Yeah, good afternoon, ladies and gentlemen, and welcome to BASF's 2014 Analyst and Investor Conference here at our headquarters in Ludwigshafen. I also welcome all of those of you who are joining us by webcast or by telephone. In 2014, the global economic environment remained challenging and volatile. In this environment, BASF delivered on its promise to increase EBIT before special items. Also, as announced this morning, we propose to again raise our dividend to EUR 2.80 per share. As a result of the cancellation of the asset swap with Gazprom, it was necessary to restate our quarterly and full-year 2013 figures, as well as the first three quarters of 2014. For this purpose, we have put on the table for each of you a special brochure containing the restated figures, and this brochure will also be available on our website.
With this, I come to today's agenda. With me are Kurt Bock, our Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, our Chief Financial Officer. Kurt will highlight BASF's performance in the fourth quarter and the full year 2014. Hans will take over, and he will discuss the Q4 2014 segment results in much more detail and review key aspects of the financial statements. Kurt will then conclude with the outlook for 2015. Afterwards, both gentlemen will be happy to take your questions. For your information, we have posted all the necessary documents, the speech and supplementary document on our website under basf.com/share. The Ludwigshafen participants, and this is a new aspect this afternoon, can also use the provided QR code, which gives you direct access to all information for today's conference.
Before we start, ladies and gentlemen, I would like to ask you again to please switch off your mobiles and smartphones because they could interfere with our microphone system. Furthermore, I would like to ask you to take a quick look at our disclosure language, which is currently shown behind me on the screen. With this, we are ready to start, and I would like to hand it over to Kurt.
Yeah, thank you, Maggie, and welcome also from my side. Pleasure having you here in Ludwigshafen on a Friday afternoon. Maggie already provided you with a snapshot of our results. We achieved what we tried to achieve in 2014, improving earnings, and we're also paying a higher dividend, but I would like to go into a little bit more detail right now. In 2014, BASF delivered on its promise to improve EBIT before special items. This was achieved against the backdrop of an overall very challenging and unpredictable economic and geopolitical environment. In particular, Q4 showed a strong finish despite considerably lower earnings in our oil and gas business. We will again raise our dividend. In the fourth quarter, the global economic environment remained challenging and volatile with ongoing political tensions and an elevated level of uncertainty. Demand in Europe only slightly improved.
North America showed the strongest growth of the developed economies. Emerging Asia still grew with solid rates. Growth in China amounted to 7.3% compared to 7.5% in the fourth quarter of 2013. The economic development in South America disappointed. In particular, Brazil remained technically in a recession. The average price for Brent crude oil dropped sharply from $109 per barrel in Q4 of 2013 to $77 per barrel last quarter. On a year basis, the average price for crude Brent was 29% lower than in the fourth quarter of 2013. In the fourth quarter, the euro lost around 8% of its value against the US dollar. In addition, we experienced strong devaluation of other important currencies such as the Russian ruble and the Norwegian krone.
Before I comment on our results, please be reminded that we restated BASF's quarterly as well as full year 2013 figures and the first three quarters of 2014. As we did not complete the asset swap with Gazprom at the end of last year, it was necessary to dissolve the disposal group and book the depreciation and the equity results which had been suspended since the end of 2012. Now the numbers. Sales in Q4 were almost stable at EUR 18 billion. The slightly higher volumes and positive currency effects could not fully compensate for lower prices, especially in oil and gas as a consequence, obviously, of the lower oil price. EBITDA went up considerably by 11% to EUR 2.9 billion. EBIT before special items increased slightly to EUR 1.5 billion, supported by considerably higher earnings in chemicals and agricultural solutions.
Furthermore, results in other improved significantly due to positive currency effects and the partial dissolution of the provision for our long-term incentive program. EBIT rose by 7% to EUR 1.7 billion. In Q4, special items in EBIT amounted to +EUR 271 million, mainly attributable to the divestment of our 50% share in Styrolution and Ellba Eastern. Impairment charges, particularly in our oil and gas segment, partly offset these gains. In the fourth quarter, the tax rate amounted to 16.5% compared to 19% in the prior year. The decrease was driven by the largely tax-free disposal gains from the sale of oil stakes in Sty lution, ELLBA Eastern, and VNG Verbundnetz Gas. At EUR 1.4 billion, net income came in 26% higher than in the prior year quarter.
Adjusted earnings per share increased to EUR 1.04 compared to EUR 1 a year ago. Operating cash flow reached EUR 2 billion, an increase of 4% versus a year ago. Let me now come to the full year 2014. The year was characterized by low momentum in the overall economic development and a high level of uncertainty and volatility. Growth in the industrial and chemical production was lower than expected. BASF performed well in this environment. Sales amounted to EUR 74.3 billion. Volumes were up by 4%, primarily driven by functional materials and solutions and oil and gas. Prices declined, mainly attributable to lower oil and gas prices. Adverse currency effects also had an overall negative impact on sales. Now, chemicals business sales increased by 1%. Higher volumes could not compensate for slightly lower prices and overall still negative currency effects.
Sales in North America were 6% up, driven by higher volumes in petrochemicals. In Europe and Asia, sales were almost stable, while they decreased in South America due to negative currency effects. EBITDA improved by more than EUR 600 million and amounted to EUR 11 billion. With an EBIT before special items of EUR 7.4 billion, up 4%, we achieved again our earnings guidance in this challenging environment. This was primarily driven by the performance of our Chemicals, Performance Products, and Functional Materials and Solutions segments, as well as others. Special items in EBIT amounted to +EUR 269 million compared to +EUR 83 million a year ago. The increase was caused especially by the divestitures of various companies I mentioned before. This was partly offset by impairment charges, mainly in our oil and gas segment.
EBIT amounted to EUR 7.6 billion. We achieved an increase of more than EUR 460 million compared with 2013, despite the fact that we recognized an overall negative currency impact on EBIT of around EUR 230 million for the full year. Income tax grew by EUR 224 million to EUR 1.7 billion. The tax rate increased slightly from 22.5% to 23.8% as the share of higher-taxed income from oil and gas in Norway increased. Net income was up by 8% and came in at EUR 5.2 billion. Adjusted EPS rose to EUR 5.44 compared to EUR 5.31 a year ago. Operating cash flow reached EUR 7 billion, down EUR 1.1 billion, caused by a swing in net working capital.
EUR 1.7 billion free cash flow generation was reduced due to the lower operating cash flow and higher capital expenditures. Ladies and gentlemen, we stand by our dividend policy to increase our dividend each year or at least to maintain it at the previous year's level. We will propose, as you have seen, to pay out a dividend per share of EUR 2.8, an increase of 10 euro cents or approximately 4%. Over the past 10 years, we have raised our dividend by an average of almost 12% per year. Based on the share price at year-end of roughly EUR 70, where we again offer an attractive dividend yield of about 4%. With this, I will hand over to Hans, who will give you some more details regarding the Q4 business developments of our segments.
Yeah. Thank you, Kurt, and good afternoon also from my side. I will start to take you through our segments, and we'll begin with the Chemicals segment. In Chemicals, sales declined slightly due to lower prices and volumes. Currencies provided some tailwind. EBIT before special items rose by 14% to EUR 580 million, primarily due to significantly higher earnings in Petrochemicals. We incurred positive special items of EUR 65 million, mainly related to the divestiture of our 50% stake in Ellba Eastern. Now I get to Petrochemicals. Sales in Petrochemicals came in significantly lower. Prices decreased due to lower feedstock costs. Volumes declined as additional business from new plants could not compensate for missing volumes in propylene oxide. This was caused by shutdowns of both Ellba joint operations.
In cracker products, we continued to perform well in North America, and we were able to improve margins in Europe. While acrylics showed an improvement in Europe and North America, we experienced margin pressure in Asia Pacific. EBIT before special items increased strongly, primarily driven by higher cracker margins. Sales in monomers rose considerably due to higher prices and positive currency effects. Volumes were flat as higher MDI volumes were offset by lower caprolactam volumes due to plant turnaround. Margins improved, driven by higher prices in ammonia and lower raw material costs in MDI. Caprolactam margins remained stable at a low level. EBIT before special items declined slightly due to increased fixed costs. Sales in intermediates were slightly down due to lower volumes and prices. Currency had a positive impact on sales.
While our business with specialty amines developed well, we experienced price pressure in butanediol, particularly in China. Towards the end of the year, we observed destocking across various product lines. However, our business with specialty products developed well and margins improved due to lower raw material cost. Consequently, EBIT before special items rose slightly. I get to Performance Products segment. Sales in Performance Products were slightly up, driven by positive currency effects. EBIT before special items came in at prior year level as higher margins were offset by increased fixed costs, primarily due to currency effects. The ongoing restructuring efforts led to special items of -EUR 34 million versus -EUR 149 million a year ago. In Dispersions and Pigments, sales rose slightly. We saw good volume growth in Asia Pacific, but experienced softer demand in Europe and North America.
Improved resin volumes could not fully offset lower volumes in pigments and dispersions. We noticed some destocking by our customers. EBIT before special items decreased significantly on lower volumes and higher fixed cost. Care Chemicals sales grew slightly. Volumes were slightly down, primarily in hygiene. Demand in home care was lower, while we saw higher volumes in personal care. Fixed costs increased due to unfavorable exchange rates and year-end effects. Hence, EBIT before special items came in slightly lower. In Nutrition and Health, sales decreased slightly. While we experienced good demand in animal nutrition and aroma chemicals, volumes declined in pharma as well as human nutrition. A further price decline in vitamin E was almost offset by price increases in other product areas such as aroma chemicals and pharma. EBIT before special items was considerably up, primarily due to lower fixed cost.
In Paper Chemicals, sales were almost stable as positive currency effects could compensate for lower volumes. While we experienced a further reduction in demand for graphical paper, we were able to grow volumes in paper packaging. EBIT before special items almost matched the prior year level. Performance Chemicals sales rose slightly, driven by higher volumes in all regions. Fuel and lubricant solutions, as well as plastic additives, showed good volume growth. Our business with water, oil field, and mining chemicals experienced lower demand. EBIT before special items increased considerably due to improved margins. With that, to Functional Materials and Solutions. In Functional Materials and Solutions, sales were considerably up, supported by continued robust demand from the automotive industry. Volumes were up, prices remained stable, and we realized positive currency effects. EBIT before special items declined slightly, mainly due to lower contributions from Performance Materials and Construction Chemicals.
Special items of -EUR 43 million were primarily related to an asset impairment in Construction Chemicals. Sales in Catalysts increased significantly on higher volumes in mobile emissions, chemical, and refinery catalysts. Sales from precious and base metals trading grew to EUR 605 million versus EUR 488 million a year ago. Fixed costs were higher due to the start-up of two new mobile emission catalyst plants, one in Poland and the other one in China, as well as a zeolite manufacturing plant in Ludwigshafen. EBIT before special items increased considerably, driven by higher volumes. In Construction Chemicals, sales came in slightly higher, thanks to improved construction activity in North America and the Middle East. Sales in Europe decreased, mainly as a result of the divestiture of BASF Wall Systems. One-time effects led to higher fixed costs, and thus EBIT before special items declined.
Sales of our Coatings division were slightly up due to higher volumes, prices, and currency effects. In OEM Coatings, we continued to experience strong demand in Europe and North America. Automotive Refinish saw lower market demand in all markets except China. Industrial Coatings developed positively. In our Brazilian decorative paints business, we increased sales primarily in the premium segment. EBIT before special items was slightly lower due to higher fixed costs. Sales in Performance Materials were slightly up. Sales volumes of specialty and engineering plastics, as well as our specialty Cellasto, increased strongly due to high demand from the transportation industry. Styrenic foams for construction applications saw lower demand. Plant start-ups and turnarounds led to an increase in fixed cost. EBIT before special items decreased as a result of that. On to Agricultural Solutions.
Sales in Agricultural Solutions increased by 25% due to higher volumes in all regions, mainly in South America as well as North America. We were able to raise prices in all regions except South America, where we experienced product mix effects. EBIT before special items jumped to more than EUR 120 million. South American sales rose substantially as the delayed start into the season led to a shift of demand from Q3 to Q4 2014. Our business in Brazil also benefited from the good performance of our blockbuster fungicide, Xemium, in its first full year on the market. The successful launch of 3 new insecticide formulations contributed to sales growth. North American sales were up strongly on higher volumes, prices, and currency effects, especially our herbicide business showed an excellent performance driven by high demand for Kixor and dicamba.
Sales in Europe came in higher as we were able to increase volumes and prices. Fungicide demand benefited from the mild weather. We also saw good demand for the upcoming season, both in Western and Eastern Europe. In Asia-Pacific, we experienced strong business growth, especially in China and Australia. From a full year perspective, 2014 was our second-best year ever in agricultural solutions. Sales rose by 4% to EUR 5.4 billion, corresponding to a growth of 7% currency-adjusted. Despite a tougher market environment and currency headwinds, full year EBIT before special items amounted to EUR 1.1 billion. At 24%, the EBITDA margin came in slightly below our 25% target. Back to oil and gas. In oil and gas, sales decreased slightly as a result of the sharp drop in the oil price.
Higher volumes, both in E&P and natural gas trading, partly offset this decline. EBIT before special items declined from EUR 502 million to EUR 347 million. Special items were -EUR 189 million, attributable to write-offs for exploration projects and producing assets. In the prior year quarter, we reported positive special items of EUR 383 million, mainly due to the deconsolidation of Gascade. As a consequence, EBIT came in at EUR 158 million versus EUR 885 million a year ago. Net income, however, declined by only EUR 191 million to EUR 446 million. This is due to positive special items of EUR 220 million in the financial result from the sale of our stake in VNG, as well as positive currency results. Now to exploration and production.
Sales in exploration and production decreased significantly due to the sharp drop in oil price. The average price for Brent was $77 per barrel compared to $109 a year ago. EBIT before special items decreased substantially due to lower oil and gas prices. Higher production volumes in Norway could only partially compensate for the strong decline in oil price. Sales in natural gas trading were stable as higher volumes offset lower prices. EBIT before special items came in considerably lower. The prior year quarter benefited from price revisions. Adjusted by this one-time effect, EBIT before special items was on a similar level as in Q4 2013. With that, to Other, sales in Other decreased to EUR 700 million as we experienced shutdowns at our Ellba joint operations. EBIT before special items improved by EUR 86 million to -EUR 28 million.
This was mainly driven by positive currency results and the partial dissolution of the provision for our long-term incentive program. Special items in other amounted to +EUR 473 million, primarily related to the disposal gain from the divestiture of our 50% stake in Styrolution. Now to the cash flow. Cash provided by operating activities decreased by EUR 1.1 billion to EUR 7 billion. This was mainly attributable to a swing in net working capital. In Q4, however, operating cash flow was up 4% versus prior-year quarter and came in at EUR 2 billion. In 2014, we experienced an increase in net working capital of EUR 700 million. Inventories were up mainly due to higher natural gas storage levels caused by the mild winter, as well as in preparation of planned startups and maintenance shutdowns.
Cash used for investing activities totaled EUR 4.5 billion. We saw the peak of our CapEx spend last year, and investments related to property, plant, equipment, and intangible assets were up by 9.9% to EUR 5.3 billion, particularly due to our large projects in Europe and in Asia. Net cash from acquisitions and divestments positively contributed to roughly EUR 370 million. At EUR 1.7 billion, free cash flow generation was significantly down due to a lower operating cash flow and higher capital expenditures. We generated EUR 1.2 billion of free cash flow in the second half of 2014. Cash used in financing activities amounted to minus EUR 2.5 billion in 2014, increasing cash outflow by roughly EUR 600 million compared to the previous year.
We paid EUR 2.5 billion in dividends to our shareholders and around EUR 290 million to minority shareholders in group companies in 2014. Now let's take a short look at the balance sheet. Total assets rose by EUR 7.2 billion to EUR 71.4 billion, especially due to four reasons, higher CapEx, acquisitions, currency impacts, and higher deferred taxes due to the increase of this pension provision resulting from lower discount rates. Long-term assets were up by EUR 5.7 billion. Intangible assets were roughly EUR 640 million higher because of an increase in goodwill, in particular attributable to the acquisition of ENP assets from Statoil.
The value of tangible fixed assets increased by EUR 4.3 billion to EUR 23.5 billion and was driven by our investment projects as well as acquisitions. Equity investments decreased by approximately EUR 930 million, mainly due to the divestment of our 50% share in Styrolution. Short-term assets increased by roughly EUR 1.5 billion. Inventories were up by EUR 1.1 billion, as already mentioned. On the liability side, provisions for pension obligations increased by EUR 3.6 billion because of lower discount rates. Financial debt rose by approximately EUR 1 billion to EUR 15.4 billion as we issued several bonds to further optimize our maturity profile and to benefit from the low interest rate environment. Net debt amounted to EUR 13.7 billion, an increase of roughly EUR 1.1 billion.
The net debt to EBITDA ratio is 1.2. At the end of 2014, our equity ratio remained at a healthy level of 40%. With that, back to you, Kurt.
Yeah. Thank you, Hans, and so much about 2014. I will now talk about our expectations for 2015, the underlying assumptions, and our outlook for sales and EBIT before special items. I will also discuss our strategic drivers. This should give you a better understanding of how we implement our We Create Chemistry strategy. Let me start with the macroeconomic assumptions for 2015. In general, as a disclaimer, obviously, we expect the volatile and challenging macroeconomic environment to persist. At 2.8%, we foresee the global economy to grow somewhat faster than last year. Major growth drivers will be North America and Asia-Pacific. Although we expect more moderate growth rates in Asia, absolute growth will remain high. At 4.2%, we anticipate a slightly faster growth of the chemical production than in 2014.
We assume an average oil price in the range of $60-$70 per barrel Brent and an average exchange rate of $1.20 per euro. Obviously, the lower oil price will negatively affect our oil and gas business. On the other hand, the appreciating US dollar will provide us with some relief, essentially in our downstream businesses. Please keep in mind that other currencies which are important for us, like the Russian ruble, the Brazilian real, and the Japanese yen, will have a negative impact, thus resulting overall in only a minor positive currency effect. Overall, we will continue to grow volumes and sales in 2015. Sales are likely to be slightly higher than in 2014, mainly driven by higher sales in the Functional Materials & Solutions and in the Performance Products segments.
We expect EBIT before special items to be on the level of 2014. Higher earnings in our Chemicals business and in Agricultural Solutions segment are anticipated to compensate for considerably lower earnings in Oil & Gas. We aim to earn, again, a substantial premium on our cost of capital, but at a lower level than in 2014 when we had a number of special effects from divestitures. In order to help you to better understand our segmental guidance, I would like to explain the oil price effects on our Oil & Gas and Chemicals business in a little bit more detail. On a molecular basis, BASF is almost perfectly hedged. Our oil and gas production equals the volume of our oil and gas-based feedstock for the chemical production.
However, the negative effect of the lower oil price on the profitability of the Oil and Gas segment is immediate and direct. In upstream chemicals, we expect to benefit temporarily from higher margins as product prices follow lower basic raw material prices with a certain delay. Our downstream businesses should experience slightly higher margin, but also with a time lag, depending on the length of the respective value chain. We have to keep in mind, in some of those businesses, we have inventory of more than one year due to very long production chains. Therefore, the total impact for BASF Group under ceteris paribus conditions, no volume growth, no currency effects, would be negative in 2015. In our Oil and Gas segment, we updated our oil price sensitivity.
One US dollar change in the average annual Brent oil price impacts EBIT of our oil and gas business by about EUR 20 million. In 2014, the respective EBIT impact was EUR 15 million. Therefore, an oil price decrease of $30-$40 per barrel translates into an EBIT reduction of EUR 600 million-EUR 800 million. This decline in earnings will be partially compensated by higher production volumes, which we foresee for 2015. The earnings of Wintershall are not as severely affected as those of many other oil and gas companies because Wintershall's gas-to-oil ratio is 3-to-1. The pricing of natural gas consumed in our main production regions, Russia and Argentina, is regulated. Gas prices in Europe have largely decoupled from the oil price in recent years and are predominantly market-driven.
Of course, we evaluate measures to how to mitigate the lower profits in oil and gas. In the day-to-day exploration and production operations, we focus on operational excellence and we scrutinize costs. Furthermore, we continuously review our investment projects. Through our portfolio management, we are confident to further optimize our CapEx commitment in the future. Against this background, we provide the following guidance for our five business segments. In chemicals, earnings before special items is expected to be slightly below the 2014 level due to start-up costs for new plants of around EUR 100 million-EUR 200 million in 2015. We anticipate EBIT before special items in performance products will be considerably higher than in 2014 as a result of higher sales volumes, our zero restructuring efforts, and continued cost discipline.
In 2015, we expect a strong demand for our innovative systems and solutions, especially from the automotive and construction industries. Therefore, we aim also to considerably increase earnings in Functional Materials and Solutions. In Agricultural Solutions, we expect a considerable increase in EBIT before special items driven by our innovative products and solutions. More favorable exchange rates should provide some tailwind in a volatile market environment. In Oil and Gas, we will not be able to offset the oil price-related lower earnings with higher production volumes in Norway and Russia, as well as higher expected earnings in the gas trading business. Therefore, EBIT will come in considerably lower. In Other, we expect a slight decrease in EBIT before special items due to the divestiture of our participation in Styrolution and Ellba Eastern. Our planning and guidance for 2015 are obviously based on various assumptions beyond our control.
However, there are tools and levers which we use to achieve the best possible result under any given circumstances. We will continue to focus on operational excellence. In 2014, our excellence program STEP delivered an incremental annual earnings contribution of EUR 400 million as promised. With a run rate of EUR 1 billion by the end of 2014, we are fully on track to achieve our increased 2015 target of EUR 1.3 billion. The same holds true for our restructuring efforts in performance products, where we want to achieve an earnings contribution of EUR 500 million by 2017. In 2015, we are planning with a run rate of EUR 250 million. Furthermore, cash conversion is on top of our agenda.
Working capital went up in 2014 due to plant shutdowns and the startup schedule, something which we plan to reverse this year. Free cash flow will be supported by lower spending for investment projects. This year again, we will conclude a number of major projects. As a consequence, we plan to reduce our CapEx spending from EUR 5.1 billion to EUR 4 billion in 2015. This represents a major reduction after four years of growing CapEx. Going forward, we anticipate this order of magnitude also for the period until 2019, which would correspond with the respective depreciation levels. From 2015 to 2019, we plan a total spend of EUR 19.5 billion, of which downstream chemicals receive approximately 40%, upstream 40%, and oil and gas 20%.
Upstream chemicals will continue to require a higher share of CapEx due to its asset intensity. From 2010 to 2014, we have increased our annual R&D spending by EUR 400 million to EUR 1.9 billion. For 2015, we plan a slight further increase reflecting the growing share of our more R&D-intensive downstream businesses and the ongoing globalization of our activities. I know that for some of you, our R&D efforts are kind of a black box. To make this a little bit more tangible, we would like to show you a real-world example of an innovation which we are currently introducing into the market. BASF will launch a new generation of highly innovative super absorbent polymers under the trademark SAVIVA. BASF researchers have worked intensively for more than a decade to develop a breakthrough technology and optimize the corresponding production processes.
Based on its round shape particles with micropores, SAVIVA has an innovative liquid distribution mechanism, making it highly efficient super absorbent polymer and diaper core. The launch is scheduled sequentially in the different regions starting end of 2016. With this, I would like to demonstrate this in a little experiment and bear with me. It should work. This is a stepwise approach. This is just blue water to make it more visible. Step 1. This is the new product. This is the old product. It looks the same, obviously. This is SAVIVA. I put this in here. It worked very nicely this morning at the press conference. This is the old stuff, which is, let's say, what you can get in the market.
What I'm doing now, the cylinder has an open bottom, so water can flow into it. I will now put both of these cylinders into this blue water, and then it's up to you just to watch what is happening here. This is essentially
This is what we're going to do for the next hour now?
Absolutely. This is not like watching paint dry. I mean, this is very different. Oops, sorry. This stuff on the right-hand side is what you get today when you buy a baby diaper. It is supposed to be effective. However, the migration of the fluid of the water is much less than what you get with the new product. I think you can keep watching, but I will continue to talk. Just one page, and then we are finished here. With innovations like SAVIVA, we are well on track to achieve our 2015 target to have sales of approximately EUR 10 billion from innovations launched within the last five years. Finally, we will continue to carefully prune our business portfolio. Examples from 2014 are the sale of our PolyAd Services and our share in Styrolution, and we announced the divestiture of our textile chemicals business.
We will also further optimize our oil and gas E&P portfolio, but we neither see a need nor an opportunity to divest our gas trading business in 2015. Overall, we strongly believe that we have laid the foundation for further profitable growth, participating in the emerging growth regions of our industry, using opportunities to strengthen our core value chains in established markets, for instance, shale gas in North America, and driving innovations in our downstream businesses. All of this will help to grow our earnings and to make them even more resilient. With that, we are happy to take your questions.
Yes, thank you very much, Kurt and Hans. With this, ladies and gentlemen, we are now moving to the Q&A session. Today we have a little bit of a different microphone system here. First of all, I would like to inform you that you please take the cards which are attached to your name tags. On the right-hand side of your microphone, you find a small slot, and it's important that you insert the cards into the slot in the direction of the arrow, and then please immediately press the speak button because this automatically puts you here on the screen and puts you in the queue so then we can take your question. I would also propose that you please limit your questions to two at a time, if I may.
Akula is not happy with me, but two at a time. I promise that you're always welcome to rejoin the queue, and we will take certainly your follow-up question. With this, I have already a list of questions, and we start with James Knight from Exane.
Hope this works. I'll start with a couple of questions. Firstly, in terms of the CapEx plans, I think what you've outlined is a cut to your plans before. Could you give us a bit of a clue either which plans have been cut or where investment's been slowed down? Secondly, Kurt, I think on the news wire this morning, you were quoted in M&A that it's a seller's market at the moment. Should we therefore not expect any mid-sized deals or significant deals in the next year? Thank you.
Yeah, thanks for your questions. CapEx, what is happening now is a pretty natural process. We have simply concluded or are concluding a number of major projects, and for that simple reason, the CapEx budget will decline going back to a level which is, let's say, more normal to compare to our depreciation levels. We haven't really slowed down any investments. We haven't really decided against any investments which we deem to be profitable and strategically relevant. What we do, however, is in oil and gas, that we certainly take a second look at the speed of investment in certain fields, keeping in mind that the oil price has come down. Actually, I'm not aware that we have put any major project on the shelf for the time being.
It's quite a natural development going into 2015 from our point of view. M&A, you're aware that we have done only relatively small deals over the last couple of years. We have really very much focused on organic growth and therefore also higher CapEx because we do see opportunities to grow in certain markets and with certain products. We always scan the market. We always try to understand is an opportunity something which is a good strategic fit and also financially attractive. Financially attractive means if BASF becomes the owner, we can create more value than the current owner, for instance, by generating additional synergies or bringing additional wisdom on how to run the business. That is something we will always observe.
For that reason, we will stay very, very disciplined given the current level of valuations as well and multiples we have seen.
We are moving on now to Tim Jones, Deutsche Bank. He's in the third row. Oops. Yeah.
Yeah, thanks. Tim Jones, Deutsche. Two questions. First, if I can follow on M&A. Do you take into account structurally lower financing costs or what's happened in the market from a fixed income perspective when you think about asset valuations? Or do you still look at the same kind of multiples and IRRs that you have done for the past five or six years? Secondly, it's quite rare to come to a BASF analyst meeting and see such optimism for a couple of divisions on the EBIT side, which don't get me wrong, I think it's a good thing. I'm just trying to wonder when you talk about considerable increase to EBIT in functional materials and performance products, can you give us an idea of why you're so optimistic on the growth prospects this year?
Really what I'm looking for is for you to break it down between raw material benefits, FX, self-help, product innovation, things like that, to give us a better understanding of why you're so confident about growth for those two important segments. Thank you.
Yeah. Thank you, Tim. I don't think that cheap financing is a good reason to buy a company, to make it very, very clear. We have a cost of capital concept which we apply almost religiously within our company across all types of decisions we have to take, including M&A. The cost of capital haven't really come down recently. If you look at this more precisely, they have stayed persistently, you might say, high despite very, very low debt costs. I know that there are many companies out there who basically say, "Okay, buying a company and making it accretive at EPS level is a great decision." That is for us, just one way of looking at a acquisition. For us, it's really about do we earn the cost of capital over time?
This then goes back to what I said earlier on about evaluations and multiples which are currently expected in the market. The Functional Materials and Solutions business, we are cautiously optimistic. We are never really bullish. We're always cautiously optimistic. We do think that we can grow earnings in that business, for a couple of reasons. One is we have a very good franchise now in Asia. We have a couple of major investments, underway, and you see this also on the one slide which we presented here today. This holds true for coatings, for performance materials, but also for catalysts. We just opened up, to name another example, a new catalyst plant, the largest one in Europe, which went on into operation in Poland last year.
We continue to be very, very cost-conscious, and there's always kind of restructuring going on within these businesses because they are under tremendous competitive pressure also from our customer industries, which is very often the automotive industry. Yet, we do think we can grow earnings in 2015 also based on volume growth. FX might help a little bit in that respect as well. Raw materials, we have to be very specific here. Some of these businesses have almost zero oil-linked raw materials like catalysts. In coatings, it's a little bit different, but even there, we estimate that probably 15% of the raw material base in coatings is really directly linked to oil price.
Our task is, at this point in time, actually to fight off expectations from our customers who also look at the oil price and now turn around and say, "Okay, how about lower prices for our automotive supply products?" To explain to them what is the real impact of lower oil prices and lower raw material costs on these businesses. Then there is a time lag, I mentioned this before, in some of the businesses, more in Performance Products, we have very long value chains, inventories sitting on the shelf, prefabricated products, for instance. It just takes quite some time to see really the effects of lower raw material prices creeping into the production costs of these downstream businesses. I don't think this will be the most important factor for driving earnings in 2015. Does this help?
The next question is coming from
Yeah, thanks. I have a question. First of all, you mentioned China, and here in the slowdown you saw in end of last year and beginning of this year. Maybe kind of flavor where this what kind of end market this you saw the slowdown? Secondly, can you give us a guidance on your financial result for 2015? What do you expect here on your financial result, financial costs.
Hans will take the financial results. China from our point of view is actually almost a split market. We are doing very, very well in the downstream businesses that I mentioned already, the investments which are underway, where we can differentiate with technology, with customer service, customer proximity. This is a nice growth area currently for us in China. We have a couple of upstream businesses where we have margin pressure. I mean, the most publicized is obviously caprolactam, which by the way, we only produce outside of Asia and then export into China. There has been tremendous margin pressure for this product. In other major product lines like acrylics, we also see a little bit of that, or in isocyanates. The big question for us in China is really will the investments really continue in chemicals?
Will this margin pressure, which we have seen recently, lead to a situation where some of the industry players will think twice about establishing additional capacity? We feel relatively comfortable in an overall uncomfortable situation, because when you look at industry cost curves and our technologies, we do think that we have good operations in place. That is pretty much what we are seeing in China. We mentioned that we see a little bit of slowing down of overall growth in China. For instance, the automotive industry will continue to show good growth going into 2015. Hans?
Yeah. On the financial result and the guidance there, we usually don't guide on the financial result. I think I understand where you're coming from with your question. When you look at the financial result for the year 2014, you see essentially two special effects in there. One is the effect of the sale of our stake of 15 point some percent in VNG to the tune of EUR 220 million on the positive side.
You see a swing in the order of magnitude of -EUR 160 million negative, which was related to the mark-to-market that we had to do for the Styrolution options, which was positive year-end 2013, and then turned slightly negative at the point in time end of Q2 when we moved the assets into the disposal group. If you take these two effects out, that gives you a pretty good picture on the clean financial result, and that actually should be pretty good guidance.
Good. We move on now with Christian Faitz from Kepler Cheuvreux.
Yes. Thank you. Just two quick questions. Related to the China/Asia question. Your adjusted EBIT in Asia was significantly down in Q4. I believe to a 3% level, minus 50% or something like that. Is that mainly driven by the copper activity issues, pricing issues you mentioned, et cetera. What's behind that? Then second of all, on the Agricultural Solutions side, you saw significant volume gains in the fourth quarter. I believe 22% or so, while prices were down. It looks like you know there was certain sales incentive to go for volume. At least if you look at the previous, at the prior quarters, Q1, Q2, Q3, which were not that great, neither on the volume nor pricing side.
Can you give us some background to that? Was it just Xemium and, I believe, the lower fipronil prices, lower mix? Thank you.
Okay. China, we experienced start-up costs for a couple of plants coming into operation, plus negative currency effects has also played a role when you look at the overall result. Sorry, I could push the button here. Again, in China we saw start-up costs, which impacted earnings and negative currency effects. Does it mean that we are happy with the earnings development in Asia? Clearly, no. There are a couple of measures we put into place to revert that development. Agricultural Solutions. Yes, we had good volume growth in Q4. I think we always cautioned you not to become too much obsessed with individual quarters when you look at the agricultural business, and this actually had happened in Q3. There are a couple of factors.
Some of the sales in the southern hemisphere were a little bit late. They came from Q3 into Q4. This all then averaged kind of out. We think we had a positive, good volume development. If your question is did we buy market share? Clearly, no. Actually, when you look at our overall numbers, we have increased pretty steadily our prices in crop protection over the last couple of years, and this also holds true in 2014, when we had something like a 2% price increase in agricultural products. South America is a kind of an interesting case. It's very difficult to read. It's very, very technical because in South America you have a triangle, Brazilian real, U.S. dollar, and our accounting currency, which is euro.
If you really try to account for all these effects, it becomes extremely difficult to really find out what is a real true underlying price effect. If you just look at local prices, which are essentially dollarized, we did not reduce our prices in South America with very, very few exceptions, where we had generic competition and had essentially reformulated our products and had then different price points. Policy is continuously to have a good pipeline, innovative pipeline, new products, new innovations and good pricing. That hasn't changed at all.
The next question is coming from Oliver Schwarz, Warburg.
Thank you. Mr. Engel, I think you said that the higher working capital partly came from a higher level of gas inventories due to the warm winter. If gas prices would follow the move of oil prices, would we see write-downs on that in inventories? Thank you. Secondly, I'm a bit puzzled about chemicals recording sales to Ellba because Ellba was consolidated in the Others segment. I thought those sales would have been recorded as internal sales, not external sales. However, if that is only the 50% of Ellba, of sales to Ellba not belonging to BASF, would we see higher sales and earnings with the Ellba franchise now that you own 0% of that?
That's a complicated one.
It's relatively. The second one, I try to answer the first one you-
Yeah.
Situation has changed in Ellba for a couple of reasons. One is we divested our share in what we call Ellba Eastern, so we are not a shareholder anymore, 50% shareholder in that. We purchase now propylene oxide and the SM/PO where we actually don't need anymore because we divested Styrolution. That is the strategic reasoning.
Mm-hmm.
behind the divestiture of Ellba Eastern. The other joint venture which we run together with Shell at this point in time, as you know, is not in operation. It's being rebuilt, reconstructed. This is going on, and this would only then actually reside in sales later in twenty-
Sixteen. At this point in time, it's kind of a almost hypothetical question you have been asking.
On your first question, the clear answer is a no. Definitely not at current price levels. Natural gas at this point in time in Western Europe is in US dollars, it's $7-$7.50 per million BTU. No risk of write-offs there.
Okay, thank you.
The next question is now coming from Norbert Barth.
Yes, two more strategic questions. First, on the oil and gas business. What we see last year with the failure of the Gazprom deal, and clearly above that is the overall political situation about Russia and Europe. How will this impact your oil and gas strategy? Can you elaborate a little bit more in detail? Does that mean, for example, also that perhaps the Russian assets you think about or even talk with Russia? And also on the other side here, your gas trading business where you said last year, it's no more of strategic importance for us. Do you look for a new buyer or how you will continue with that? And the second question from a strategic point in the Asian market.
Elaborate already a little bit, but if you see the results in the last year, I think that clearly must be somewhat of a disappointment also for you, the overall performance there. Does that also impact somewhat the Asian strategy, for example, go more to other markets like India? Is that a thing you think about? Or will that also impact other regions in the Asian markets?
Thank you, Norbert. Oil and gas, I think we made it pretty clear that we didn't really welcome the result of not having the asset swap late 2014 because we thought this was a good transaction for both parties involved. There was a lot of good economic and strategic reasons for doing this kind of swap, which included, by the way, in case you have forgotten, that we would have increased our exposure in Russia by adding additional licenses and therefore also additional commitments to develop these fields, which means from our point of view, we do feel comfortable operating in Russia. We have been doing this now for quite some time. We have a very good collaboration, cooperation on the ground. The conflict has had no impact on operations.
There is a joint understanding with our partner, Gazprom, how to run these operations. When you look at our annual report, you can also see that these operations are profitable. They're profitable, and they pay dividend to BASF. We do believe, this is no political statement, that economic ties are still essential to bridge conflicts between countries or within a region. We do feel comfortable. We don't see any reason to go back to the drawing board to find out, does it make sense to have assets in Russia? Yes, it does make sense to have assets in Russia.
We also made clear, by the way, at the same time, that we would like to balance our portfolio overall a little bit more, and for that reason, we have made these acquisitions in Norway now twice, acquiring producing fields, but also developing fields from Statoil. With regard to the gas trading business, I think I said it in my little speech. At this point in time, we see no reason nor any need to think about further strategic consequences. It is a good business, by the way. It is not a suffering business, not at all. We know how to run the business jointly with Gazprom. We feel comfortable with our partner there. We will continue running it, and then we see where we are. At some point in time, we might reflect what needs to be done.
At this point in time, it doesn't add any value now to do some soul-searching here with regard to gas trading. Asia. Growth rates in Asia have come down. Business has become a little bit more complicated. we said this earlier on, the good times in China, where whatever you build would be sold, are probably history, and they will not come back very quickly. However, Asia is larger than just China, and we also made that clear. We have quite some big investments underway in Malaysia, for instance. we have started up a new production site in India, Dahej, which is in the state of Gujarat. this works so far very nicely. we have a clear commitment to continue to grow in Asia.
When you look at our investment budget, which you also find in your annual report here, I think page 124, you can see the regional distribution. We will continue to heavily invest in China. I would say that the focus of those investments will shift more now from what you might call or we might call upstream to downstream, which also clearly reflects a life cycle type of concept. When you enter a country, for instance, China, you normally start with upstream products, building the base chemicals, and then you go downstream. We have done this in other parts of the world as well, and this is exactly what is happening in China as we speak. I mentioned the resins plant, there's a coatings plant, the catalyst plant, the performance material plants which we are building right now.
We're now moving on to Andreas Heine.
Two questions from my side. The first, as you mentioned in your speech, sometimes higher fixed costs being the reason for lower earnings. My understanding is that especially these step programs and all your efforts in efficiency are to offset inflation and fixed costs to hold this flat. Is that now over so that the growth you have with CapEx makes it not possible anymore to hold this flat? That's the first question. The second on this oil price sensitivity, I understand that this oil price sensitivity includes also the gas part, which is in any way also linked to the oil. But could you elaborate a little bit more how we have to understand this oil price sensitivity given that oil is just 25% of the total production and gas the other?
What of the gas part is dependent on what, that we can understand what we have to model there?
On your first question with respect to fixed cost, Andreas, fixed cost is, was, and will always be a focus point of our attention. Where I alluded to fixed cost increases, these fixed cost increases are almost in all cases driven either by a currency impact in Q4 or, and even more so, by startup costs that we have for plants that we started up in Q3 and in Q4. Such as the catalyst plants that we started up in Poland, a new coatings plant that we started up in coatings. There's a dispersion plant in the dispersion segment in Freeport that we started up in the fourth quarter, the SAP plant in Nanjing.
When you go through the list, where I said there are increases in fixed cost, and you compare that to where we started our plants, you will see the correlation there, predominantly driven by startup costs for new plants that we have. In my world, or in my head, I differentiate between good fixed costs and bad fixed costs. Good fixed costs are those that will generate future profits for us, so as a result, they come into your P&L from new plants. Bad fixed costs are those that you alluded to, for example, driven by inflation, and that's exactly where our operational excellence programs are focused on.
With respect to the oil price, in fact, we increased the sensitivity from one dollar change in oil price equates to ±EUR 15 million in EBIT for the Oil & Gas segment only, to EUR 20 million on an annual basis. Now what is that driven by? That's driven by, in the end, more production that we will have in 2015. The target is to move production from 136 million barrels of oil equivalent to 160 million barrels of oil equivalent.
When we look at the sensitivity, we look at oil primarily, but then we also look at the part of the gas business, and the split between oil and gas is, as you mentioned, 25%-75%. 25% oil, 75% natural gas in 2014. We also look at that part of the natural gas production business, where there is still a link to oil, and that's what the guidance relates to.
Now we come to the next question from Ronald Köhler, MainFirst.
Yes. Thank you. My first question is on agrochemicals. You're also having, let's say, a positive outlook, considerable increase of earnings 2015, despite obviously that soft commodity prices are a bit of a drag point for the farmers. Could you elaborate a bit what makes you so confident? I know this business is quite a bit sensitive, I guess, so from that perspective, that might be a significant driver. But besides that, how do you feel you will do in a potentially more competitive environment in agro in 2015? Second question, to cost savings and Performance Products. You mentioned you have a run rate of EUR 250 million in 2015 and an overall target of EUR 500 million.
Can you give us a bit, let's say, run rate is a bit imprecise for an analyst, I have to say. What was the level of savings you already achieved in 2014? What is still left, so to say, in achieving additional earnings, cost savings in this segment? Thank you.
Yeah. Well, on agricultural products, we are still cautiously optimistic again for 2015. We do think we can continue to grow our business. Yes, you're right, FX will provide a little bit of a tailwind, but essentially we are betting on our product pipeline and the products which are already in the market or will be introduced in 2015. I don't think, frankly, that because you alluded to it, the competitive pressure has increased in the sense that we today face different market circumstances than what we have seen in the past. This is all about bringing new active ingredients to the market and fighting for more innovative products, and this has served us very well, and this will continue to work in 2015 as well.
We have a couple of products like Xemium, which are developing very, very nicely. We have to fight off, we mentioned this already at Q3, sometimes a little bit of, let's say-
Generic competition, which is also not unheard of in our industry. I think we also find ways to deal with that situation in the most, let's say, value generating or preserving way.
On your restructuring question with respect to performance products, if I understand you correctly, you're asking with respect to the P&L impact that we had in 2014 from restructuring. Is that correct?
Yes. What did you have achieved already from the EUR 500 million, and how much is left?
Order of magnitude in 2014 P&L impact is roughly EUR 100 million.
EUR 300 million. Which means you have another EUR 200 million to go for the 500.
100 million. We say EUR 250 million P&L impact in 2015. Full impact of EUR 500 million in 2017. Which is when you compare it to other restructuring programs with ramp up, they are pretty much in line.
Okay, good. Thank you.
This brings us to our next question from Peter Spengler.
Hello. Yeah, thank you for taking my questions. I have two questions. First on the oil and gas business. I think given the sharp decline of the crude oil price, the operating result was quite decent. Did you cut operating costs like exploration costs? If so, how long could you maintain such a margin if everything stays the same? Or do you have to increase the cost level over time? On an additional question on that, can you give us an oil price at which level your oil and gas business would be on par with last year? You gave us an oil price for this year, and you said you expect a sharp decline in profits.
My second question is, could you take advantage of the low euro to other currencies by shipping more from the euro sphere to other currency spheres to have more transactional advantage compared to only translational?
Yeah. Peter, let me take the last one about FX and let's say exports from Europe to other parts of the world, and then Hans will talk about oil and gas. Obviously, the weak euro helps a little bit to boost our, let's say, international competitiveness. But please keep in mind that our essential strategy always has been to produce where we do have our customers. Still in Asia, there is some way to go. We are not yet where we need to be. We still export quite some product from Europe to Asia, and that certainly then also will result in, let's say, transactional FX gains. That is certainly also reflected in our earnings guidance when we talk about performance products and functional materials and solutions. In both businesses, we have quite some exports.
I mentioned, I think I mentioned that FX also plays a certain role, limited role in driving the earnings improvement in 2015. It's a limited opportunity, frankly. Now, you cannot just boost product unless you see competitors in Asia really falling off the cliff, which is not the case.
Now, on your question with respect to operational costs, when you get a healthy wake-up call as a result of your oil prices or natural gas prices coming down significantly, what you do is you go through your portfolio, you review it, and you typically aim for fixed cost improvement. This is exactly what we started doing end of Q3, early Q4. We're pruning the portfolio. This is not only the case with respect to fixed costs, it's also the case with respect to CapEx and investments. It's a healthy wake-up call, as I call it.
You get a lot of attention all of a sudden to topics where that you may have taken for granted while you were sailing for three years in an environment where the average Brent oil price was in the range of $105-$110. Your second question was, at what level of profit do we go back, do we get back to, the-
No. What level of oil price do we get back to?
Yes.
Unfortunately, I didn't do that calculation for you. The easy answer that I could come up with is, if we go back to an average oil price of $99, which we had last year, we should be pretty much back. That would not be a fair answer. All I'm trying to say is I haven't done that calculation for you because there are a lot of moving pieces, additional production coming in from the Statoil acquisition. There's additional production coming from the ramp-up that we have in the Western Siberian field in Achimov. Can't provide you with that answer. Sorry.
We're now moving to the next question from Patrick Lambert, from Nomura.
Two questions, please. Again, oil and gas sensitivity. More around the gas sensitivity. First, have you seen already some oil-linked contract impact on prices on your gas part? That's one. What is the best things to look at in terms of sensitivity for the gas business? Is the ruble has an impact at all into your EBIT, or is it MMBtu the normal spot price, which would have a bigger impact on your EBIT on gas? That's the first set of questions. Second, on ags in particular, you said. I think you said in Q4 you raised prices everywhere apart from LatAm. Could you comment a bit more on Eastern Europe, meaning Ukraine, CIS in particular? Were you able to raise prices to dollarize your sales there?
Also in Western Europe, could you comment a bit more on your price increases? Are you still trying to get some U.S. dollarized type of market in Western Europe, or so it's a euro-denominated market? Thanks.
Yeah, thank you, Patrick, for those questions. Actually, I don't have pricing data, regional pricing data at the tip of my fingers for Eastern and Western Europe. I would guess that in Eastern Europe, we have not been able to fully dollarize our prices because the local currencies have both in Ukraine and in Russia come down so quickly that you cannot adjust simultaneously. I would expect that there is a certain time.
The strategy is to get there.
Strategy is to be there, and you have to keep in mind that we are only now entering the season. That is also very important. Very little has happened in Q3 and Q4 in this Northern Hemisphere. We are now starting to sell stuff to the distributors, to the big farmers, and then it's ultimately sprayed. I think we are still in the midst of assessing the situation and trying to adjust our pricing levels. I think the more difficult question is for you, Kurt. It is in fact the more difficult question, Patrick. Thanks for asking it. Because it's so difficult, we decided not to come up with a guidance on gas price.
Some of the issues you alluded to already, which is currencies that play a role, and we have to look at various currencies there. The ruble is one that we have to look at. The Norwegian krone is another one that's relevant for our gas production. The Argentinian peso is also in that mix. You have a number of interesting currency factors, and I would like to help you to fill your spreadsheet, but unfortunately I would probably more misguide you than anything else. Please understand that we came to the conclusion not to provide guidance on natural gas.
Thank you.
We're moving on now with the next question from Thomas Wrigglesworth, UBS.
Good afternoon. Two questions. The first one is, what are you currently feeding into Port Arthur, ethane, propane, or naphtha? Have you played the scenario of variable feedstocks and flexible feedstocks with this volatility? That's the first question. Second question is for Dr. Bock. In 2011, you announced the We Create Chemistry strategy. From what I understood, your one of your most passionate statements was that the company has to get more market-focused and customer-focused and less molecule-focused. Can you sort of give an idea where the company is on that path? Maybe specifically to specialty products that are linked into the upstream Verbund, which from what it looks like do worse downstream compared to specialties that are not linked into the Verbund, for example, catalysis. Where are we with that cultural shift of the company? Thank you.
Okay. Thank you. Thomas, will you start with the Port Arthur situation? It's an easy one. This case is the easier one. I'll take that, Thomas. The only feedstock that you didn't mention, which we also feed on top of ethane, propane, and naphtha is butane. So, the entire slate, you know that we've flexibilized the cracker in Port Arthur now in a way that it can take up to 90% of light feed. And yes, we almost run on a daily basis the models. So it works. It actually works. Margins in 2014 were excellent. They have come down a bit in 2015 reflecting the different price levels of gas versus naphtha, essentially.
Market forces versus what you call molecular focus is an interesting way of looking at it. Actually, our task within BASF is to have both in the appropriate businesses. In upstream, it's very much about product focus and focusing on producing the right molecules, having the right technologies in place and economies of scale. I think we're pretty good at that. For me, the ultimate test about our market focus is really when you talk to our customers because they give you pretty direct and unbiased feedback how they see BASF. In that respect, I don't think we have to be shy to talk about what has been achieved over the last couple of years.
There's a clear recognition within our customer base that BASF is probably the best company to go to if you really look for something innovative, a new solution, customer-driven in close collaboration. We have many, many examples, not just in the automotive industry, but also in the, for instance, home care, personal care industry, where we very, very closely collaborate with our customers, with our clients. This has developed very nicely. This is within a business that is something you would expect us to do. The more interesting part from my point of view is actually how can you present BASF as one company to our customers, especially to those customers who buy or could potentially buy a broad range of products from different industries, different businesses of BASF.
There we have seen we call this industry groups or customer focus groups. There we have seen very good results over the last couple of years because what we do here is very simple concept, obviously, to present BASF across its businesses to really have what we call tech days with our customers, where we talk about the entire slate of technologies which we have and opportunities to do something together with our customers. Doing together doesn't mean we just sell. It very often means we develop something together, and this has developed very nicely.
I mean, Hans, for instance, in North America, has done this personally with large customers, organizing this, spearheading these efforts, and it is really paying off because many customers actually, for the first time realize how broad the range of technologies and products really is BASF brings to the table. Actually this is a very different entrance ticket when you talk to large customers because they clearly understand what kind of value a company like BASF with its size and innovative power can bring to them, and this works very nicely. This is, for me, an added value of what has been done over the last couple of years. I think it's self-understood that we trying to be as customer-centric and conscious in our sales and marketing operations as possible. Yeah.
Really adding additional value on top by talking about BASF as one company adds value from many, many customers' point of view.
We're now coming to the next question from Rakesh Patel from Goldman Sachs.
Thanks. Just a couple of questions, if I can, on the functional materials business. I wonder if, first of all, you could give us a little bit of color that you're seeing in the chemical and refinery catalyst business, given the sort of large build-out we've had in the past. Are your customers now adopting a wait and see attitude on their investments, going forward? Then secondly, just in battery materials, do you think longer term this can be as profitable as your auto catalyst business? What share of electric vehicles do you think we need to see to achieve that same level of profitability? I'm just trying to figure out what the path is for you to sort of grow that business. Thanks very much.
On your first question with respect to demand in chemical catalysts, we've seen a very strong fourth quarter for chemical catalysts. I was always a little bit concerned when I looked at the forecast that I got from my catalyst folks on their chemical catalyst sales for Q4. They had an outstanding fourth quarter. It looks at this point in time like Q1 also will deliver good results. From a demand perspective, that overall seems to be very healthy. Now, your question on battery materials is obviously a difficult one to answer. We are, as you are aware, we're building a business from scratch.
It's based on research on BASF's research, and we did a string of smaller acquisitions, acquired Novolyte, acquired the electrolyte business from Merck. We acquired Ovonic. We invested in a cathode active material plant in Elyria, Ohio. Yesterday, we announced the joint venture with TODA in Japan, where we will have, or where we do have a majority position. This is a business really in its infancy stage. Made a conscious decision there. We see this as a very attractive growth area for BASF. At this point in time, it is small, very small, but it should reach a, let's say sizable sales, so in the order of magnitude of minimum EUR 500 million by the turn of the decade, 2020.
Still some time to go, and I said on a similar question that came in the morning. It's quite interesting to follow the analyst reports on EV, so electric vehicles. They read a little bit like the weather report. Depending what the mood is, you see big numbers for EV or not so big numbers in the next report. We believe, looking overall at regulations and standards for emission standards for the automotive industry, our firm belief is they can only be reached with electromobility, whatever the mix is there between hybrids and full EV, and that should form a good basis for our business. Now always keep in mind when we talk about battery materials, this is not about BASF producing batteries.
It's not about BASF producing cells. We focus on where we think chemicals can make a difference and chemistry can make a difference, and this is electrolytes and cathode active material.
Thanks very much.
Yeah. Now we're moving on to Martin Roediger from Kepler Cheuvreux.
Thanks also. Two questions from my side. First, on loss-making activities at BASF. When I see the 5% EBIT margin in Asia, and you mentioned in this call that you have good margins in the downstream chemical activities, so Performance Products and Functional Solutions, then my conclusion would be that petrochemicals in Asia as well as intermediates in Asia is loss-making. Can you confirm that? And also in regards to loss-making activities, are your E&P activities in the North Sea also loss-making at the current oil price? I mean, right now in Q1. The second question is on targets. At the end of last year, you scrapped the target for 2015, and at that point on, we were being told that we should wait for an update for the targets for the year 2020.
Now we have Q4 finished, and I have not seen any update on your targets for 2020, so maybe you can do that right now. Thanks.
Yeah. Very fair point. Loss-making activities. Nope, our petrochemicals activities in Asia are not, or in China are not, loss-making. Same holds true for exploration & production activities in the North Sea. Which doesn't mean that we are satisfied with the profitability of our petrochemical activities in China, to make this very clear. Targets for 2020, I don't think that too many people were really interested in 2020 quantitative targets at this point in time. We have just been talking about 2015, and we made the disclaimer that there's lots of volatility and uncertainty going forward. This holds even more true for five years and not just 12 months going forward. What we have in mind, Martin, is that we will spend much more time with you in September when we will have an investors day.
Actually, it will be two days almost, where we will go through all of our businesses, and then we will have, let's say, an educated discussion about the long-term targets and path forward. I think this is the right point in time to do this. It is pretty clear, since 2015, target achievement is less certain than what we had said three or four years ago, that from today's point of view, it would be not very wise if you just now draw a line between the, let's say, new targets for 2015 and 2020. So far, I have seen no analyst actually doing that. Yeah.
We come to the last question from the first round, and this is from Lutz Grüten, Commerzbank.
Yeah, thanks for taking two questions on Europe. The European Chemical Association, CEFIC, seems to have made a quite bullish call on chemical production growth outside Germany but in Europe. Is this something you can share? Is this something you were already experiencing in countries like France and Italy, for example, that there is a strong growth and the recovery already in 2015? And then question related to that one, you mentioned that the margin in Europe in petchem was up. Is this only due to cracker margins and raw materials, or is this also related to a stronger demand driven by that what I've just mentioned before?
Europe, yes, we have seen a little bit of recovery in countries like Spain. What is the importance of Spain for the European chemical industry? It has a certain significance, but still it's limited. At the end of the day, it's the major chemical hubs are the Netherlands, Belgium, and Germany and France in a certain way. This is really where it makes a difference at the end of the day. I have complained a little bit about the lack of growth in 2014. We are not very optimistic about 2015 when you look at the overall macroeconomic set of figures. Our assumption for our guidance here is this, that Europe continues to lag behind in terms of growth.
There might be a little bit of a recovery, you know, but it's not really a booster and will not really. Our position today would not really accelerate over time. We probably need more economic tailwind for that to happen. Petrochemical margins in Europe.
Yeah, this was something you've mentioned in your speech.
Yeah.
That the petchem margin was slightly up, but this seems then entirely driven by the cracker margin and raw material effect and not by demand, if I follow.
Demand has been relatively sluggish or I'd say put it positively, kind of stable in Europe. We are very much talking here about a raw material price effect. Yeah. Absolutely.
Thank you.
You're correct. Plus, keep in mind there have been outages, et cetera, which also affect then the pricing situation. Yeah. At least temporarily.
I'm inserting one, or a set of questions from Mutlu Güngördü from ABN AMRO, who cannot be here with us today. Basically, he wanted to know on the chemical segment, how much will plant startups add to volume growth, and what is the level of expenses that we should expect for the startups in the chemical segment? Then secondly, on nutrition and health, he wanted to know, why do you expect a considerable increase in volumes?
Yeah. I will take the first two, and then Hans, you talk about nutrition and health. Startup costs this year, approximately, I think I mentioned it in my little speech, EUR 150 million-EUR 200 million.
This is slightly higher than what we had expected a year ago. What is the contribution of new capacity, available capacity to projected growth in 2015? When you talk about chemicals, excluding oil and gas, we anticipate to grow more or less in line with overall market growth. We said market growth chemicals is about 4.2, 4.0%, so maybe slightly above that. About 50% of that growth should come from additional capacity which came on stream over the course of last year, or will come on stream in 2015.
I didn't get the first part of the question.
Nutrition and health, why do we expect considerable increase in volumes? Among other things, in the aroma area, from our investment that we did in the menthol plant, that should drive some of the volume growth, in nutrition and health in the year 2015.
Now we are moving into the second round of questions, and we start with Tim Jones again.
Yep. Thanks, Maggie. Two questions. I apologize to mention FX again, but firstly, on FX, your budget for the year is 1.20. Obviously, the rate is much more favorable than that at the moment. How quickly does the improvement or the weakness of the euro feed through to your business? So I guess really what I'm asking is what's the hedging policy at BASF, and how slowly do FX benefits feed through at the EBIT level? The second question is about pensions. So obviously your pension deficit went up materially. Can you just remind us, is that the unfunded scheme, Pensionskasse? And in which case, does that have any impact on your cash flow contributions over the next couple of years? Or is it just purely an accounting issue around discount rates? Thank you.
Tim, it is a pure accounting issue, I'd say, at this point in time. We have made one contribution to one of the plans, which is the U.S. plan, in the order of magnitude of $200 million. What you see is completely driven by discount rates. On average, the discount rate came down by 150 basis points in 2014. We provide the sensitivity there for 2014 as well as for 2015. By the way, that does not only have an impact on our pension contributions.
It also has an impact on the asset side, because as a result of the pension obligation increasing by EUR 3.6 billion, there is also a roughly EUR 1 billion deferred asset position that goes on the books. Now, with respect to foreign exchange and hedging policy, we're typically hedged for all booked positions in foreign currency. That gives you an idea then. When I say booked positions, you look at our accounts receivable and the time that we have in the books there, which is on average somewhere in the order of magnitude of 60-70 days.
We also, to a certain extent, in certain currencies, we also hedge the planned exposure there, in particular for the U.S. dollar, and that can go out to somewhere in between 6-12 months.
We're now moving on to Christian Faitz, Kepler.
Yes, a couple of questions, please. On the oil side, can you comment on the current situation in Libya, what is happening there or not happening there? There was a write-down in the Qatar gas field. Can you also elucidate what happened there? Is it the Qatari government's trying to build a football stadium there or something, and you had to shut that down? In terms of absolute chemical margins, I mean, you seem to be of the few that you can keep absolute chemical margins in a declining oil price environment. Can you elucidate how that works? You also mentioned in your downstream businesses that obviously, contracts are longer, maybe even up to a year.
I mean, these contracts are not rolling over on December 31st, 2015. They are rolling over all the time. What are your customers at this point in time when a contract is rolling over telling you? How tough are those pricing negotiations? Thank you.
I take the Libyan one and the margin one, and then Hans will talk about what happened in Qatar. Offshore Libya is okay. We're producing offshore, and we can have what we call these liftings from time to time. Onshore is very, very difficult. We had to stop again in December. It's extremely volatile. Actually, it's almost not worthwhile to comment on individual days. Are we starting up? Do we shut down again? What is pretty clear from today's point of view that we will not in Libya in 2015 achieve our, let's say, nameplate capacity. We always produce something like 80,000 barrels a day. That is very, very unlikely from today's point of view.
I can frankly, Christian, give you no forecast because it's such a volatile is not really the right word to describe the situation. It's a very uncertain and very dangerous situation. To exemplify this, at this point in time, we have no expert
On the ground, because we cannot ask any one of our employees to go to Libya. In some cases, you need experts to increase production levels again, because there is also some technology involved. The planning assumption is that Libya onshore will stay at relatively low levels. The good news here is that with the lower oil price, the opportunity losses of Libya have come down. I mean, we always try to look at the positive side of things. The margin story, yes, our target is clearly to maintain what we call absolute margins. This is demand supply driven. So far demand, not looking at China in particular, a couple of products in China, demand is still solid or even slightly growing.
That is, I think, the precondition for being able to maintain margins. If we were heading towards a real slowdown, macroeconomic slowdown, then it would become extremely difficult. So far, I think Q4 has demonstrated that we were able in the Chemicals segment, which is essentially upstream, to achieve that. However, the rollover time, cycle time in this business is relatively short, 30, 60 days and things are done. In downstream, I think I talked about it's extremely difficult to predict what's going to happen, especially when we would really get increased volatility.
If the oil price now is, let's say, stabilized at current levels or slightly above, I think we can cope with that situation better than going up, going down, going up, going down, because then discussion with customers become kind of difficult, more difficult, put it that way. Qatar?
Now the soccer field in Qatar would have to be offshore, so floating field. What we did is, we had one well there, offshore, where we had to come to the conclusion in Q4 that it would not be economical to actually continue. As a result of that, we took the write-off. Unfortunately, in the world of oil and gas, that happens occasionally. Shouldn't happen too often, but occasionally it happens.
To make this very clear, we discovered gas, so we could produce. The problem is we need a link into the pipeline network, and that is nothing we can achieve at this point in time. Therefore, it's not economical. Yeah.
We are moving on now with Laurent Favre from Bank of America.
Yes. I've got a question on MTP, please. When you presented this project about nine months ago now, I guess you were talking about the strategic side, which was not being short properly in potentially a short market. There was an economic side which was making a good return on a potentially huge investment. Can you talk about those two sides in light of what we've seen in the past six months in terms of energy prices? Next to that, are we now seeing 100% of the investment in the EUR 19.5 billion CapEx guidance, given that this project is slowed down.
Yeah.
Are we now seeing some of that investment away from the 15-19 CapEx budget window?
Yeah. The EUR 19.5 billion for the next five years includes all the ideas and projects which are under consideration at this point in time. That is the case, yes. With regard to the relative attractiveness of the investment, gas versus naphtha prices, propylene prices, I think Hans-Ulrich Engel will fill you in.
MTP at current price levels looks still attractive. It's methane to methanol to propylene. As we said, as you mentioned rightfully nine months ago, we'll take our time to make our decision, and we'll make that very diligently. Don't expect us to make a final investment decision prior to the middle of next year, which will be middle of 2016. At that point in time, we will have seen more of the current developments. We'll get a better feeling for what's gonna happen on oil prices, on natural gas prices.
Now natural gas prices, when you look at them in the first quarter of 2015, despite the strong winter that we have, at least on the East Coast, and Bill is here, he can probably tell you stories from Boston which are quite amazing. The average natural gas price is at, well, Q1 so far is at around $2.80, which gives you a significant advantage compared to natural gas prices when you look at them in Western Europe as an example. At this point in time, I'd say that's still an attractive project, but we'll take our time. We'll make up our mind, and we'll then make our decision based on that.
Maybe as a follow-up, I think the budget for North America CapEx is EUR 5.2 billion as a percentage of the 19.5. Away from MTP and Ammonia JV, what are the big investments in North America that you're planning?
We have a number of investments that we have on the list. There's the ammonia investment. We just announced that we closed the transaction with Yara. We'll start and put concrete and steel in the ground relatively soon. There are a number of other highly attractive projects that we have in the U.S. Please accept that I don't reveal what we have in the plan, but then we also have things in there which we'll finalize in 2015, such as, for example, the formic acid plant, the surfactants plant. A number of things that we have in the portfolio.
There is one additional factor which you have to keep in mind, another moving part, which is reconstruction costs. That's also something we have to consider. We have seen quite a steep increase in production and construction costs on the Gulf Coast, and it needs to be seen whether those costs will become, let's say, more acceptable going forward. That's also something we have to put into our little equation there.
Ladies and gentlemen, we're now zooming into the last three questions, and one comes still from Peter Clark from Société Générale, who cannot be with us today, but his question fits with what we were just talking about. He says, "The five-year CapEx projection is reined in slightly to EUR 19.5 billion from 2015 to 2019. Am I right in the aggregate chemical operation through to 2019, North America is now seeing a similar allocation of CapEx at around 35% of the total as in Europe?
Peter, I'd say, yes, that's approximately correct. Please keep in mind that also there's a fair share of oil and gas-based investments included in the European budget. If you take that out or if you just look at pure chemicals, I think your estimation is pretty close to expected reality.
This brings us to the next question from Ronald Köhler, MainFirst.
Yes, the first question on your previous 2015 guidance, your EBITDA guidance you provided in November last year, when you actually stated EUR 10 billion-EUR 12 billion, and rather at the upper end than at the lower end. Could you perhaps say a word on that guidance? How does that fit with your current EBIT guidance, and do you see this still as valid? Second point, a bit more short-term, Q1. You obviously mentioned you expect a growth in line with the chemical markets, 4% volume growth for 2015, if I rightly understood, in chemicals. Can you elaborate a bit on what happened so far? Let's say January, February, whatever you can see, chemicals volumes are similar to that. The second sub-question on that, natural gas trading.
We obviously had a cold winter. Do you think we can come back to kind of, let's say, historical good quarters, winter quarters on the earnings? Or is the structural margin pressure too high for natural gas trading not to come back to these kind of levels?
Yeah, Ronald, I think our EBITDA guidance for 2015 is still correct. We said something between EUR 10 and EUR 12. I'll leave it to you to figure out whether it's the higher end or the lower end. I think we provide you with some at least some clues today where it could be, and you should I think you should know us well enough to understand our let's say aspirations and what we try to achieve here. The trading environment and natural gas you will cover in a second, and how did January and February develop so far? It was an okay start into 2015. It's rather difficult now to interpret individual daily data, which we also get, because there are so many moving parts.
You know, prices coming down in some businesses, obviously driven by raw material costs. Volume developments are pretty different in the various regions. I don't want to speculate at this point in time. I think what we see right now is incorporated in our guidance for the entire year.
Now, on your question with respect to natural gas trading business, historic margins, structural issues. My view, this is supply and demand at its best, with stronger demand, meaning stronger winter. I think you will be back at higher margins, and back to, as you called it, more the historical type of margins. Second winter in a row, if you look at the price development where we have, at least on this side of the Atlantic, warm weather. If you look at the price development during the course of 2014, I think we've seen the low in price, as low as, I think, roughly $5 or even below $5 per million BTU in April of last year. From then, we've seen the price increasing.
Currently it's somewhere in the range of $750 per million BTU. There were voices out there that said gas will not come back from this $5 price level that we've seen in the second quarter of last year. We see that once demand is kicking back in, prices go also back up. That's also my expectation to see that going forward.
That means the strong winter we have seen here in the first quarter in Germany will be quite helpful for your business.
Uh-
in natural gas trading.
A strong winter is always helpful, yes.
Okay.
We are zeroing in on one question each, one by Thomas Wrigglesworth and one by Tim Jones, and then we will have a finishing. Thomas?
I had three. I pick one then.
Which one do I actually pick? I pick the ag one. This spectacular V-shaped recovery in the ag business from the third into the fourth quarter. You can explain it with, you know, the way the season started last year was 2013 versus 2014 in Brazil. Is there something the organization has learned suddenly from the third into the fourth quarter? I'm specifically asking about Becker Underwood, because that's the new business that you have, and I suspect that's the business that gave you trouble in 2014. With your guidance in mind, is it the biologics business that you see considerably improving as you go into 2015? Is that the reason behind the improvement?
Yeah. Again, Thomas, I caution you a little bit to put too much weight on individual quarters in that particular business. Functional crop care, that is Becker Underwood, actually has developed very nicely and according to our plan and the projection that we had made before we made that acquisition, actually. We are very satisfied with that development. It's gaining traction. It has been a very, let's say, U.S.-centered focused business, and the task for the team is now to globalize it, and they already had made some progress in Latin America.
I think we will grow it in a very nice way, and it adds new products to our portfolio which we haven't had before, and the growth rates for these functional crop cares, biological crop care should essentially be higher than on average for crop protection products. We are quite optimistic about it. Yeah.
Final question now comes from Tim.
Yep, thank you. Just looking at some of the numbers or the guidance that you've given us this year. EBIT's flat, CapEx down. I presume working capital will be better because 2014 wasn't great. You're not gonna do any big M&A. I'm just wondering what you're gonna do with the big pots of cash that you're gonna have at the end of this year. It's the age-old question, buybacks, extra dividends, at what point do BASF management just tip the balance and do step up the payout ratio or do some special dividends or go back to buybacks that you've done historically? Thanks.
Could we answer that question at our Investors Day in September, Tim? Would that be okay? Between now and September, there's nothing new to report, actually.
Okay. Okay, we'll save it for September.
Okay, thank you.
Wonderful finishing. This concludes our conference this afternoon. It's also the end of our broadcast. As Kurt has already indicated to you, ladies and gentlemen, 2015 marks BASF's 150th anniversary. We are very honored and that we would like to invite you to our two-day Investor Day on September 28 and 29 here in Ludwigshafen. Our intention is that at this occasion, at this special occasion, we will present to you the entirety of BASF. We hope that many of you will take this opportunity and visit us here in Ludwigshafen at the largest chemical site and certainly meet with our senior management. At this point, ladies and gentlemen, I would like to thank all of our guests who are listening in via web or on the phone.
Should you have any further questions, then please contact the IR team. We are happy to help you. For those of you who are our guests here in Ludwigshafen, we would like to invite you for a small buffet outside, and there you will have additional opportunities to speak with our members of the management board to discuss BASF's 2014 performance as well as the expectations for 2015. I am happy to tell you that we'll have additional BASF board members and BASF representatives. Martin Brudermüller, our Vice Chairman, will be here. Michael Heinz, our Board Member responsible for performance products. Andreas Kreimeyer, our Research Executive Director and our Board Member responsible for crop protection, coatings, and South America.
Certainly, Manfredo Rübens , our President Finance, will also be there, and many other representatives who you have already met, maybe at the beginning, will be happy to answer your questions. With this, we conclude now, and we still wish you a nice day. Thank you.