good afternoon. Thank you. Obviously more questions than normal on guidance. I just want to come down on the downstream divisions where obviously you have more control in theory. I hear what you're saying about the second half entirely. No one knows where it's going. Just looking at Performance Products, obviously in the fourth quarter, there was no margin improvement year-on-year. First nine months, you're running at 400 basis points. The main mechanics you see working in there in 2017, because I noticed you see an uplift in the fixed costs with the new plant starting up, and you had a big year in 2015. That's an element. You've got raw materials, but also a lot of cost cutting still coming through next year from the program this year from the program you've done, bitumen pricing.
The second question is in Functional Solutions. Obviously Tony was touching on this, but the mix effect, I presume the drag, cause you're indicating a margin down. The main drag there is probably the effect of mix and Automotive. Just wanna check those two points on the two downstream segments. Thank you.
Yeah, this is Hans. I'll address your Performance Products question first. Keep in mind the seasonality that we have in that business. You look at the years 2013, 2014, 2015, you look at the fourth quarter that we have there, you always see the same pattern. Q4 in Performance Products is the weakest quarter of the year. That is one thing. The other thing that we have is, Performance Products and chemicals are the two segments that are affected by the incident in the North Harbor, and that is clearly to be seen in the results that we generate in Q4 with Performance Products. Now, Functional Materials and Solutions, we guide there for further profitable growth.
As mentioned earlier by Kurt, are there some uncertainties? Yes, there are. Automotive grew strongly last year. For this year, we are a bit more cautious with respect to growth rates in automotive. Reasons are the high volumes already reached in North America at rate of 17.5 million units. We also have seen significant stimulus, in particular in China, coming out of the sales tax that was reduced from 10% to zero in 2016. Now they continue with partial stimulus. It's now 5% on engines up to 1.6 liters, and it remains to be seen what kind of an impact that has.
Overall, we think that we see slightly slower growth in automotive, in the transportation industry than what we have experienced in the prior year. We also see that there's a slowdown in construction business in the second half of 2016, in particular, in the Middle East, which is strong part of our portfolio in construction chemicals. Taking all of these uncertainties, we still see further profitable growth in our Functional Materials and Solutions segment.
Keep in mind we
Mm.
No, go ahead.
Yeah, I was just saying the guy, it was more about the guidance for Performance Products, not Q4. I hear what you're saying, but you're obviously indicating no significant margin advance on Performance Products despite the cost-cutting. Obviously, one of the drags is more manpower or more fixed costs coming in with the startups. Just what the main mechanics were for that guidance of very little improvement on the margin, if any, in 2017 in Performance Products.
Keep in mind that we are in a situation where raw material prices have increased significantly. We're currently compared to Q1 of last year. If I look at the entire raw material portfolio, we have a cost increase there of 41%. Now, if you do margin calculation on a relative basis, that automatically will lead you on a percentage basis to a decline. On an absolute basis, and that's what we really measure delta margins in euros and in U.S. dollars or whatever the currency is, we fully intend to grow that business profitably also in 2017.
Okay. Thank you.
Maybe I just add one comment with regard to functional materials and solutions. Keep in mind that we also did some divestitures last year, so you have to take out the earnings from polyolefin catalyst and from industrial coatings when you do your math, 2017 compared to 2016.
Now the next question comes from Laurent Favre, Evercore, and following him will be Andrew Stott, UBS. Laurent, please go.
Thank you. Thank you for taking my one question on oil and gas. What I'm trying to do is understand the operating leverage of that business on E&P as we see increasing prices, especially on the Brent side, where I think you reduced exploration costs. I think Hans, you just said that you were quite happy with exploration costs where they are or where they were in 2016. Does it mean that if we were to see oil and gas prices or, you know, Brent above $55, your assumption for 2017, you would be quite happy to just take, you know, the incremental profits? Or would you actually be tempted to just reinvest into exploration to try and maintain your asset life to 10 years? Thank you.
Laurent, good question. Remains to be seen. When you look at our results that we generated with the oil and gas business in 2016, when you keep in mind that even in that year we were able to generate a positive free cash flow, you know that we pulled all levers that we could. We moved costs down wherever we could. Depending on where the oil price is, I think I'm willing to give my guys in the oil and gas business a little bit more leeway going forward.
Understood. Thank you.
Now Andrew Stott, UBS, please.
Yeah, good afternoon. Thanks for taking the questions. Had a couple. The first is on China. Just looking at your report on accounts, the JV that you consolidate, you show net income going from EUR 64 last year to EUR 332 on a fairly minimal sales increase. I'm sure there are some one-offs so very simply trying to get an idea of, I guess, the context here for China in general. How clean are those numbers, please? That's the first question. That's on the YPC JV. Then the second one was this, I'm sorry to come back to it, but guidance. The circularity, I guess, the circular reference that there may be in this guidance.
If we assume that you're too conservative on your chemical guidance, do you come back to the market and have to recalibrate on your downstream guidance? I mean, I'm just going back to your point, Hans, just now on the 41% increase in Performance Products, for example, in Q1. Just, if you can just educate us on the extent to which your guidance downstream is based upon a significant deflation in costs through the next 9-10 months. Thank you.
Hi, Andrew, this is Kurt. I start with the circularity of our assumed security of our guidance, and Hans will talk about China and the joint venture, whether numbers are clean or not. I mean, I think I explained the assumptions which are the basis for our guidance. If we see over the course of the next couple of months that things move more positively, I think this would be a high class problem, and we will certainly be able to adjust. The guidance of the different segments are not completely independent from each other insofar as raw material costs play an important role. But again, I propose that we revisit that question when we have a little bit more visibility with regard to the next couple of months.
Sure.
Yeah. On your question on BYC, what do we have there? I mean, we have a situation where you're absolutely right, sales increased a small amount there. Earnings increased significantly, margin expanded. We've seen a nice margin boost there, in particular in the fourth quarter. Also please keep in mind that depreciation has come down quite significantly because a lot of the plants that we still depreciate or some of the plants that we still depreciated in 2015 were 10 years old in 2016. As a result of that, depreciation drops quite a bit. Thus, I would say the numbers are clean.
They're clean without that. Okay, perfect. Thank you very much.
Okay. The next question is from Patrick Lambert, Raymond James. Please go ahead.
Hi, good afternoon. A very quick question on oil and gas again and trying to gauge 2017. If I look at the 2015 appendix in the annual report, some of the numbers of 2015 have changed versus what was reported last year. I just want, especially in Russia and gas sales, I was just wondering if it's the risk adjustment that you adjusted in the annual report or is there something else in there? What do we need to focus on in 2016 since I think it was basically a one-off for the past 10 years? Thank you.
Patrick, this is Hans. Right. We have some changes there in the numbers for 2015 due to changes in the standards. I think, thinking about the audience for this call and how long it would take to walk you through that in detail, why don't we schedule a separate call and I'll take you through that.
Thank you.
Welcome.
Now we have two more questions. One is from Jamie Wang, Nomura, and then we will have a final follow-up question from Andrew Benson. Now please, Jamie Wang, go ahead.
Hey, good afternoon. Can you guys hear me?
Yes, we can hear you all right.
Okay. Thank you very much. Since I'm a chemical analyst based in Hong Kong, my question is focused on the MDI and TDI capacity mentioned in China. What I understand is that China's MDI demand growth is actually slower than elsewhere in the world. I was just wondering why you still want to expand the capacity in Shanghai to double your capacity this year. Would you consider expanding your capacity in Chongqing in the coming next few years? That's my question there. Thank you.
Yeah. Thank you for your questions, Jamie. MDI, we have a joint venture in Shanghai. Yes, there is a new plant being announced a couple of years ago, and this is being under construction now. There is new capacity coming on stream in Chongqing. As I said before, we don't plan additional capacity. However, we still have capacity available to be filled. What we have seen in 2016 is not a complete surprise that sometimes also asset availability is not what it's supposed to be. There have been some trips and some capacity, not on our side, but in the market was not available. That has certainly also led to a certain tightness in Asian isocyanates markets.
Now we have the follow-up question from Andrew Benson, Citi.
Thanks very much. I may have misheard or not heard at all, but can you just let me know the total costs in the fourth quarter and the probable total cost in the first quarter of the accident you've had and how you've allocated that. I presume a lot of that will be offset against insurance. Have you accounted for that within the figures, or are you going to take the insurance gain at some point in the future? Then on the performance part, the raw material costs increase because you're talking about an increase in or a slight increase in profits. You're talking about the year having started very well, and you're also talking about a 41% increase in raw material costs.
I know those aren't necessarily intimately connected. Can we imply from that that you are having significant success in fairly aggressively and rapidly passing through those cost increases as we speak in the first quarter? Thanks.
Yeah, Andrew, this is Kurt. Thanks for the question. Hans will talk about raw materials. The accident, October 17, the result or the effect in terms of loss of contribution margin is something like a low double-digit number per month, and this continues going into 2017 since we have not been able to reestablish the entire supply chain operations. There are still some bottlenecks which essentially affect CP, which is petrochemicals and some of the performance product businesses. We have a deductible in our insurance, and that deductible already was included in the 2016 numbers. Apart from that, there's an ongoing discussion with the insurance company about how to account for this and the I think the final invoice will be done later this year.
Yeah, Andrew, this is Hans. On your raw materials question, keep in mind when we compare now, we find ourselves in a situation where in January of last year, we saw the low in oil price of $26 per barrel. We had a naphtha price last year in January of EUR 245, EUR 248. Oil price has doubled. Naphtha price has doubled accordingly. We see this going through all value chains. Overall, what I said is when we look at January, February, we find ourselves overall with respect to raw material prices in a range of roughly 40% increase over the prior year quarter, which apparently was very weak with respect to raw material prices. We have to pass raw material price increases on.
There's no question about it. Based on everything that I can see right now, we are quite successful in doing this, and the strong demand that we experienced in Q4, when we first experienced steeper raw material price increases, continues also, as Kurt mentioned, in Q1. I hope that we can actually pass all the increase that we're seeing on.
Thanks very much.
Ladies and gentlemen, this brings us to the end of our conference call. BASF will report on its first quarter 2017 results on April 27. Our annual shareholders meeting is scheduled for May 12. Should you have any further questions, please do not hesitate to contact the members of the BASF IR team. Thank you for joining us today, and goodbye for now.