Good afternoon, ladies and gentlemen, and welcome to the BASF 2011 annual results conference here in Ludwigshafen. At the same time, I would also like to welcome all of those of you who are watching the webcast or are listening by phone. BASF posted again excellent results in 2011, despite moderate global economic growth and higher market volatility. Following a soft fourth quarter 2011, latest macro indicators signal a moderate sequential improvement of global economic momentum during the first half of 2012. We will show you, ladies and gentlemen, that BASF is in excellent shape and fit for 2012 and beyond. With me today are Kurt Bock, our Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, our Chief Financial Officer.
Kurt Bock will highlight BASF's performance in 2011 and talk about the key strategic achievements of last year before he will conclude with the outlook for the year 2012. Hans-Ulrich Engel will then review the fourth quarter 2011 segment results, explain some details with respect to the financial statements, and finally provide you with some projections and good numbers for your 2012 spreadsheet. Afterwards, both gentlemen will be happy to take your questions. Now, please let me remind you that we are webcasting this event. We already posted the charts, the speech, as well as the press documents on our website at basf.com/share. Before we start, I also would like to ask you to please turn off your mobiles and BlackBerries because they could interfere with our microphone system.
Furthermore, I would like you to take a look at the disclosure and forward-looking statements page here, on the chart behind me. Actually, this brings me already to the end of my introductory statements, and I would like to hand over to Kurt.
Yeah. Thank you, Maggie, and also welcome from my side, ladies and gentlemen. We are glad to have you here in Ludwigshafen for our 2011 earnings call, so to say. Also, welcome those of you who join us via webcast. BASF achieved again new record sales in 2011. In the last 12 months, we reached sales of EUR 73.5 billion, up 15% compared with the full year of 2010. EBITDA at EUR 12 billion and EBIT before special items at EUR 8.4 billion also marked new record highs. We also delivered on our promise to significantly increase EBIT before special items adjusted for non-compensable oil taxes. We achieved EUR 8 billion, which represents an increase of 12%.
EBIT came in slightly higher than EBIT before special items due to the disposal gain from the formation of the Styrolution joint venture, which we formed on October 1st. Net income climbed to EUR 6.2 billion, an increase of 36%, and adjusted EPS reached EUR 6.26, up 9%. Finally, operating cash flow was EUR 7.1 billion, up 10% and a new record as well. In the fourth quarter, we saw, as expected, a slowdown in business activities, but we continued to pursue our value before volume strategy. Moreover, customer orders were down due to slowing demand and tight inventory management. This resulted in lower volumes and margins across most of our chemical businesses. Sales in Q4 increased by 10% to EUR 18.1 billion, primarily due to our successful price increases of 9%.
BASF achieved again a record EBITDA in the fourth quarter of EUR 2.9 billion, up 7%. EBITDA as well as EBIT of EUR 1.9 billion were positively impacted by the disposal gain of Styrolution in the amount of EUR 593 million. EBIT before special items declined by 14%, mainly due to lower volumes and margins in several of our upstream businesses. In addition, EBIT before special items was down as the styrenics activities were moved out of BASF into the Styrolution joint venture. Net income was EUR 1.1 billion, up 3%, and adjusted earnings per share were at EUR 1.05 in Q4, which is a slight decline compared with 2010. What did we achieve in 2011? We are on track with our announced investments for future growth.
Just to name a few, we successfully started up the plants of the second phase of the investments at our Verbund site in Nanjing and commissioned Nord Stream and the OPAL pipelines. In 2011, we have completed the integration of Cognis, and we are on track to realize synergies of EUR 290 million. Our Styrolution joint venture with Ineos successfully commenced operations on October 1st, as mentioned before. In September, we signed a contract with EuroChem to sell our fertilizer activities in Antwerp. In January of this year, we announced that we also signed a contract to sell our 50% share in PEC-Rhin in Ottmarsheim in France to our joint venture partner GPN, a member of the French Total group, thus completing our exit from the fertilizer business. We also delivered on operational excellence.
We finalized our next program, which will lead to more than EUR 1 billion of annual earnings contribution. BASF already has leading positions and fast-growing businesses in the emerging markets, and we will continue to build on these. BASF sales in emerging markets increased to EUR 21.2 billion in 2011. This represents 34% of BASF's total sales, excluding oil and gas. Since 2001, we have generated a compound annual growth rate of 13% with our activities in these emerging markets. We will further spur organic growth in these countries by increasing our sales force, strengthening our regional R&D, and investing in new production capacities. We expect that in 2020, emerging markets will contribute around 45% to BASF's sales, again excluding oil and gas.
In 2003, we set ourselves a goal of earning a premium on our cost of capital. Since then, we have earned a premium every year with the exception of the crisis 2009, which also included the first-time inclusion of Ciba. In 2011, we again reached a significant premium of EUR 2.6 billion on our cost of capital. We achieved this high premium despite a higher cost of capital rate. For 2011, the cost of capital rate increased from 9%- 11%, which explains the lower premium achieved. For 2012, we are also calculating with a cost of capital rate of 11%. In the coming years, we strive to earn an average premium on our cost of capital of at least EUR 2.5 billion.
Ladies and gentlemen, as you know, share return is of utmost importance to us. We stand by our dividend policy to increase our dividend each year, or at least maintain it at the previous year's level. We will propose, as you have seen this morning, to the annual general meeting to pay out a dividend of EUR 2.50 per share, an increase of EUR 0.30 or 14%. Over the past 10 years, the compound annual dividend growth rate was 15%. This reflects an attractive dividend yield of 4.6% based on the share price of EUR 54 on December 30th of last year. Moreover, we continue to deliver consistent long-term value for our shareholders.
Over the past 10 years, the average annual return on BASF stock was 14%, clearly outperforming the German and European stock markets, as well as the MSCI World Chemicals Index. In the last five years, which were impacted by the economic crisis, the outperformance was even better. Let me turn to the outlook for 2012, which obviously is much more important to you. Obviously, today, the uncertainty about the development of the next 12 - 24 months is much higher than expected a year ago. Our plan for 2012 is based on the following assumptions. First, in 2012, we expect GDP growth of 2.7%, the level achieved last year. Second, we expect global chemical production without pharmaceuticals and industrial production to grow by 4.1% respectively, which is below last year's number.
Finally, we assume an average oil price of $110 per barrel, as well as an average exchange rate of $1.30 per euro. In 2012, global chemical production, excluding pharmaceuticals again, will continue to grow in, from our point of view, in all regions. While the current uncertainties in financial markets will dampen growth perspectives, the chemical sector will benefit from positive impulses from emerging markets. In Europe, we expect growth at a lower rate. However, please keep in mind that we saw a significant surge in demand in Europe in 2011. In Asia, excluding Japan, growth continues to be strong at approximately 8%. Despite an anticipated slowdown in growth due to lower export demand, China is expected to still grow strongly with nearly 9% this year.
Based on these assumptions, the outlook for 2012 is as follows. We strive to increase volumes in 2012, excluding the impact from acquisitions and divestitures. We aim to exceed again the record levels of sales and EBIT before special items achieved by BASF Group in 2011. However, in the first half of 2012, we will most likely not achieve the exceptional high results of the comparable period of 2011. However, we expect to outperform during the second half, meaning higher results in the second half of 2012 than in the second half of 2011.
More specifically, we plan to increase sales and earnings in all our business segments, with the exceptions of the segment Chemicals, where we expect sales to be above last year's level, but earnings to decline due to margin pressures in petrochemicals and intermediates. Sales and EBIT before special items in Other will be lower than last year simply due to the formation of Styrolution now accounted for at equity. Looking at 2012 and beyond, we announced at our strategy day last November that BASF wants to deliver an EBITDA of EUR 15 billion by 2015 compared with the EUR 12 billion in 2011. With that, I would like to hand over to Hans, who will fill you in on some other details and the financials. Thank you.
Yeah. Thank you, Kurt. Good afternoon, ladies and gentlemen, also from my side. I will focus on my presentation on the business development in the fourth quarter of 2011 in comparison to the fourth quarter of 2010. We start with Chemicals. In Chemicals, successful price increases in all divisions led to higher sales. In addition, the start of the Styrolution joint venture contributed positively to the top line because feedstock sales to the joint venture are now reported as third-party sales. Due to weakening demand and ongoing high raw material prices, EBIT before special items came in significantly lower. In Inorganics, sales grew by 9%, mainly as a result of higher prices and slightly higher volumes. EBIT before special items was significantly up, driven by higher margins.
Following excellent results in the first three quarters of 2011, we saw a softening of demand in petrochemicals. However, sales grew by 9%. We increased product prices due to higher feedstock costs. Volumes were considerably down since customers speculated on falling prices and consequently delayed their orders. EBIT before special items came in substantially lower given reduced volumes in many product lines and lower margins, particularly for cracker products in all regions. Sales in intermediates decreased by 4% due to customers destocking at year-end. Accordingly, we adjusted our global capacity utilization and reduced our inventories. EBIT before special items declined. For the full year 2011, sales in chemicals rose by 14% and EBIT before special items reached a new high of EUR 2.4 billion.
Despite lower volumes in major product lines, sales in plastics increased due to higher prices, primarily in the Performance Polymers division. EBIT before special items declined considerably due to lower margins as a result of weak demand and increased raw material costs. In Performance Polymers, sales went up by 8%. Polyamide and intermediate sales rose, driven by price increases. In engineering plastics, high demand in North America compensated for lower volumes in Europe and Asia. EBIT before special items was, however, significantly lower due to the receding margins, especially in intermediates. Sales in polyurethanes rose by 2%. We realized higher prices in all businesses with the exception of TDI. TDI prices and margins remained under pressure since sizable new capacities came on stream during the year and higher raw material costs could not be passed on to our customers.
EBIT before special items was substantially down, mainly due to lower TDI margins. For the full year 2011, sales in plastics rose by 12% and EBIT before special items came in below the high level of the previous year. The Performance Products segment posted a 19% rise in sales. The inclusion of the Cognis businesses as well as strong price increases across all divisions contributed to this growth. Volumes, however, declined by 6% with a relatively strong volume decrease in paper chemicals and performance chemicals. EBIT before special items declined by 25% due to higher raw material costs, margin pressure and higher fixed costs partly related to the integration of Cognis. Special items amounted to EUR 125 million, mainly related to the restructuring charges in paper chemicals and the Cognis integration.
In Dispersions and Pigments, we posted higher sales in all regions and in all product lines except in pigments. The sales growth was driven by price increases and the inclusion of Cognis. Higher raw material costs could partially be passed on to the market. EBIT before special items declined substantially as a result of reduced pigment volumes and lower margins. Sales in Care Chemicals increased by more than 50% thanks to the inclusion of Cognis business. Price competition as well as tight inventory management by our customers resulted in a slight volume decline. However, ongoing price increases, especially for detergents and formulators, compensated for the decline in volumes. Integration costs related to Cognis negatively impacted EBIT before special items. In Nutrition and Health, the inclusion of the Cognis businesses and slightly higher prices contributed to good sales growth.
Higher fixed and raw material costs, as well as product mix effects, outweighed price gains. Consequently, EBIT before special items declined substantially. In paper chemicals, demand was down because paper producers ordered less given the weaker economic environment. Volume losses could not be offset by higher selling prices. Despite these challenges, EBIT before special items improved, benefiting from ongoing restructuring measures and stringent fixed cost reduction. In Performance Chemicals, price increases and the inclusion of Cognis lifted sales. However, volumes declined significantly due to destocking activities at our customers. EBIT before special items was lower due to reduced volumes and higher fixed costs. For the full year 2011, sales of the Performance Products segment increased by 28% to EUR 15.7 billion.
EBIT before special items reached EUR 1.7 billion, an increase of 11%. Volumes in the Functional Solutions segment were up 6% driven by growing demand from the automotive industry for mobile emission catalysts and automotive coatings. Demand from the construction industry increased slightly, primarily owing to improved building activity in North America and Asia. EBIT before special items more than doubled. Catalyst sales increased by 17% mainly due to higher sales volumes of mobile emission catalyst, particularly in Asia and North America. With EUR 676 million, the sales contribution from precious metal trading was up by 3.4% driven by higher prices. EBIT before special items improved strongly. In construction chemicals, sales were up 4%. The business environment in Southern Europe remained challenging. However, we experienced a positive development in demand in North America and Asia-Pacific.
EBIT before special items declined mainly due to higher fixed costs. We implemented restructuring measures to streamline our structures in Europe and Asia. Sales in Coatings increased by 8%, reflecting continued high worldwide demand for automotive OEM and refinish. EBIT before special items came in significantly above prior year. Coatings incurred high special items, primarily in preparation of the planned divestment of Relius Decorative Paints. For the full year 2011, sales in Functional Solutions rose by 17% to EUR 11.4 billion and EBIT before special items was up 20% at EUR 559 million. Now to Agricultural Solutions. While reaching new records in both sales and earnings for the full year 2011, Agricultural Solutions saw a slight sales decline in Q4 due to pre-buying of our customers in Q3 in South America and portfolio optimization measures.
In Q4, price increases of 2% were achieved, confirming guidance. Regionally, sales in Europe were driven by positive year-end business in France. In North America, sales were up due to higher fungicide sales. BASF's growing success in South America and other emerging markets has driven rapid growth of second half year crop protection sales over the past years, surging from EUR 1.3 billion in 2009 to EUR 1.7 billion in 2011. This corresponds to an increase of 31% in only two years. EBIT before special items in the fourth quarter almost matched the prior year's level despite an increase in R&D spending and selling costs. The investments for our future growth are reflected in the significantly increased peak sales potential of our R&D pipeline, which amounts to EUR 2.8 billion.
For the full year 2011, sales in Agricultural Solutions rose by 3% to EUR 4.2 billion. EBIT before special items was up 8% at EUR 810 million. In Oil and Gas, sales increased by 33% driven by higher sales volumes and prices in natural gas trading. In Libya, the onshore oil production restarted mid-October with 20,000 barrels per day and reached 60,000 barrels per day at the end of December 2011 compared to a production capacity of 100,000 barrels per day. EBIT before special items for the entire oil and gas segment declined by 4% in Q4 2011 due to lower production levels in Libya. Reported EBIT, however, came in 11% higher due to lower special items.
Net income after minority interests went up by 20% to EUR 276 million. Exploration and Production volumes were below previous year's level as a result of the curtailed oil production in Libya. However, higher oil prices partly compensated for the lower production volumes. Consequently, sales declined by only 4%. Sales in Natural Gas Trading rose strongly thanks to higher gas prices and volumes. Margins, however, continued to be under pressure by the relatively low price level on the spot market. This effect was more than compensated by additional earnings from the startup of the OPAL pipeline. For the full year 2011, the Oil and Gas segment reported sales of EUR 12.1 billion, up 12%. EBIT before special items decreased by 13% to EUR 2.1 billion.
Adjusted for nondeductible oil taxes, EBIT before special items came in 16% higher at EUR 1.7 billion. Net income rose by 15% to EUR 1.1 billion. In other, sales decreased by 30% due to the deconsolidation of Styrenics following the formation of the Styrolution joint venture with INEOS on October 1st, 2011. EBIT before special items increased by EUR 128 million due to both lower hedging losses as well as lower provisions for the long-term incentive program. Positive special items of EUR 623 million resulted primarily from the disposal gain of Styrolution. For further details, please refer to the annual report. We started the year 2011 with a cash position of EUR 1.5 billion.
With EUR 7.1 billion, we again generated an excellent cash flow from operations in 2011. Thereof, EUR 2.1 billion in Q4. Free cash flow reached EUR 3.7 billion, thereof EUR 768 million generated in the fourth quarter. In 2011, we stuck to our priorities with regard to the use of cash. We spent EUR 3.4 billion for capital expenditures, which was significantly up from previous year's levels. Major projects which started operations in 2011 included the expansion of the Nanjing Verbund site in China and the new methylamine plant in Geismar, Louisiana. In addition, we completed the new oleum plant in Antwerp, Belgium, and extended our natural gas pipeline grid with the OPAL and NEL pipelines in Germany. Net cash in, mainly related to the formation of the Styrolution joint venture, amounted to EUR 500 million.
We paid EUR 2.5 billion in dividends to our shareholders and minority interest holders, and we used EUR 2.4 billion for the repayment of debt. Other cash inflows include mainly the proceeds of the K+S disposal. At the end of 2011, we had a cash position of EUR 2 billion. Let me turn to our balance sheet. Compared with 2010, total assets rose by EUR 1.8 billion to EUR 61 billion. Long-term assets declined by EUR 445 million. Due to the sale of K+S shares, financial assets declined by EUR 1.1 billion. The Styrenics net assets in the amount of EUR 734 million, which were reported as assets of the disposal group, were deconsolidated with the startup of the Styrolution joint venture on October 1st, 2011. BASF's 50% stake in the Styrolution joint venture will from now on be reported at equity.
Our equity ratio improved from 38.1%- 41.5%. In 2011, we repaid two bonds in the amount of EUR 1.2 billion. We reduced net debt by EUR 2.6 billion- EUR 11 billion, a reduction of EUR 650 million in Q4 alone. With this, our net debt EBITDA ratio is now below one. With our A1/A+ rating and a well-balanced maturity profile of financial debt, BASF has an excellent financial position. Now I would like to give you some additional information and start by our Operational Excellence Program, STEP. We are now taking the next step in operational excellence. Key focus areas of the recently announced STEP program are fixed cost reductions and margin improvements across the entire group. We expect the program to result in annual earnings contributions of about EUR 1 billion by the end of 2015.
Generating a strong cash flow will remain a key priority for 2012, and we will continue to keep tight control on our working capital. Our priorities for the use of cash remain clearly set. We continue to put great emphasis on organic growth through innovations. Therefore, we plan to increase our global R&D expenditures from EUR 1.6 billion - EUR 1.7 billion in 2012. We project CapEx spending of about EUR 3.5 billion. As demonstrated again this year, we remain committed to our dividend policy. In conclusion, BASF continues to be fit for 2012 and beyond. Thank you very much for your attention, and we are now happy to take your questions.
Yeah, thank you very much, Hans. Ladies and gentlemen, we have a new system today with respect to our questions and answers. Give me a minute to inform you. Basically, behind your name tag, you will find a card, which you have to please use and slide on the right-hand of your microphone into a small slot. Then it is important that you firmly insert this card so that then it gives basically the indication, and it shows up on the screen here. Also please automatically press also the speak button, and this puts you in the queue, and then we take you one after another. We would also like to ask you to please limit your questions to about two, if possible.
If you have any further questions, you can re-queue, and then we will start from the beginning again. With this, I would like to start with the first question from Norbert Barth. Comes Markus Mayer, and then Peter Spengler.
Can I start? Yeah. Mr. Bock, you said the outlook statement is important for us. You are right. Perhaps what I want to know a little bit or can you give us a little bit of flavor of what happened, especially with the beginning of the year 2012, so January, February are already closed. Can you elaborate a little bit how that business goes by volume pricing and by order intake? And also perhaps regarding to your guidance, full year guidance 2012, you mentioned EBIT before special item. You know, last year we have the special situation with this oil tax where you exclude that guidance. First question, is it on what is it this time really? And I believe it's now including the oil tax.
Would you give the same or are you the same confident if you exclude in the EBIT before special items also the oil tax? Because this year we have to expect some bigger figures from the oil tax side.
Yeah, thank you, Mr. Barth, for the question. How did we start into 2012? Let me start by talking briefly about Q4, because in Q4 we saw volume decline, as you noticed, also in chemicals. That means that essentially during Q4, there was inventory destocking effect, and customers became very cautious because they simply expected price declines. What we saw then in January, and this, you know, goes into February, is that they came back and they buy. Business is improving. However, volumes are still below the very high level we had achieved in the first quarter of 2011. You remember that the first quarter of 2011 was the absolute best performing quarter we have ever had.
I today, I'm not in a situation that I can tell you that we will have higher volumes in Q1 of 2012 than we had last year. That needs to be seen. It's coming back, and it's getting much better than what we had in Q4 over the course of the fourth quarter. Pricing is okay. We are still in an uphill battle to increase prices. Just to give you one example is polyurethanes, MDI, we went out and put price increases forward, which highlights our strategy of value before volume. This is still our preferred strategy. I think this is the value-creating strategy for the chemical industry, which could lead naturally sometimes also to volume losses because one or the other customer might say, "Okay, I don't accept that," but we are pushing very hard.
Order intake is above last year's number, but that is certainly also affected by price effects because we have seen steady price increases over the course of 2011. Excluding Oil and Gas, that was the other part of your question, we give guidance now for full year saying we want to increase sales and earnings above the record levels of 2011. We qualify this by saying most likely during the first half, we will not achieve the numbers of last year, which in itself is not really an extremely optimistic start into the year. However, we think based on our economic assumptions, GDP growth, chemical production growth, et cetera, that during the second half we should be able to outperform the numbers which we have achieved in the second half of 2011.
We stick to that guidance. It includes Oil and Gas, and we will not now go into segmental guidance. We certainly strive, that's quite clear, to improve our chemical earnings as well. That, to a certain degree, will clearly depend on the upstream business. We made one caveat where we said in petrochemical and intermediates, and I said this in my little speech, we see higher sales, but most likely, we will see some kind of margin squeeze because we are coming from extremely high margins, as you all know, especially in petrochemicals in 2011.
The next question now is coming from Markus Mayer, table 20, over here.
Questions. First, you named destockings. Can you give us a flavor from which region and which end customers these destockings are coming from? Second question on your STEP program, can you give us a split from which business unit or business division this STEP program or the cost savings are coming from?
Actually, I don't think that we have provided that detail of information about NEXT and STEP, which division, which segment will provide what number. What we have done over the past couple of years is that we detailed quarter by quarter, essentially, how much have we already achieved and what is the run rate. Actually, we overperformed compared to our EUR 1 billion goal for the NEXT program. We are very confident that we will achieve the STEP EUR 1 billion as well. Destocking, that was a pretty big effect actually in Asia. Asia cooled down. You saw that also when you look at our quarterly numbers for Asia cooled down quite a bit. There were also some portfolio and mix effects. I think Asia was an effect.
We saw a little bit of that in Europe as well and in the United States. Hans can probably better answer than I because that's your show.
Yeah, thanks, Kurt. In North America, what we've seen there is also in the fourth quarter tight inventory management. We've seen that in particular in going into the fourth quarter. I think as a result of the overall feeling about economic development in North America getting better, we actually saw that the situation improved in going into December. It's looking pretty good for the months of January now and also going into the months of February. There in particular, an industry that's going strong is automotive.
We come to the next question from Peter Spengler, table number nine. In front of us.
Okay, thank you very much. Two questions, if I may. First is on your sales projection. Can we add something like 2% to the chemical production growth in 2012, like, always? And the second question is on your business in the United States. There's quite a hype about shale gas and also oil production there. There's talks about new production facilities. Do you have plans to expand your business there?
You're absolutely right to refer to our target to increase our business by about 2% above chemical production. That is what we always have said. Obviously, this is a medium-term kind of average target. Can I promise you that we will achieve this number in every single particular year? No. Are we striving to achieve something like that this year? Quite clearly, yes. Yeah. Again, too early to say. Please.
Yeah, your question on shale gas, that is certainly providing a competitive advantage to the North American chemical industry. Just to give you an idea, average spot prices in the month of January in the U.S. were right around $2.50 per million BTU. Average spot price in Western Europe in excess of $8 per million BTU. Gives you. Pardon?
It's okay.
Gives you an idea on the environment there. What are we doing with respect to it? One, we started up last year in 2011, a new methylamines plant, which is natural gas, methanol-based. We're looking at the situation. We haven't announced any further major investments, but you see us taking advantage of that as an example now, with the revamp of our cracker in Port Arthur, where we will shift a little bit to lighter feed, taking advantage of low natural gas prices.
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Welcome.
We're now moving to the next three questions. First is Lutz Grüten, table 21. Then Tony Jones, 25, and Martin Roediger, table number 10.
Yeah, my first question is on TDI, actually. I think it's the second consecutive quarter where you report lower margins, and you're also saying that additional capacities are hitting the market and deteriorating the prices here. What makes you so confident that your own capacities coming on stream, I think end of 2014, along with your competitors, then will be absorbed by the market and you will come back to more healthy margins in TDI? That would be my first question. The second one, more a housekeeping question. You talk about feedstock sales in chemicals becoming third-party sales due to the Styrolution joint venture. Could you quantify that effect for the final quarter, please?
We have to think about the second question for a second.
We have an answer.
Oh, you guys have an answer? Okay, give the answer.
That effect is EUR 350 million in sales.
Okay.
What that is is the net effect of losing the Styrolution sales and then having sales coming out of the petrochemicals operating division.
To TDI, yes, your observation is absolutely correct. Squeeze on TDI margins over the last couple of quarters. As expected, we have to say. We knew that. That was going to happen because obviously capacity which has been installed could be forecasted already a couple of years ago. So that is no big surprise on our point of view. Our investment for the TDI expansion here in Europe, in Germany, is really based on midterm forecasts, where we see a balancing out of supply and demand over time. We will contribute to that as well because I think you are aware that we will shut down ultimately then our relatively small 80,000-ton capacity, which we have in Eastern Germany in Schwarzheide.
What is really important, the new TI plan from our point of view, as far as we observe the market, will have very, very attractive cash costs. Extremely attractive cost position, and that makes us quite confident that we will be able to reap some benefits from that investment, absolutely.
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No.
to say $100 and competitors are $105 or $110?
No.
No. Thank you.
No.
At least I tried.
Sorry.
Now we are moving on with Tony Jones from Redburn, table number 25.
Some of us are trying to reconcile your new guidance in a period of fairly challenging visibility with that old market assumption that at these kind of times, visibility for BASF is like a few months, you know, like three months forward on the order book. Does that imply that the mix of the business over time has allowed you to get better visibility and your order book is further forward than, say, just three months, especially some of the downstream businesses? Or are you just hoping that margins recover on restocking? That's the first one. And then secondly, last year, a few of the businesses had quite a big mismatch on input cost to selling prices, especially downstream. Are you able to fix that? I mean, are you looking at any measures to, say, shorten the price duration of certain contracts?
Is there anything you can do to try and close that gap? Thank you.
Yeah, thanks, Tony, for that question. I think both questions are related with each other. It's an important point. Did our mix portfolio change over time? Has it changed? And does it really then affect our ability to forecast the path forward? There are a couple of things where we see upside potential for 2012. First of all, we had some businesses which were not performing at the level of excellence that we want them. One is obviously paper chemicals, and we have talked about this for quite some time because it's a restructuring case coming from the combination of our business with Ciba's business. This is an ongoing process. We are making pretty good progress, I would say, and this will help us through 2012 as well.
The other one, where we are heavily affected by the business environment, is construction chemicals, apparently. We expect a little bit of a bottoming out of the market. You see first indications in North America for that, although at a very, very low level, and we shouldn't really be overconfident here. It means essentially that, also in construction chemicals, we see an opportunity to improve over what we have achieved in 2011. We had the Cognis integration. The Cognis integration did not just bring, let's say, special items, it also had additional costs which are accounted for as normal ongoing costs. IT integration is just one example. Those costs will not rehappen again in 2012. This is all downstream activities as you notice. Automotive, I think Hans already alluded to it.
Automotive performed much better as an industry in 2010, 2011 than what we had expected. We are quite optimistic, frankly, for the industry and as particularly for our customer portfolio, which we serve in Asia, in North America, but also in Europe. That tells us that there might be some upside potential as well. The problem is still, and you mentioned the level of visibility, that the orders on hand tell us something for the next two to three to maximum four months. Beyond that, it's pretty cloudy and actually pretty dark out there. Our full year guides are certainly based on the underlying assumptions. Again, I repeat myself, there is global economic growth and also chemical industry and industrial growth.
I think these are a couple of explanations where we see, yes, the portfolio has shifted, and yes, we have opportunities. What has happened in 2011 is also too important to keep in mind when you talk about the downstream businesses. We had a huge surge in prices and margins in our upstream activities, petrochemicals, intermediates. These guys sell at market price to our downstream businesses. Our downstream people had to fight very, very hard to maintain their margins, bring up prices. This simply takes time, as we all know. In certain industries, you have annual contracts. Now we are working through this, and we also will see some effect from that kind of adjustment through 2012. These are essentially underlying positive developments. We have to realize them.
Still, we have to work very hard to make them happen, but we have an opportunity here.
Now we come to the next question from Martin Roediger.
Yes, two questions from my side. First, on Others segment. Taking out the Styrenics business and soon also the fertilizer business, would it be fair to assume that this segment will generate a loss of EUR 800 million on a normalized basis, ceteris paribus? Or should we keep in mind that you had some release of provisions for the BOP program or any windfall profits from the hedging result? And if so, can you give us an indication of what was the effect from both in 2011? And secondly, on financial results, could you provide us with a pro forma profit contribution figure for Styrolution in your financial result for 2012, or at least for a pro forma for 2011?
Maybe an indication which or how much of restructuring costs we have to assume for Styrolution in the next years to come?
On Other, your question is, can you assume EUR 800 million in cost on an ongoing basis? I'm just trying to think about that, with now Styrolution's moving out, with fertilizers moving out. I'd say that figure is slightly too high. What we have in other is the cost for our corporate R&D programs. It is the cost of our central corporate organization. So if I think about that, I'd say that figure of EUR 800 million is too high overall.
Financial results and Styrolution. Please keep in mind, we will now account for Styrolution at equity, which means we do not control the restructuring cost of Styrolution directly anymore.
We are just one shareholder with 50% share. We are sitting on the board of Styrolution, but the Styrolution management will essentially take those decisions. I cannot tell you today what kind of restructuring measures and what kind of costs they plan for 2012. We expect, obviously, based on the combination of both businesses, the INEOS and BASF, that we will have a healthy financial income. That income is slightly affected when you look at our annual report, that is the beauty of having now the annual report in front of you, by a very scrutinized and detailed accounting for the options we have in place for placing our share to INEOS or INEOS asking us to sell to them. Because under IFRS now, we have to, on a quarterly basis, determine the fair value of those options.
That will also impact the financial result. It's something which doesn't add any value. It keeps the accounts maybe happy, but it's. Take a look at the annual report. It's amazing what you have to do today.
This brings us on to the next question from Jeremy Redenius from Sanford C. Bernstein, table 37.
Hi, this is Jeremy Redenius. Hi. Could you please give us an indication of the production level you achieved in Libya for the full year of 2011? On my math, you averaged about 35% of your potential volume there. I'm wondering if you could confirm that, and then also your expectation for 2012. Second, could you talk a little about your expectations for wage inflation in 2012 and also changes in headcount, please? Thank you.
Jeremy, I didn't get your first question. Could you repeat it again?
Sure. Could you give us an indication of the production volume you achieved in Libya in 2011 full year?
[audio distortion] In Asia, it's obviously much higher than in Europe. As you probably follow here in Germany right now, we have negotiations starting between the unions and the employers, and they expect 6%, and that is certainly higher than what we want. I do not want to speculate about this, but in the past, we always had across the globe something like 2%-3% wage increases on average. Headcount increase approximately 1,500 people globally, something like that. It's something we control very closely on a local level or business level, but apparently in some cases, it's directly linked to volume as well and business opportunities. It's always a little bit difficult to give you a precise number for the entire year.
This number will be adjusted according to business needs, obviously.
Jeremy, your question on Libya, I tried to do the math quickly. We ran in Libya till, let's say, roughly the end of February, using the full capacity that we have there. Then, we had a ramp-up phase during November that got us to, on average in the second half of December to 60,000 barrels per day. I'd say if you take all of that together, we were probably somewhere in the range of 25%-30% of the capacity that we have in Libya.
Richard Logan from Goldman Sachs, next question.
Okay. You mentioned about some restocking going on at the start of the year. I just wondered if you could give us a sense of your perception with regards to inventories in the chain. And then secondly, I remember previously whenever you completed the Ciba integration, you announced the Cognis acquisition fairly shortly afterwards. You know, given that you've now completed the Cognis integration, should we expect a significant acquisition in the coming months? And also with that, I mean, are there any particular areas that you would say are more likely than others? I mean, would you potentially consider oil and gas assets? Thanks.
Stocking, restocking, and I start with the Ciba, Cognis. Going by that pattern, Ciba, Cognis, obviously, we are working on the letter C right now. But seriously, it's too early to say. I mean, we are not really motivated by, let's say, our integration experts now being idle, and let's do something about it, but more by the strategic fit and by the financial attractiveness. This is everything I can say right now. There's nothing really to add. I wouldn't expect, if I were you, a pattern that something has to happen almost automatically. I agree for now, a couple of years we had every other year a mid-sized acquisition from our point of view.
What you have seen, obviously, is that we are quite busy building up capabilities in some areas, particularly in batteries, where we have now. We've done three smaller acquisitions, all capability-driven, which is a different pattern, apparently, than acquiring a Ciba or a Cognis, new businesses or complementary business in some cases. This is also important for creating future growth and earnings.
Now, if I get your question correctly, restocking, destocking, where are our customers? That was the question. Where are we? As always, not that easy to tell because our customers have a tendency not to tell us absolutely where they are with respect to their inventories. But what we've seen is that basically everyone has managed their inventories tightly during Q4.
As a result of that, our assumption is that our customers are running their inventories at what's called safety levels. Not a lot of room to go below that. Actually, probably no room to go below that. As a result of that, the expectation is that we'll see some restocking activities. Still very early to tell because there's a number of, let me say, unknowns out there, in particular with respect to Asia that makes things a little bit difficult at this point in time to comment on. That simply has to do with the fact that this year we have Chinese New Year already in January, while last year we had in February.
Comparing there, in particular in Asia, you've got a distorted picture, which makes it a little bit difficult to comment on that. Overall, as I said, based on what we see, customers running on very low inventories.
now our next three questions come first from Annett Weber, then Christian Faitz, and finally Ronald Koehler. Annett is table 24.
Just a quick housekeeping question on Cognis. You mentioned a couple of times that there had been integration costs in Q4 again that were not shown as special items. Can you possibly quantify the impact on the Q4 results in performance products, please, for us in Q4? The second question relates to the pricing side. You posted a 9% price increase year-on-year across the whole group in Q4. When you look at this pricing number in comparison to Q3, where would we see the percentage price increase Q4 versus Q3? Then the third question relates to the overall question on the raw material cost increase that you have seen in Q4 compared to the prior year quarter, please.
Integration costs, Cognis, not accounted for as special items. About EUR 40 billion in Q4. It seems to be some kind of a run rate as well. Price increase consecutively Q4 over Q3, I don't have it at the tip of my finger, I have to say. We have to look it up, and I'll give you the number later on. Raw material price increase was quite dramatic, actually, throughout 2011 going into the fourth quarter. That, as I said earlier, is probably our biggest concern we have right now. If the oil price really continues to go up, then the world would look probably differently.
If the higher oil price would just be an indication of a good, thriving global economy, that would be nice, but apparently the oil price is not entirely driven by economic considerations. The raw material effect? I don't think we ever quantified this, actually. We try to keep it a little bit opaque here.
Christian Faitz, table number 11.
Yeah, thanks. Just quickly, two things. First of all, Agricultural Solutions. Can you give us an update about current trading conditions? How has the year started? How has the crop season started for you on the volume side and pricing side? Second, maybe a more complex question. How do you deal at the moment or maybe for the business year with the spread between your oil-linked contracts for your gas trading activities and the spot market in gas? Because apparently there seems to be somewhat of a gap which could at some point lead to a certain loss situation in natural gas trading simply because of the spread.
Because my understanding is you are buying oil-linked, an oil and gas price from Gazprom, and you can only give, obviously, the spot market price into your customer base. Thanks.
The question about our ag business. First of all, let me state that just looking at Q4 is not really a good indication where we are in that particular business because Q4 is just a final part of the year, cleaning up, so to say, housekeeping. The start into the first quarter was excellent. What we have seen so far, we are very confident for 2012 to see good volume growth, also based on overall our underlying good conditions in the industry. For instance, in the United States this year, we expect record acreage to be grown, 95 million acres. We've never seen that before. Yeah, I think the preconditions for good growth are there. On top of that, we have an excellent portfolio.
We had a press release.
Talk about that later. Last year about our pipeline, and you notice that we increased the pipeline value of our products from about EUR 2.1 billion, if I remember correctly, to EUR 2.8 billion based on very innovative actives which we have and very good formulation. We are optimistic for 2012. Should be a good year. The big disclaimer is always the weather, but that's sort of understood here. So far, yes, but it's still February. I mean, there are some early deliveries, farmers are picking up, but let's see and wait. What we have seen so far is good news.
Now with the situation that you're describing with respect to the natural gas trading business, we are dealing since late 2008, early 2009. That was the point in time when we started to see the decoupling of the spot prices from the oil-linked contract prices. We've taken a number of measures over this period of time now to deal with that situation. We have, to the extent possible, used the flexibility that we have in our long-term contracts. We have renegotiated contracts as everyone else in the industry has done. We are buying spot in the market, so we have a whole portfolio there.
You see how our natural gas trading business has performed in the year 2011, which is at or slightly higher than the level that we've performed at in 2010. If you look at Q4, the same is true there. Positive quarter with roughly, if I recall the figure correctly, EUR 120 million in EBIT. You see us in a very difficult environment there. On the one hand side, adjusting our purchase portfolio, and then doing the market what we need to do to keep our profitability in that business.
We're coming to the next question, it's Ronald Koehler again.
Yes. Hello. I have one question additionally to Libya. Obviously, you said you have ramped up to 60,000 barrels per day. Full capacity would be 100,000 per day. What is your goal? When do you believe you might come back to full capacity? I have an accounting question, IAS 19, pension accounting. The change here, which was just implemented and you should implement over the next years, what might that have an impact on your equity? And on the Others line in Q4, obviously, this was quite low. Was there any reversal of option plan or was it, let's say, yeah, what has driven the Others line to such a low level?
Yeah. I start with an answer to your Libya question. It's pure speculation. If I would give you an answer and say here's the point in time when we think we'll be back at 100,000, completely depends on the infrastructure. We could ramp up the production quickly, basically immediately, but it all depends on what can actually go through the pipelines and the terminals, and that's where the restriction is at this point in time. I can tell you when that situation will move so that we are able to produce the 100,000 and ship the 100,000 barrels again.
On your Others question, please keep in mind that in others you have the profit from the sale to Styrolution as one thing. You mentioned rightfully that there is, compared to prior year, if you compare to prior year, there's a significant impact there that comes from the long-term incentive program as a result of a lower share price in the end of 2011 compared to the year 2010. On your IAS 19 question and the equity impact, I can't give you an answer at this point in time.
Yeah. The next question, Fabian Smeets from ING, table number 41.
Two questions from my side. In the review on Nutrition and Health, you indicate results in 2011 were hampered by higher fixed and raw material costs as well as product mix effects. In your guidance, I think you're quite optimistic on the division, indicating you expect a significant improvement in earnings. What makes you so confident on passing on the raw material prices or maybe the mix effects in 2012? Secondly, I think you already highlighted it a little bit, oil. It is reaching new highs in euros every day. What is the response you are hearing from your clients to price hikes you are currently implementing? Or what is the response you expect maybe to see in the next months when oil prices move higher?
Okay. I'll try to take the question on Nutrition and Health. Yeah, we are quite confident for 2012
we had to absorb higher feedstock cost last year. That was quite a burden. We have worked also through price increases that should certainly help. It is a mixed bag of activities that you have to keep in mind. It's not just one, let's say, homogeneous business. We're talking here about vitamins, for instance, where we still see more or less good pricing. We talk about aroma chemicals, which doing well right now. We also see some restocking there. Overall the start into the year was good and so far there's nothing really we can add to that. With that, the other part.
Yeah, on the oil price, we've seen quite a development during the last three, four weeks, I'd say. I think what you see reflected in there are, let me call them, geopolitical issues that are driving, you know, the oil price and particularly the oil price in Brent up at this point in time. We're at $124 earlier in the day. You know what our forecast is with respect to oil. We say Brent on average $110 in the course of the year 2012. Obviously, with the volatility that we got used to over the last four or five years when you look at the oil price.
Our expectation is that we see a certain, let me say normalization of the oil price once the geopolitical issues cease to exist. Could that develop in a different direction? Could the oil price increase further? Absolutely. Then the question will be, where will that have a negative impact on the overall growth environment?
Question?
With this I break for a moment, and I'm plugging in one question that came via email. This question is from Andrew Benson, and he asks: Will BASF buy back shares in 2012 post the AGM approval?
Yeah. Hi, Andrew. Thanks for the question. As you rightfully noticed, we asked our shareholders meeting, AGM now to approve again a stock buyback program, which we had in place until 2008, where we for about 10 years bought back about 20% of our outstanding stock. This is a precautionary measure, so to say. It needs to be seen then over the course of the year, what kind of ideas we have. So far we are cash flow positive, and we have reduced our net debt quite nicely and if this is a further opportunity to improve our capital structure, I think that Hans will come forward with a proposal, but simply too early to say. It depends really on investment needs. Maybe we have an idea with regard to M&A.
I think Hans can still add to the IAS 19 just to explain also how detailed our annual report is at that point.
The quick check with the experts allows me to say that we do not expect a significant impact, or we do not expect an impact there at all.
All the details attached on page 155 of the annual report.
On this, we go on now with Jean de Watteville from Nomura International, table 45.
Yes. Hi, good afternoon, Jean de Watteville from Nomura. Just two question. The first one, I think you mentioned on some of the areas where you would be interested by acquisition. You mentioned water chemicals. I'm just wondering whether you could elaborate a little bit on that subject. What are the technologies and assets that you at BASF currently has in water chemicals, and what would be a nice complement? Is that you're looking for technology, market access, more assets, higher market share? Just elaborate a little bit what you're looking for here. The second subject is going back to the shale gases. Obviously significant difference of competitiveness for petrochemicals between North America and Europe. We know that there is some potential shale gas projects in Europe. It's very early days.
We talk about Poland, maybe in France. I'm just interested, what's BASF's position here? Obviously, you're a major consumer of gas. You're also in gas trading. You're an E&P company. Are you actively lobbying for the development of shale gas in Europe? Are you seeking technological partnership so that you can play a role in the development of shale gas in Europe, or you're just an observer of what could happen here? Thank you very much.
Yeah. Thanks, Jean, for the question about water chemicals. I think it's fair understood that water in itself is a big mega trend and a growing business opportunity. What we won't do. Let me start by what we won't do. We will not go into servicing water or sewage plants. Forget about that. That is not our business. What we will do is to develop, and we acquired actually a water chemicals business with Ciba, as you know, to develop additional chemicals to further improve the processing of water, wastewater, et cetera. One core technology in that respect are membranes. I don't know if you noticed that we made a pretty small acquisition of a German-based company called inge watertechnologies AG. A few dozen people actually, but they are very
Well-regarded specialist for membranes. The big issue now is for us, how can we combine their expertise and their market access with our knowledge, especially in certain specialty plastics to come up with better membrane technology. That, for us, is a path forward to really offer better technological solutions to our customers. Just providing another chemical which is already in the market doesn't make a lot of sense for us. It's really about innovation and new technology. It's an emerging field of activity. We have this water chemical business, but now we are working on the membranes. We might take a look at other opportunities as well, whether we can hasten up the development process, maybe by making one or the other smaller acquisition. It's simply too early to say.
What we have done, we identified the area as a growth opportunity for BASF. We have expertise, which we now combine with something which we have acquired, and I think we can go from there.
Shale gas in Europe, a lot of discussion, a lot of talk about shale gas in Europe. You already mentioned some of the hotspots. You mentioned Poland. In particular, Exxon is active there. Interestingly enough, Exxon is looking for farm-in partners, which Exxon does not usually do there when there are a lot of positive aspects with respect to their EMP activities. You mentioned France.
If I understand the situation correctly, France does not allow hydrofracking, which is essential to produce shale gas, so I don't see real potential there in France. You asked with respect to our activities in shale gas. Do we have any shale gas activities at this point in time? No, we don't. Do we have the technology in our portfolio, the hydrofracking technology? Yes, we have that. We have licenses in North Rhine-Westphalia, where we're actually doing desktop studies, but we haven't drilled any wells or anything like that. If you compare the situation in the U.S. to the situation that you find in Europe, I think there are a number of major differences. The first difference that you have is population density.
When you look at a shale gas field and you look at the number of wells and you look at how many wells need to be drilled, it's a lot more than in conventional gas drilling and gas production. As a result of that, I think we would run into some environmental discussions and issues in particular in Western Europe when it comes to shale gas production. The regulatory environment is different in the U.S. compared to Western Europe in particular. I think that probably the highest prospects for shale gas being produced eventually you'll have in Eastern Europe and there in Poland, because Poland tries to become independent of natural gas import.
There's also discussion about shales in Hungary, Bulgaria, and Romania, but I'd say very, very early stages. Our assumptions are that shale gas in the European market will not play a significant role in the next 10 years.
This brings us to the next question from James Knight, Exane BNP.
Hi. Good afternoon. I've got two questions. Firstly, in chemicals, you indicated in intermediates some of the product lines that might see lower margins this year. Could you do the same in petrochemicals, either on product line or by region? The second question is referring to chart on page 104, which is the risks and opportunities section. I'm probably reading too much into this, but you've added a line on acquisitions or cooperation, which optically suggests it's not gonna be a particularly active year, BASF in M&A this year. Am I reading too much into that?
No.
I guess I got the answer in that one.
Yeah, you probably are reading too much into that. I mean, we have to put something into our annual report. As I said before, we are not driven by the desire to keep our integration experts busy. That cannot be the determining factor. It's really about, again, strategic fit. Do we find something which really makes sense both strategically and operationally, and is it financially attractive?
104 is the introduction to the general section of the risk management report. It's actually that.
Yeah. I think you have lots of reading stuff in front of you. You can go through all those pages, and we can discuss it. Petrochemicals. We saw a slowdown in Q4. That's quite clear, especially in Asia as we experienced it. The start into the new year was actually quite good.
A little bit better than what we had expected, coming out of the fourth quarter. In terms of margins, I mean, you follow this also very, very closely, for the major products. What I can say here is, for us, we are a propylene net buyer. We are an ethylene, small net seller, a very small net seller. What is really important, a majority of what we produce here goes downstream for captive demand, and I alluded to that earlier on when I talked about some of our downstream folks who had to cope with the high feedstock costs, raw material costs in 2012 and who might now see a little bit of room to maneuver, which still doesn't mean they should reduce prices, but should improve their margins, obviously.
We have the next question from Thomas Gilbert, UBS, table 44.
Thank you for taking my two questions there on the segmental guidance you've provided in the annual report. First, wearing the bullish glasses, sounds like from listening to you and from reading that the Performance Products segment is really the big swing factor for the earnings this year. I mean, you're exiting 2011 with 14.7% EBITDA margin. I think the target under [third month ] for 2012 was 20%. The difference is EUR 800 million EBITDA. Will you make the 20% margin in 2012, or how close can you get? That is the first question. The second question is now wearing the more bearish glasses. You're guiding in Plastics the EBIT in the nylon chain down. TDI is difficult and remains so. That means if I back MDI, you must have a very bullish view on MDI or system houses.
What are you seeing in these product lines going into 2012? Is this really making up for the weaknesses elsewhere, because you're guiding, I think, the segment up in earnings for 2012?
Yeah, let me start with plastics. We talked about TDI. That is a no-brainer, obviously. Polyamide, capro. We had a record, as you know, record pricing and margins in 2011. There will be a slight decline of pricing, which we already have seen in Q4 and subsequently also of margins. However, we are talking here about very high levels of prices and margins still reflecting, obviously, supply and demand, which overall is still quite healthy. We are not talking about going back to 2009, 2008 numbers. We are talking about very substantial profitability still in this entire value chain.
MDI, we are in the midst of fighting for a price increase because we think that the underlying supply-demand conditions justify this. We try. We've seen how successful we will be. We are determined. This again reflects our strategy, value before volume. The system houses, that is a growing business for us. It's a profitable growing business. It's a very important outlet for our precursors, MDI, TDI, polyols, obviously. That's highly profitable. Performance Products. Yes, there is room for improvement. We fully agree. I already mentioned a couple of reasons why we should see some improvement there. You asked specifically, can we guarantee the 20% EBITDA for 2012? I think that's a little bit too early to say.
As you have noticed probably, with the exception of AG, which has a very specific business model, which really relates itself to EBITDA as a specific target, we have. When you look at the annual report, we also shied away from providing you with EBITDA guidance for our particular segments because there are a couple of reasons which makes this really difficult. Oil and Gas is self-understood a case in itself. Even in other cases, if you have price inflation, which we have seen now for a couple of years, we have seen price inflation for three years of about 10% a year. Obviously, the denominator of that equation, EBITDA over sales, increases quite a bit and brings down your profitability.
For that reason, we really prefer talking about absolute earnings, and that is also guidance we provided to increase absolute earnings for BASF Group. The 20% might be a little bit of a stretch, but there is room for improvement in absolute terms. I agree.
The next question is coming now from [Harald Gruber], table number one.
Yes, hello. Thank you. Two questions. The first is related to the capital cost issue. Can you just briefly explain which assumptions are behind the lift from 9%- 11%? Is this telling us or saying that you might have reached an inflection point for value-adding across the group level, so to increase the hurdle rate because your content of specialties or higher value-added business has increased over time? Secondly, working capital. Can you explain the measures behind the, well, the aim to further trim working capital? Is this like last year when you had noticeable downsizing of receivables, or is this related to inventories?
Although oil prices might stay high, so this might be very challenging when it comes to inventory downsizing. Thank you.
Your question on your cost of capital. The increase from 9%-11% that we've seen for the year 2011 and going into the year 2012 simply has to do with the cost of capital model. The fact, the representation of our equity and the debt that we carry as a result of that, it increased from 9%-11% in the year 2011, and we see that at the same level going into the year 2012.
[Harald], could you repeat your second question one more time? I didn't catch it quite.
Second question is dealing with the planned measures to further trim working capital requirements. Does this come from downsizing inventories or receivables or what is likely to happen, I mean, this year?
It's an ongoing effort to reduce our working capital. Obviously, our measure is days outstanding, both for inventories and for receivables. We have seen good progress with regards to receivables in 2011. With regard to inventories, there was a slight increase over the course of the fourth quarter because obviously demand came down a little bit and we had to adjust capacities, which was a little bit of a time lag. We are one or two days above what we would like to achieve. It's the biggest swing factor apparently for our cash flow development also in 2012. I think overall, if you look at the entire year, 2011, we have managed our working capital quite nicely.
The increase is really well below what you would expect if you look at volume growth and price developments, and that is certainly also what we try to achieve in 2012.
We have the next question from [Derek Rosenthal] from Axis Capital Management, table number four.
Hi. Thanks for your time. Can you guys elaborate on your strategy a little bit on the newly formed battery materials division? Are some of the various upstream battery materials businesses of interest to you, such as lithium chemicals or other products? Thanks.
Yeah. We try to build a position in battery chemicals, correct. We gained a position in that particular business by acquiring Engelhard, by the way, in 2006. They had a foothold in that technology at a point in time when nobody spoke about automotive and batteries. We are in the midst of building a plant in Ohio in Elyria for cathode materials, and that already tells you a story. We are interested in battery chemicals, so we are talking cathode materials, electrolytes. We are not talking stacks, packages, building the battery itself. From our point of view, the sweet spot in that technology is really better innovative chemicals, and we are closely cooperating with, for instance, car manufacturers, but also with battery producers, to develop new chemical entities.
What we have done now is we formed a business unit, Battery Materials, which is based in New Jersey. We have also made a couple of acquisitions, small ones, by our standards, but they are entirely what we call capability-driven. Three happened over the last couple of weeks, which add new technology. Some of the technology is 10 years out from now. Lithium sulfur technology for batteries is nothing which will materialize over the next 10 years. This is the fourth generation, so to say, of battery material, which has much higher density, longevity, et cetera. For us, this is a long-term play. It's based on the assumption, which I think is realistic, that electrical mobility will grow significantly in developed countries and in developing countries.
For making that happen, batteries and battery materials are the core technology to make that happen at the end of the day. We are quite confident we can build a position in that business. The plant which we are building in Ohio right now will come on stream third, fourth quarter of this year. This is a start. If the business grows according to our expectations, there will be additional investments needed. Hopefully, if we can come up with better materials and better technologies, but we are quite confident that bringing the entire expertise of BASF together with also some acquired expertise, that we will be a front runner in that particular industry. Yeah.
This brings us to the next question of Markus Mayer from Kepler, table 20.
Two questions from me. You said in this outlook you are quite optimistic on the automotive sector. The question is, despite the big OEMs which have premium products, all the others are quite negative for 2012. What is your positive view on this? Is this legislation change, for example, in catalysts, which makes you positive? Or do you see several other trends which are then of importance? That's the first question.
The second question is, we had already a question on the margin target on your functional solutions business. You gave out a target 2012 of a EBITDA margin of 18% for the group. Is this target still valid, or is it also too far away to say this is still a valid target?
Start with automotive, then I go.
Yeah. If you look at the developments in automotive, what have we seen there? Let's go back to the year 2010. You saw 74 million units being sold in the year 2010. You go to the year 2011, you are at roughly 79 million units. And you look into the forecast for the year 2012, and you're talking 84 million units. You see significant growth in that area. If you look here in Europe, I fully agree. A different picture depending on where the producer sits and what brand and what spectrum of the portfolio the producer is in.
What we hear from the producers in Germany, be it Daimler, BMW, or VW, actually quite positive. If you look into North America, the figures there, last year we were at 12.8 million. The sales forecast for this year is roughly 1 million higher. The news that's coming out of Detroit, in general, very positive. We see in transportation or automotive, we see strong underlying growth, which in part has to do, in particular North America, with the average age of the fleet, which just requires you to replace your old car at a certain point in time. There's obviously significant further growth also coming from emerging markets and there, in particular, out of Asia.
EBIT, EBITDA. I think that's an important point to talk about for a minute. When we made that announcement of the guidance in 2008, we said we want to achieve 18% in 2012. Actually, we had just finished the year 2007 when we had 17.6% EBITDA over sales. So you might say that wasn't really that much of a challenge. Why did you come up with just 18%? Now we are at about 16%. So what has happened in between? First of all, we added about EUR 2 billion absolute terms of EBITDA during those years. Secondly, we have an effect because the denominator, I said this before, the denominator just went up. Higher oil prices, higher pricing in general, which dilutes these kinds of profitability measured.
Thirdly, there was a big change in our portfolio structure as well, including oil and gas and its size. Give you another example, the precious metals business, which is a high volume, very low margin business. For that reason, we discussed this in November when we met with some of you in London, for that reason, we really decided we wanna set ourselves an absolute target. We came forward with this medium target, which is EUR 15 billion in 2015. We are currently at EUR 12 billion, so you might say it's just EUR 3 billion, but nevertheless, it's something like 20% increase, and that needs to be materialized. We are fully determined to achieve that particular target.
I think that provides you with at least equally good guidance with regard to the overall profitability targets we have as BASF.
With this, we move on now to Annett Weber, BHF Bank.
A quick follow-up question on the chemical segment in Q4. The reclassification of the sales to the Styrolution joint venture or of Styrolution sales to the joint venture now led to a significant sales impact. Did it also have an earnings impact in Q4?
No. No.
No.
Because sales gets consolidated or deconsolidated. Earnings just is earnings. It doesn't change, really. Whether it's intracompany.
Mm-hmm.
for external sales, it's just earnings for the business because we sell at market. Yeah.
The next one is Tony Jones from Redburn, table 25.
Just two last questions. The cost-saving programs and then also your capital allocation or CapEx plan, could you help us understand which benefit, which businesses will benefit most over the next year to two years? That would be helpful to sort of think about growth, especially. Then finally, going back to Libya, I know you've had a lot of questions about this, but is there any option for you to renegotiate your tax regime there over the next year or so?
Yeah. I'll start with the Libya tax question. If we go back roughly one year, we had negotiated our EPSA-4 agreement. It sits there. It's ready to be signed.
That would lead to a completely different tax situation than what we have currently. You followed the events in Libya. The agreement is sitting there. I can tell you it's pretty much the same question as with respect to infrastructure and what's gonna happen there. I can tell you at this point in time if and when we get back to talking about moving from the current concession agreement environment to an EPSA agreement, I just don't know. The full focus of the National Oil Corporation at this point in time is at ramping up oil production. They came back much quicker than we would have actually expected. The oil production is much higher than where we thought it would be in the January, February timeframe.
Frankly, there is not a lot of focus at this point in time in the NOC on any type of contractual discussions. Agreements are honored as they are, but the point in time where we can talk again about moving from concession agreement to EPSA, I can tell you.
Tony, talking about CapEx, actually, you find this also in our annual report in very detail on page 117, breakdown by segments and regions. To give you an idea, 20%, roughly 20% goes into chemicals, 13% is plastics, performance products, 14%, functional solutions 6%, AG is about 4%, and oil and gas is a pretty big chunk with 31%.
Regionally, it still looks like it's tilted towards Europe because Europe has 65%, but you have to keep in mind that essentially includes the 35% oil and gas piece, which we account for as Europe, even if it happens, for instance, in Northern Africa. If you take that piece out, the oil and gas piece, I think a pretty good chunk of our investments also goes to what we call emerging markets. But again, you'll find the detail here in the annual report. The cost savings program NEXT. It goes across, or STEP, it goes across all businesses, frankly. There is no exception. Everybody participates, everybody joins in. These are programs which cover productivity enhancement, cost reductions, margins improvements because you have better yields, better management of plants, et cetera.
It's quite difficult for me to give you now a specific breakdown by segment. I think it would be fair, take oil and gas out because they run a different scheme here. It would be fair if you look at this from, let's say, sales proportional point of view. It pretty much reflects also the relative contributions of the respective segments to that program. Yeah.
Now we're coming to Ronald Koehler and then Christian Faitz.
Yes, another question on natural gas trading. It's one of the areas in your annual report where you actually say earnings might be lower in 2012 versus 2011. We have seen quite a volatile spiking spot market price, and I know you have potentially 4 billion gas reserves, or you had potentially 4 billion gas reserves, which you perhaps sold between these spikes. Would that mean that an event like that might so positively contribute that you potentially could do better than what you're guiding? One additional question on that is that you renegotiated your contracts. Do you still have this lag effect by higher oil prices selling, whether it's your selling prices or is this also now out after these renegotiations?
One question to your overall group targets, and yeah, you have obviously these 2015-2020 targets, and you spoke about you are committed to that. Did you have or do you have a kind of special incentive management, incentive program which is kind of linked to these targets to increase the commitment of upper management, middle management?
I'll start with your question on the time lag. For the oil price-linked part, in the contracts, the time lag still exists. Still the same. You look at the average of your last nine months, in your purchasing contracts, and to the extent you sell, you sell based on the average of the first six of this nine-month period of time. So no change there. Does the cold spell that we had here lead us to changing our guidance for natural gas trading results? No, it does not. Let's first of all see how the month of February comes in, and then we have a better picture and a better understanding on what that actually has done.
Volume certainly went up as a result of the very cold weather.
Talking about medium-term targets, let's explain this a little bit coming from our corporate governance structure which we have here at BASF. We have an executive board, have a target agreement with our supervisory board. That target agreement certainly encompasses our budget for 2012. That is a no-brainer. It also has medium-term targets and longer-term targets. Obviously, the implementation of the strategy which we put forward in November, We Create Chemistry, is a major part of our target agreement, and we will report to our supervisory board as well how we are doing with regard to implementing those specific measures and achieving our targets. They are one year more short-term targets, but also medium and long-term targets.
Apart from that, even if we did not have that target agreement, I mean, we stepped forward and said, "Okay, this is what we want to achieve." Again, based on certain assumptions about economic growth and production growth, et cetera, globally. I can assure you that this team works extremely hard to make this happen. Absolutely. Because we do not want to disappoint you. That's quite clear.
Now I'm inserting one question that came from Jeff here via email. The question is: Could you give us some guidance on the tax rate for 2012?
The tax rate for 2012. I'll give that a try. You've seen our tax rate come down significantly by roughly 5 percentage points, from 31%- 26% in 2011. The big driver for that drop, we've mentioned a number of times already, that's the oil production in Libya that comes with that extremely high tax. I would expect us to be in a more normal environment in the year 2012, which means a total tax rate in the low 30s, and it means an underlying tax rate, excluding our oil and gas business, in the mid-20s.
Now we come to our last four questions. There is one from Christian Faitz and one from William [Cross], from Jeremy Redenius and Richard Logan. I would like to start with William [Cross], though, because he didn't have a question yet. Please, William, go ahead.
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Oh, mine is on. Sorry.
Oh, thanks. Could you just amplify on your philosophy with respect to share repurchase? It did seem an important part of your presentation at the end of November. If I am reading correctly your comments about the change in the cost of capital, you don't expect to move sharply to a higher leverage. There are many companies that think of it as an accordion, that to the extent that an acquisition doesn't appear and they are unpredictable, then you'll use the repurchase authorization. Perhaps that's not the way you're thinking about it. It would be helpful just to hear your philosophy about it beyond the term precautionary measure, which could mean many different things.
I think we have used it in the past very aggressively, actually. As I said, we bought back about 20% of our outstanding stock, and very consistently so. I think every single year between 1999 and 2008, we bought back stock. That was always a very pragmatic decision. When we had surplus capital or financing available, we bought back. That meant that we increased our leverage quite dramatically. We had a much more efficient capital structure. We still have certain uncertainties today in our capital markets, financial markets. That is certainly something we have to keep in mind. All other things being equal, I would foresee if we have to reduce our leverage or increase buybacks, we would go for the most cost-efficient solution, and that could mean buybacks, frankly.
Again, it needs to be seen when this is going to happen. The other disclaimer is always, if you had a great idea how to spend the money operationally, strategically, that then is still the first consideration. If you have surplus money available, then we buy back, which also, as you said, reduces our cost of capital, apparently. Does it answer your question?
You do think of this as what you will use in the event that larger acquisitions that consume the cash flow don't appear, and so it's an accordion, yeah?
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Sorry?
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Okay. Thank you.
Good. I want to go back to Christian Faitz, still had a question. Is that correct? Yeah.
Yeah. Just two quick questions. One is Nutrition and Health. You talked about adverse mixed effects in Q4. Can you elucidate on those, please? Second, I just want to pick your brains because I'm sure your brains are bigger than mine, at least combined. If I look at the general perception, it seems that the market seems to think Q3 and Q4 were kind of the exception to the norm, that they were lower.
If I look at the normal chemical business year, I would typically also assume because of a typical seasonality in Q3 and Q4, and maybe in addition, in the future in Q1 because of the Chinese New Year, you would typically book 60%, roughly, of your profits on the chemical side in the first half and 40% in the second half. As such, would you actually believe that maybe the years 2009 and 2010 were rather the exception to the rule, that you had fairly strong and actually also sequentially growing earnings in the second half of these respective years? What is your view on that? Thanks.
That's a tricky one, I have to say. You're right. Essentially, we make more money in the first half than in the second half, reflecting essentially seasonality in ag. However, over the last 10 years, that kind of seasonality has come down or was reduced quite dramatically. For instance, now Q4 for ag is also a positive quarter, which never had been the case in the past. I think it's hard to say from today's point of view whether there is, let's say, an underlying change or this is just, let's say, a reflection of industry or economic cycle. We saw and obviously the uncertainty grew over the course of the second half of 2011. I come back to what I said earlier on. Our guidance for 2012 is based on the assumption that we have underlying economic growth.
We see no reason why that should not be the case, and that over the course of the year, the situation will not deteriorate but might even become a little bit better. There are a couple of positive factors you can mention. I mean, Japan has a rebound, et cetera. The big question mark is always emerging markets in Asia. To what extent can they still continue to grow at that growth rate? That is probably the one big risk factor apart from the oil price, which I see. The other question was about Nutrition and Health and how we are doing there. First of all, let me start. We had an excellent performance in 2011. It was really good.
Incorporating, by the way, the Cognis business, which now is a major piece or is the major piece of that particular business. Trading conditions so far are good. I wouldn't say they are benign. They are certainly challenging, but they are good. We aim to increase our earnings for the year. This reflects certainly further growth opportunities which materialize coming from the Cognis integration, which is not just about cost, but also about growth, growing with our customers. It also means that we have worked through some of the integration issues which we were facing last year.
Right. I just want to come back to the phrase you use in the Q4 statements that there was an adverse mix effect. I was wondering whether you can elucidate on that.
Yeah. Get these vitamins.
All right.
A little bit that E, C, B, D, you know, there's always this letter soup, and sometimes it's the
All right. It's nothing structural.
The weights are shifting a little bit. Yeah.
Yeah.
That's the mix effect.
Nothing structural.
Yeah.
Okay, thanks.
Last three questions now. Richard Logan, but please only one more question. Richard Logan first, then Jeremy Redenius, and Martin Roediger, the final one. With Richard Logan, we start.
Okay, great. Just within the Care Chemicals area, you talked about price competition. I wondered if you could elaborate on that to some extent in terms of how the market there has developed, how you see it going forward. Has it been in line with your expectations in terms of the industry and how competitors have reacted to you acquiring Cognis? Thanks.
I would say yes.
Mm-hmm.
As you implied, yeah. It has developed according to our expectations, and integration has been a positive experience for us and experience also with our customers is very positive. They have reacted very, very positively to BASF acquiring the business. They see it as a solidification of the Cognis operation extension of the product portfolio and the offerings, and it has really opened up new avenues for BASF also entering certain industries and, most importantly, certain large customers where we had a certain share of business, but now with Cognis we are much bigger, much more important and also more successful. Yeah.
Jeremy Redenius, table number 37.
You mentioned earlier that you're net short propylene. Propylene's been structurally tight for the last several years, partly due to ethane cracking, partly due to refineries running at lower operating rates. Do you see this persisting for many years from here? You know, do you see anything that'll change that, or is there anything that you can do to address that? Thanks.
Apparently it affects especially North America due to the shift of feedstock for the crackers. Some people are talking about dedicated C3 plants now. For instance, we have one in Tarragona in Spain. That might happen. The price differences have grown quite attractive in some cases, so there might be a rebalancing happening over time. For us, again, we are a small, relatively small net buyer. It hasn't had really that much of an effect. For us, access to propylene is important. I'll give you one example. We announced last year that we will build an acrylics complex in Brazil, and that was only possible because we were able to conclude a contract with Braskem to provide the propylene, which we need for that particular investment, which is a half a billion dollar investment.
Acrylics, dispersions, which would acrylates and SAP as well. Yeah. Far we have been able to secure advantageous raw materials for our growth.
Martin, you have the final question.
Coming back to acquisitions, you already talked about the smaller acquisitions, like in batteries and also water technologies. When it comes to bigger size acquisitions in the vein of, for example, Engelhard or whatsoever, those kinds of, I know you have several acquisition criteria. Could you please prioritize these kinds of acquisition criteria? What is the first ranked criteria? Is it more the position being close to end customers helping BASF to reduce the cyclicality? Or is it similar to the small acquisitions that you want to get technology enabling you to generate innovations, for example?
I would say the first criteria is really how can we make money acquiring that company? How can we create actually value? That is all based on cash flow models, which we have explained at other opportunity occasions already. It has to be financially attractive, genuinely attractive to help us to grow the business. We are not that short-sighted that it has to be in all cases accretive in year one, and especially when we talk about capability-related acquisitions, small ones, which are essentially below your radar screen, I would say. You cannot expect that they will have decent returns within the first couple of years. It's really about building long-term growth and profitability. With regard to strategic positioning, what we have said in the past still holds true.
We are especially interested in acquisitions which are technology-driven, which have high barriers to entry, where innovation really makes a difference, where we can differentiate ourselves from our competition. If you look at the entire pattern of our portfolio changes over the last couple of years, moving out of, let's say, commodity type of products, fertilizers, the last one, Styrolution, and acquiring businesses which are more technology-driven, I think you can clearly understand this is also the path forward. You saw that we have done very, very few acquisitions in chemicals, in the segment chemicals and in the segment plastics, for instance.
Sometimes for lack of opportunity, sometimes because we already have a very strong, inherently strong position, based on our Verbund philosophy, and it doesn't make sense to just add something on which essentially dilutes your earnings power and doesn't really create additional value. Okay, thank you very much for your questions and for being with us today.
Ladies and gentlemen, this brings us to the end of our analyst conference. I would like to thank you for joining us here in Ludwigshafen. At the same time, I would also like to thank all of the guests who listened via the web or on the phone. Secondly, we hope that with our special gift today, namely that we handed out our hot off the press annual report to you, this will help you to do a good analysis on BASF, and we wish you happy reading and good analysis. Should you have any further questions, please contact us in the IR team. We will be happy to help you.
We will next report on our first quarter 2012 results on April 27 already at 8:30 A.M. because this is the day of our Annual General Meeting. With this, I would like to say goodbye to all of those who have joined us electronically. For those who are here, I would like to invite you now that we will have dinner together at the casino. Thanks again.