Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the BASF Analyst Conference Call, third quarter 2017. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one. When preparing to ask your question, please ensure that your phone is unmuted locally. If any participant has difficulty hearing the conference, please press star followed by zero on your telephone for operator assistance. This presentation contains forward-looking statements. These forward-looking statements are based on current estimates and projections of the Board of Executive Directors and on currently available information. These forward-looking statements are not guarantees of the future developments and results outlined herein.
Rather, they depend on a number of factors, involve various risks and uncertainties, and are based on assumptions that may not prove to be accurate. Such risk factors particularly include those discussed on pages 111 to 118 of the BASF Report 2016. The BASF Report is available online at basf.com/report. BASF does not assume any obligation to update the forward-looking statements contained in this presentation. I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our Analyst and Investor Conference Call on the third quarter of 2017. On the call with me today are Kurt Bock, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, BASF Chief Financial Officer. Kurt will explain the financial performance of BASF Group in the third quarter, while Hans will present the segment results and financial figures in more detail. Kurt will conclude by providing BASF's outlook for 2017. Please be aware that we already posted the speech on our website at basf.com/q32017. Additional information on the business development in the operating divisions can be found in the quarterly statement and our fact sheet published this morning. With this, I would like to hand things over to Kurt.
Yeah. Thank you, Steffi, and good morning also on my side. Thank you for joining us here for our earnings call. In the third quarter of 2017, the positive demand development continued. Despite strong comparables in the prior year quarter, we achieved solid volume growth. Overall, we considerably increased sales and earnings. Our earnings mix was again characterized by strong results in the Chemicals segment. In contrast, sales price increases in our downstream businesses could only partially offset significantly higher raw material prices. Thus, margins remained under pressure. Overall, EBIT before special items in our chemicals business, which comprises the Chemicals, Performance Products, and Functional Materials and Solutions segments, has improved by 29% compared to last year. Turning to the financial figures compared to Q3 2016 in more detail. Sales increased by 9% to EUR 15.3 billion.
This was mainly due to higher volumes and prices. Volumes increased by 4%, supported by all segments. We achieved year-on-year volume growth for the 6th consecutive quarter. We raised sales prices by 7%, especially in chemicals. Currency effects amount to -3%, while portfolio effects positively impacted sales by 1%. EBITDA before special items increased by 12% to EUR 2.8 billion. EBITDA without special items increased 23% to EUR 3 billion. At EUR 1.8 billion, EBIT before special items came in 16% higher due to considerably higher earnings in our chemicals segment. We received another insurance payment of around EUR 60 million related to business interruption losses incurred in Q2 2017 following last year's accident in Ludwigshafen. The hurricanes in the U.S. had a negative earnings impact of around EUR 50 million.
Both amounts mainly pertain to the chemicals segment. At EUR 2 billion, EBIT was 34% higher than in the same period last year. Special items amounted to +EUR 198 million in total and were mainly related to the closing of the transfer of BASF's leather chemicals business to the Stahl Group. This resulted in a special income of EUR 203 million. The tax rate was 20.5% compared to 17.3% in Q3 last year. The prior year quarter benefited from the release of tax positions for previous years. Furthermore, earnings contributions from high-tax countries increased. At EUR 1.3 billion, net income rose by 50% compared with prior year quarter. Earnings per share were EUR 1.45 in Q3, versus EUR 0.97 last year.
Adjusted earnings per share rose by 27% to EUR 1.40. Cash provided by operating activities rose from EUR 2.5 billion to EUR 3.8 billion due to lower net working capital. Furthermore, the operating cash flow was supported by higher net income. Free cash flow amounted to EUR 2.8 billion compared to EUR 1.6 billion last year. We continue to implement our We Create Chemistry strategy. In addition to organic growth, acquisitions are a key strategic lever to achieve our targets. We want to acquire businesses which generate profitable growth above the industry average, are innovation driven, offer a special value proposition to our customers, and reduce the earnings visibility of BASF. In addition, we have clear financial acquisition criteria in place.
During recent weeks, we announced two major transactions which perfectly met our criteria. In September, BASF and Solvay signed an agreement related to the sale of Solvay's integrated global polyamide business to BASF for a purchase price of EUR 1.6 billion on a cash and debt-free basis. The acquisition will support BASF's aim to grow profitably in innovation and solution-focused downstream businesses. The acquisition complements BASF's engineering plastics portfolio and expands our position as a solution provider for the transportation, construction, industrial applications, and consumer industries. Regionally, the transaction enhances access to key growth markets in Asia and South America. At the same time, the purchase price will strengthen our polyamide 6.6 value chain through increased polymerization capacities and backward integration into the key raw material, ADN.
In 2016, net sales of the business to be purchased from Solvay amounts to EUR 1.3 billion and EBITDA to around EUR 200 million. According to French law, the intended transaction is subject to consultations with the relevant social bodies of Solvay, following which both companies will enter a binding purchase agreement. Solvay and BASF aim to close the transaction in the third quarter of 2018, pending customary regulatory approvals and the consent of a joint venture partner. In October, we signed an agreement to acquire significant parts of Bayer's seed and non-selective herbicide businesses. The all-cash purchase price is EUR 5.9 billion, subject to certain adjustments at closing. The transaction will be an asset deal.
The assets to be acquired include Bayer's global glufosinate-ammonium non-selective herbicide business, commercialized under the Liberty, Basta, and Finale brands, as well as its seed businesses for key row crops in select markets, canola hybrids in North America under the InVigor brand using the LibertyLink trait technology, oilseed rape mainly in European markets, cotton in the Americas and Europe, as well as soybeans in the Americas. The acquisition also includes Bayer's trait research and breeding capabilities for these crops and the LibertyLink trait and trademark. In 2016, these businesses generated sales of around EUR 1.3 billion and an EBITDA of around EUR 385 million. The transaction is subject to the closing of Bayer's acquisition of Monsanto and approval by relevant authorities. It is expected to close in Q1 2018.
With this investment, we are seizing the opportunity to acquire highly attractive assets in key row crops and markets. It will be a strategic complement to BASF's well-established and successful crop protection business, as well as to our own activities in biotechnology. I will now hand things over to Hans, who will provide more details on the development of the segment, and then finally I'll talk about the outlook for the remaining three months. Hans?
Thank you, Kurt. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment compared to Q3 2016, starting with Chemicals. Sales in Chemicals increased considerably. Higher volumes and significantly higher prices in all divisions were the main driver for this development. Currency effects impacted sales negatively. In a continued favorable market environment, we were able to increase margins in isocyanates, acrylic monomers, cracker products in Europe, and butanediol and derivatives. This resulted in an EBIT before special items of EUR 1.1 billion, which is more than EUR 600 million above the prior-year quarter. All divisions contributed to this significant increase. The hurricanes in the U.S. had a negative impact on earnings. Sales in Performance Products increased slightly. Higher volumes in all divisions compensated for negative currency and portfolio effects.
Higher prices in dispersions and pigments and care chemicals were largely offset by significantly lower prices in nutrition and health, mainly in vitamins. Overall, sales prices were stable. As raw material prices increased, margins remained under pressure. Therefore, EBIT before special items declined considerably. EBIT increased by 21% due to the special income in Performance Chemicals attributable to the transfer of BASF's leather chemicals business to Stahl. BASF now holds a 16% stake in the Stahl Group. In Functional Materials and Solutions, sales rose considerably. This was mainly driven by higher prices and the acquisition of Chemetall. The positive portfolio effects more than compensated the negative currency effects. Volumes rose in every division except Catalysts, where we posted a considerable decline in precious metal trading volumes. We continued to see good demand from the automotive and the construction industries.
EBIT before special items did not reach the strong prior year level, as our initiatives to increase prices could not offset significantly higher raw material prices. The Agricultural Solutions segment continues to face challenging market conditions. Sales decreased significantly, mainly to the weak business development in Brazil and negative currency effects. Overall, we were able to increase volumes by 5%, largely driven by higher demand for our herbicides. Sales rose considerably in Europe. This was mainly due to higher herbicide and fungicide volumes, particularly in Central and Eastern Europe. Sales in North America were up slightly on the prior year quarter. We increased herbicide volumes with our innovation Engenia and fungicide volumes with Xemium. Negative currency effects slowed sales growth. Business in the region South America, Africa, Middle East continued to be dominated by the difficult situation in Brazil. Sales decreased considerably.
With the market environment deteriorating, farmers' economic situation remained strained and competitive pressures were high. This pushed down prices and sales volumes, especially of fungicides and insecticides. Negative currency effects also contributed to the decline in sales. We increased sales considerably in Asia, mainly due to volume growth with fungicides innovations in India, as well as higher volumes in South Korea and Southeast Asia. Compared with the prior year quarter, EBIT before special items declined considerably. This resulted primarily from the difficult market situation in Brazil and the lower average margins due to an unfavorable product mix. Furthermore, the recent hurricanes led to shutdowns of our production facilities in Beaumont, Texas and Manatí, Puerto Rico. Sales in oil and gas increased significantly due to higher oil and gas prices and higher volumes.
The average price of Brent crude in Q3 2017 was $52 per barrel, compared with $46 in the prior year quarter. In addition, gas prices on the European spot markets were significantly above the same period last year. Sales volumes, especially of natural gas, exceeded the level of Q3 2016 by 9%. Production volumes were slightly higher compared to the prior year quarter. The combined price and currency effect amounted to +11%. Overall, EBIT before special items was slightly below the prior year quarter, which benefited from one-time earnings effects related to contract renegotiations. EBIT increased considerably due to special income from the sale of shares in the concession in Argentina. Net income in oil and gas increased from EUR 33 million to EUR 139 million in Q3 2017.
EBIT before special items in other declined to EUR -325 million from EUR -233 million in the prior year quarter. This was partly due to an increase of provisions for our long-term incentive program. Let's now turn to our cash flow development for the first nine months of 2017. Cash provided by operating activities increased by EUR 1.8 billion to EUR 7.6 billion. This was largely due to the higher net income. At EUR 3.4 billion, cash used in investing activities was EUR 637 million higher than the first nine months of 2016. One factor was the increase in financing-related receivables. Moreover, fewer payments were received from the disposal of assets and divestitures. Payments made for tangible and intangible assets decreased by 11% and amounted to EUR 2.6 billion.
Free cash flow rose from EUR 2.9 billion to EUR 5 billion in the first nine months of 2017. Financing activities led to a cash outflow of EUR 1.5 billion compared to an outflow of EUR 1.9 billion in the first nine months of 2016. With that, back to Kurt for the outlook.
You have seen that we confirm our 2017 outlook for sales, EBIT before special items and EBIT. We expect BASF Group sales to grow considerably in 2017, which is quite obvious. We target to considerably raise EBIT before special items compared with 2016. This forecast considers the very strong performance of the chemicals segment during the first three quarters of this year. EBIT is also expected to grow considerably. We strive to once again earn a significant premium on our cost of capital. Deviating from our forecast at the end of July, we expect EBIT after cost of capital to increase considerably and not only slightly. What does it mean for the second half? We now expect that EBIT before special items will considerably surpass the level of the second half of 2016.
As shown on the slide, we slightly increased our underlying assumptions for the GDP growth and the growth in industrial production. We did not change our exchange rate and oil price assumptions. This implies a slight upside potential from the oil price and a slight downside potential from the euro-dollar exchange rate. Now Hans and I are happy to take your questions.
Ladies and gentlemen, I would now like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Please limit your questions to only two at a time so that everybody has a chance to ask his or her question. Of course, you are welcome to rejoin the queue. The first question comes from Andrew Stott, UBS. Please go ahead.
Yeah, thanks, good morning. There's a couple of quick questions. Firstly on crop protection, it's a long time since I've seen -8% on pricing in any of the, I guess, any of the players in this key industry. I think I have to go back to 2010 to see a material negative number for you, which is -3%. Can you tell me what happened in Q3? Sequentially, you went from -2% to -8% on pricing. Are we just clearing out inventory? Is this a temporary situation, or is this a genuine sort of leg down in Brazil that we should be concerned about for 2018? That was the first question. The second question was just on Q3 detail on performance products.
I didn't really fully understand why EBIT was down so much, considering that your D&A was flat. My point being that you're saying that Malaysia and Texas impacted the cost side of the equation, and I would have expected that to hit the D&A line, and it didn't. D&A was flat. Can you tell me sort of the moving parts on margin year-over-year in nutrition? Thank you.
Yeah. Hi, Andrew. Thank you for your questions. Crop protection, this is by and large essentially only a problem of South America. If we look at our price development, Europe slightly up, North America flat, Asia, that might be a portfolio effect, very nicely up, and then steeply down in South America, which is essentially Brazil. This is all the follow-up of the cleanup, which I think the entire industry had to do in Q3 starting already late in Q2. This by and large explains the development. I might add, we know that Q3 is a relatively small quarter in crop.
Volumes were up in Europe, volumes were up in North America, volumes were up in Asia for BASF, and very nicely up, I have to say, and they are down in, again, South America, although this is very much a Brazil thing, which means there is a cleanup. Which also means that, going forward, and that was the second part of your question, the conditions should be better because I think at least BASF and other companies have done their homework there to reduce in-field inventory, and that should now enable us to have a better Q4. As we all know, this is a very important quarter for South America. Hans, will you answer the more difficult question on PP and earnings and cost development?
Andrew, what you see continuing is what we already experienced in Q2. Performance Products results compared to prior-year quarter down. Key impact there continues to be high raw material prices. If I look at the specific situation in Performance Products overall, we are faced with cost increase in the order of magnitude of roughly 20% coming from raw material prices. The businesses at least in part are not able to pass these type of price increases on. You're also aware of the special developments that we have in areas such as, for example, the vitamins. I alluded to that briefly already.
We are at historically low prices in vitamin E, which compares in Q3 of last year to the situation where in particular the Chinese competitors had to throttle their production in Q2, Q3 of 2016, which led to a nice increase in prices. If I remember that correctly, vitamin E prices, just to give you a price point there, were around the EUR 8 per kilogram mark last year, where they are in the range of EUR 420-430 EUR per kilogram in Q3 of the year 2017. We have other businesses such as the hygiene business that goes through some difficult times resulting from overcapacity.
Paper is another area which suffers from overcapacities, but you're well aware of these situations. Overall, that leads then to a decline in EBIT before special items in Performance Products of the order of magnitude of EUR 100 million.
Hans, can I just follow up on the 20% number you gave me? Is that nine months or three, or is it the quarter?
That is the nine-month figure. On a quarter basis it is slightly lower than that.
Okay, perfect. Thank you very much.
The next question is from Andreas Heine, MainFirst. Andreas, please go ahead.
Yeah, thank you for taking my question. I would like at first to address net working capital, which has shown a strong improvement in Q3, and you have given some reasons for this. Is that only temporary? Do we see then a strong net working capital reversal in Q4, or is that what you have managed here sticky also on a full-year basis? That's the first question. Secondly, would you mind to give us an update on what you expect your availability in MDI and TDI will be next year? Referring to your plant in MDI in China, the expansion of MDI in Chongqing, the TDI plant in Ludwigshafen, maybe also major turnarounds you have. What we can expect from this currently extremely profitable business?
Yeah. Thank you, Andreas Heine, for your questions. Hans Engel will talk about net working capital. I take the question on isocyanates. We had another good Q3. Actually, it was better than Q2. We have grown very nicely. Margins are very satisfying, I have to say. We don't see any bottleneck going forward, if that is a background to your question, in supplying the market in 2018. The ramp up in Ludwigshafen continues. Obviously, we will exchange the reactor in 2018 with a larger one. The original one was bigger than the current one. So that means we also have more capacity available, and we will certainly time that maintenance work to comply then or to be aligned with market development, put it that way.
We have new capacity coming on stream in Shanghai, in our joint venture. We are not yet at full capacity with our MDI plant in Chongqing, which also had a very good quarter in the third quarter in 2017. What you see here is, I think Verbund at work, because we have a very good operating leverage on those businesses. And with higher volumes and better prices, these investments are paying off very nicely, I have to say. Hans?
Yeah, Andreas, this is Hans Engel. Good morning. Your question on net working capital, thanks for noting that we've done a fine job there. Expect us not to reverse this in Q4. We'll go through the typical seasonality in our business. You will see in our Agricultural Solutions business, obviously a buildup of inventory to prepare for the season in the Northern Hemisphere. On that, it will depend on what we'll see happening with respect to raw material prices. My expectation is that from a net working capital perspective, there may be slight cash utilization in Q4. It may also be flat, but for sure you will not see a reversal of what you've seen happening in our cash flow statement in Q3. Thanks a lot.
The next question is from Andrew Benson, Citi. Please go ahead, Andrew.
Yes, thanks very much. The cost pressures you're seeing in your two downstream divisions, when do you think or when are the businesses telling you they believe they will fully pass on these cost pressures? Obviously excluding the, you know, one-off challenges within, you know, the vitamins and the superabsorbents that you talked about. Secondly, you note within your chemicals business, upturn in acrylics. I just wondered if you could flesh that out and how you see the prospects for that part of the business. Thanks.
Yeah, hi, Andrew. I answered the question on downstream and passing on higher feedstock costs. We've had this earlier this year. We said this takes 3-6 months. Sometimes it's a formula base, sometimes it's contract renegotiation. For Performance Products, we expect now Q4 to be above last year's number. For Functional Materials and Solutions, that might be a bit difficult simply because we have to absorb obviously much higher cost in our Performance Materials business, which by and large has been able to increase prices and had been able to pass on part of the higher raw material cost, but not to the full extent. That cannot be a surprise given the very steep increase in our especially isocyanates prices over the course of 2017. This is again an ongoing task.
In some businesses, as Hans alluded to, we do have pricing power, and we use our negotiations to increase prices. In others, we are price takers and vitamins is probably the most prominent example in that respect. Hans, acrylics?
Yeah. On the acrylic acid prices, in fact, we've seen overall what I would call nice development from our perspective throughout the year 2017. Continuous improvement in prices in Europe, continuous improvement in prices in North America. Asia, a little bit of a rollercoaster ride starting very high going into the year, then dropping to 2016, mid-2016 year levels by midyear. And then a relatively sharp increase again during end of Q2 and then in Q3, which in fact continues. Overall, I'd say we're rather satisfied with what we've seen happening with respect to acrylic acid prices. Also, when looking at it from the perspective of margin over propylene demand around the globe is strong.
We see some impact still from the temporary shut-ins resulting from the storms affecting plants in the Gulf Coast area in the U.S. Overall, I think key driver that we see is the strong demand around the globe, and that should certainly support pricing for acrylic acid.
Thanks very much.
Maybe one thing to add it here. Andrew, please keep in mind last year we had the North Harbour incident, which also affected our production of acrylics and derivatives. This effect has evaporated in 2017.
Okay, thanks. Thanks so much.
Welcome.
We'll now have Laurence Alexander from Jefferies, and after that Christian Faitz and then Tony Jones. Now Laurence Alexander, please go ahead.
Good morning. Could you give some detail on your volume trends in China? What's happening in the upstream businesses compared to the downstream? Can you flesh out a little bit the comments around catalysts? You know, what is happening excluding the pressure, precious metal pass-through?
We have to look up the numbers for China to give you a little bit more detail here. Overall, we had pretty good volume growth in Asia, almost 10% in Q3. In China was a major factor contributing to that, 7% slightly higher than the 10%. This is moving all in the right direction. We have seen a higher utilization rates in, for instance, in our MDI plant in Chongqing, which has certainly helped in the upstream businesses. But given the overall, let's say 10%-12% growth, I would say that we have grown across the board in most of our businesses, especially everything which is automotive and construction related. This is really important for the downstream businesses.
Overall, I think this was a continuously good development in Asia and in China, in particular, in 2017. The second question, I think I will hand over to Hans.
Laurence, your question with respect to catalyst and the effects that we have therefrom, our precious metal trading business. What we've experienced in Q3 are relatively sharp price increases for precious metals, in particular Palladium prices, which for the first time in I don't know how many years are now higher than the price for Platinum. What this has led to is that our customers, in particular in the automotive industry, have decided to adjust to these steep increases in prices and apparently are hoping for prices to come down in Q4 and Q1 of next year. I think that is the key explanation there.
Net of this, we see overall nice business development in catalyst across all businesses, in particular in our automotive catalyst business.
Thank you.
The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.
Good morning, Stefanie. Good morning, gentlemen. Two questions, please. First of all, after Laurence's question, in catalysts, can you please talk about the current order situation from a different aspect? Would it be a correct assumption that the mix is shifting a bit at present away from more complex diesel exhaust systems to simpler gasoline exhaust systems? Second question would be looking at the operating result of Latin America in Q3. I would have expected a much worse EBIT performance given the relative size of Agricultural Solutions. Also I would figure a weak Decorative Coatings business in Brazil. What are the good performers in this region? Thank you.
Hi, Christian. A good performance in South America certainly was oil and gas. Please keep that in mind. Decorative paints was okay, but ag obviously was pretty bad, probably as bad as we ever had it. Catalyst, this diesel discussion is very much a German discussion, actually. We see relatively little consumers changing their behavior in other European markets. They continue to buy diesel cars because diesel cars are good for both CO2, and they can be cleaned up completely. For instance, using SCR technology. In Germany, and you see the registration of new cars, the numbers have come down. I think we have to explain even more that diesel is a very good technology.
If you want to achieve our CO2 objectives, especially for the transportation and automotive industry, we need a high diesel share. This is an ongoing debate and BASF will actively participate in that debate.
Thank you.
Welcome.
The next question is from Tony Jones, Redburn. Please go ahead.
Morning, Kurt and Hans. I've got two questions left. Firstly, in Q3, I worked out, I think, that the EBIT margin for the three downstream businesses had dropped to only about 8%. I was just looking, though, at the R&D to sales ratio. These are supposed to be high quality specialty growth businesses, but R&D to sales is only about 3%. I just wondered whether that could be increased. It seems low compared to peers and whether that was part of the issue in terms of degree of specialization. Then partly related to that, in the segments where you're struggling to get prices up to offset the costs, how are you thinking about the status of some of those businesses within the BASF group? Thank you.
Yeah, thank you for the questions, Tony. Let's start with the second question. We continuously review the performance of our businesses. We do this on a peer-to-peer pure play basis. We compare ourselves to our relevant competitors, obviously, which includes, by the way, also the research intensity, so R&D as percent of sales. We don't see that we would underspend in any relevant business. Give you one example, catalyst, very obviously very innovation driven, where we continuously innovate new products. In the downstream businesses, we also, and I think Hans alluded to it, we also have bloody commodities. We never said that Performance Products is only specialties, whatever the definition of specialty is.
There are commodities which are supply and demand driven, and in those businesses you have relatively a little earnings power. Which leads then to the second question of what are we gonna do about it if you cannot raise prices and margins continue to be unsatisfactory? There's certainly an ongoing restructuring. We have continuously adapted our production capacities, and this will continue also in the future. We have also decided to divest or merge businesses, if we believe that another owner can do a better job or a combination creates additional value. One example is leather chemicals, a relatively small business which we now merge with the Stahl Group.
that I think will lead to a very, very strong competitor, and prepare the business for a brighter future than what it had been if it had remained within BASF. I think we take a very rational approach at all these options, one by one, and then we make up our mind and take a decision at the right point in time.
Thank you very much.
You're welcome.
Okay, the next questions will be from Patrick Lambert, Jeremy Redenius, and then Stephanie Bothwell . We start with Patrick Lambert, Raymond James. Please go ahead.
Hi, Stefanie. Good morning, everybody. Two quick questions. The first one is on the EBIT of ags in particular. If you could help us understand the impact of the production problems in Puerto Rico, in Beaumont, and the impact on EBIT. Also a more general question about insurance payments versus underlying EBIT, not just on ags but also in the chemical segment. If you could help us, you know, timing of repayments of insurance, if any, for both of these businesses. I'm not 100% sure you can answer that, but could you comment a bit on the free cash flow generation of the oil and gas business, separately? Thanks.
Okay, thank you, Patrick. Hans will take the question on free cash flow of oil and gas, which is a very important one obviously for us as well. Ag results have been impacted by the production interruption in Beaumont and in Puerto Rico. That is a lower double-digit number, so we should put this into perspective. It had a negative impact, but it doesn't explain obviously the difference, the negative deviation from last year, which is again fully driven by the South American businesses, business development. With regard to Hurricanes Irma and Harvey, I don't think that we have any fair chance to receive any major insurance payment for that, because we had actually no structural damage.
This was all related to logistics issues, and our employees could not come to work for the simple reason that their homes were flooded, and they had to take care of their personal belongings and most importantly of their families. This was the main reason why we had business interruption. Puerto Rico was then even a little bit more difficult because obviously infrastructure is quite weak in Puerto Rico, and efforts to support and help this island started relatively slowly. I think we have been affected by that one, as well.
We should figure Q4 too, right?
Yeah.
Okay. Patrick, your question on free cash flow in oil and gas. I'll start with last year. Let's keep in mind, even in this very difficult environment last year, the oil and gas business was free cash flow positive, order of magnitude EUR 150 million-EUR 200 million in 2016. When you look at the improvement in results that we have, and keep in mind that we, from a CapEx perspective, will spend same order of magnitude, maybe slightly less than we did last year. You can expect to see that business with what I would consider to be the appropriate improvement in free cash flow in the year 2017.
Excellent. Thanks.
Now we have Jeremy Redenius, Bernstein.
Hi, it's Jeremy Redenius from Bernstein. Good morning, and thanks for taking the questions. Firstly, just wanted to come back to the ag business once more. I saw you mention price decreases in LATAM, and I think that's really, you know, the first time we've heard that in quite some time. I'm wondering if you could talk a little bit more about the nature of those price decreases. Are you seeing competition from excuse me, from generics producers, or are you seeing price competition from kind of your R&D-driven competitors as well? So just a little bit more detail on where that price competition is coming about. Then second, a topic we've also talked about before has been some of the supply outages in China.
I guess there's been a series of environmental checks occurring throughout the country. I think in some cases shutting down some of your competitors temporarily. I would like to hear if that was a factor that played into some of the results in Q3, and if you see this having a meaningful impact on kind of reducing available capacity out of China for competitors into Q4 into next year. Conversely, would that actually have any impact on any of your customers in any meaningful way? Thanks very much.
Morning, Jeremy. It's kind of difficult to answer the second question. We do know, and the party congress, the recent party congress confirmed it, that China becomes more concerned about obviously environmental issues, and they wanna favor now quality of growth about growth itself. Going forward, we might see the government or the regulators become even a bit more strict with enforcing environmental laws and regulations. From our point of view, by and large, it is a good and positive effect because we are on the good side of that problem. Obviously, it is very difficult for us to contribute any specific earnings number in Q3 to any supply outage in China.
Sometimes it feels a little bit like this is probably more about perception and customers getting nervous about the situation rather than actual supply availability. I cannot put a number behind that, but it drives market sentiment. Sometimes when several events coincide and then it becomes even more relevant for the market. That happens from time to time. South America, yes, price decrease is for us essentially a mix effect. We had a higher share of products with weaker margins and lower prices. The price reaction was essentially to a relatively stiff innovation competition in some of our products, which is to be expected, I have to say.
That is the normal course of the crop protection business, that over the life cycle of product, new competition arises and then price pressure increases and to try to counteract with new formulations and different price points, which normally is quite effective to maintain share and earnings, but you cannot always avoid price declines. I hope this helps.
Yeah. Can I just ask to clarify then? For example, with an insecticide you might have seen, basically trading down to more value-based or value priced, insecticide.
Yeah.
versus latest formulation.
Yeah. You're exactly right. Yeah. Okay.
Thank you very much.
Welcome.
Thanks very much for taking my two questions. The first one was on construction chemicals. Within your commentary, you flagged that volumes were up slightly in South America, Africa, and the Middle East. That commentary looks quite different compared to what you put out at the H1 stage, where you essentially said that demand in the Middle East had been down considerably. I wondered if you could give us an update in terms of how underlying trends were looking there. The second one was a very quick follow-up. Can you confirm that the impact of Hurricane Harvey was around EUR 50 million at the EBIT level? And if that was the case, can you split it between the impact on chemicals and within ag? Thanks.
Yeah. Hi, Stephanie. Hans will answer the question on the hurricane effect. Construction chemicals, actually our business in the Middle East decreased, continued to decrease, so it's a difficult market environment. This is part of our European definition. Middle East is part of Europe at BASF. In Europe, we had slightly higher volume overall. Again, with Middle East down, so the rest of Europe, the mature markets developed quite nicely. I think we alluded to that in our speech when we said construction markets in Europe are relatively strong. Europe ex Middle East, to be precise. Hans?
Your question with respect to the impact of the hurricanes. The figure there is EUR 50 million to the EBIT line for Q3. From a split perspective, that actually think about it in a way that it's pretty much evenly spread over Chemicals, Agricultural Solutions, Functional Materials and Solutions, and Performance Products. We are expecting another EUR 30 million-EUR 50 million EBIT impact for Q4.
Okay. Thank you very much.
The next question is from Peter Clark, Société Générale. Please go ahead.
Yes, good morning. I've actually still got a couple left. I was drilling down in functional solutions, and obviously you've made note of the higher fixed cost effect of the ramp up. I can see actually the CapEx is quite significantly up year-on-year. Presumably you're gonna have quite a bit of ramp up cost going forward. I'm just wondering if you can put a number on that, how significant it was for the functional solutions. Then on the coatings, again, I asked this with Q2. I mean, if I try and adjust for the M&A effects of Chemetall and the industrial business going to AkzoNobel, it does look like the EBIT is probably running 20% light or more, year-on-year, again.
I'm just wondering if there's anything specific you'd highlight that, 'cause I try and adjust for the Deco in Brazil, et cetera. Just looking against the peer group, that seems to be worse than the peer group. I'm just wondering how things stack up in the coatings business. Thank you.
Yeah, on coatings, Peter, we had last year still the industrial coatings business included, so this goes away. This is a negative effect. By and large, we were able to maintain profitability in coatings. As you alluded to, there is continuous price pressure coming from the automotive industry, which is not surprising, obviously. Hans, on fixed cost development from material solutions?
I think the question, Peter, was specifically on
The fixed costs. Yeah.
Yeah. The ramp-up effect that we have in the portfolio of Functional Materials and Solutions. They are about twice the amount compared to the year 2016, but we're talking very low double-digit EUR millions when we talk about ramp-up costs in Functional Materials and Solutions.
Thank you.
We have five more participants in the line that would like to ask questions. We'll start with Laurent Favre now, and then have Markus Mayer and Chetan Udeshi, and to follow are Sebastian Bray and Mutlu Gundogan. Sorry. Now it's Laurent Favre, Evercore. Please go ahead.
Good morning. Thanks for taking my question. My question is actually on oil and gas. On the Argentine disposal, can you give us more details, i.e., are those assets that are currently in production which were going to show growth, i.e., is it part of the Vaca Muerta field or is it just an exploration license which you were able to monetize? Second question, is there a cash impact from memory? The issue that you historically had in Argentina was that you could not repatriate cash flow out of the country. Is it still the case? Third, more generally, are you in cash harvesting mode in oil and gas or is it a very specific case? Thank you.
Okay, Laurent, I start with your last question. Consider this to be the usual portfolio management that you do in oil and gas. You've seen us in the years where we could not send cash out of Argentina building positions in Argentina to protect us against the significant amount of inflation. This move here is one where in the Neuquén province we have a big position in the Vaca Muerta. The government decided to split this between the east and west concession. We're staying in one concession, and we're divesting the other part of the concession. The entire thing is in development with first pilots and we will focus, and now you got me.
I think we'll focus now on the east and have divested the west, but it could be the other way around, and if that should be the case, we'll confirm after the call. That's the context. As I mentioned already, since the Macri government is in place, we are able to do dividend payments out of Argentina. Argentina has become a significantly better place to do business after the change in government that we've experienced.
Thank you.
In this regard to what our plans for the oil and gas business, Laurent, the good thing about oil and gas is that you can actually design cash flow profiles very nicely by deciding which prospects you wanna develop, which fields you wanna own, whether you wanna exit, whether you want to grow. Our overall goal is to have, and Hans Engel said it, to have a healthy free cash flow in 2017. Looks like we are advancing very nicely in that direction. At the same time, drive operational excellence, which is much easier in a low oil price environment, and to have continuous production and reserve growth. So far, we have been able to combine this very nicely.
This continues to be a good investment, even under the current relatively low oil and gas prices.
Thank you.
Now we have Markus Mayer, Baader Helvea.
for taking my two questions. Well, basically three questions. Firstly, I saw an article that the European Bedding Industries' Association claim a mid double-digit euro million amount from this TDI quality problems in Ludwigshafen. Maybe you can shed some light what your estimates are here for this kind of claim. Also, is there any kind of insurance coverage for this kind of issue? Secondly, maybe you can give us some insight how the demand is going into Q4, October versus September. Then lastly, also from the agrochemical space, it looks like that you are becoming a little bit more positive on the outlook for Q4, but also for 2018. Maybe you can quantify this or at least explain why this is the case.
Yeah. Thank you, Markus. Outlook for Ag, I mean, I think I said that, we are now entering into the most important period in South America. This is now make or break for Brazil Q4.
Essentially, it's far too early to speculate about 2018, obviously, but I think a couple of industry observers believe that the industry is poised for an improvement after we have had a pretty rocky time over the last couple of years. Since 2014, 2015, growth and especially profitability growth in our industry has slowed down a bit. Too early to say, but if there are more market opportunities, and this is also based on our innovation pipeline, BASF will go for it.
October so far, as planned, we slightly increased our outlook for the second half, which you certainly noticed, and we don't see any indication in October which would change, based on yesterday's sales number, frankly, which would change our wording or forecast. TDI, yes, we saw this as well. What we're doing here, we are returning product from our direct customers, product which has not yet been foamed, or even if it had been foamed but not yet converted into, for instance, mattresses, we return it to BASF, and we have to absorb the financial cost, obviously. The mattress producers, they can rest assured that there is no health risk. This has now been confirmed several times also by independent institutes, which I think is very, very important.
We are working with them to find an amicable solution for both sides. One thing is clear, I mean, there has to be a proof that BASF product is involved, obviously, and that claims they are making in the market cannot be substantiated due to the product from BASF. We look at this and we feel responsible for what has happened, obviously. Again, we have to sit down and find a rational solution to that problem. Your question was on insurance and by and large, yeah, that is also something you can insure against, and that is the case, but that is not our foremost concern. The foremost concern is to reduce the concerns of our customers and to help them to continue producing as quickly and as much as possible.
I hope that answers your questions.
Perfect. Thanks very much.
Yeah.
Given the time and the fact that we still have three participants with questions in the line, I would ask you to limit yourself to one or two questions only. Now, the next participant is Chetan Udeshi, JP Morgan. Please go ahead.
Yeah. Hi. You know, two questions from me would be, can I get your view on what you think, you know, in terms of sustainability of this trend we've seen in the upstream prices? Do you think all of this can be sustained into next year, or do you think some of this is temporary, which will reverse? And if it does reverse, next year or whenever it does, how do you see that, playing out in terms of group earnings? Because you yourself mentioned that, the downstream businesses have had difficult time raising the prices to sort of offset the raw material headwinds. And my second question is, you mentioned about innovation in your catalyst business, but one of your competitors in AutoCat is talking about significant share gains in diesel over the next one or two years.
Is that something you subscribe to, or you think your share remains intact over the next two years? Thanks.
Yeah. Thank you, Chetan, for your questions. Sustainability of prices in chemicals, very difficult to say. Obviously, this is supply/demand driven. We are aware that in some markets and some products, a new supply is going to come to the market. That could have an effect, however, as long as you see healthy demand, and it looks like we have momentum going into 2018, I think this is a positive precondition for keeping up margins, but I don't really want to speculate for how long and to what extent. If margins or prices should come down in upstream, obviously this means, with a very short time lag, a lower raw material cost for our downstream businesses. That should improve margins, obviously.
There will be an ongoing discussion with our customers about prices again, because they also are aware what our input costs are. Nevertheless, you normally have then at least temporarily a margin expansion. With regard to catalyst, this is a very good business overall because it's very much innovation-driven. Innovation-driven means you have to qualify at the OEMs. This is a competition about best technology. And what you have seen here over the last couple of years is sometimes shifting market shares. Sometimes somebody has a new technology introduced and then gains, as has been the case with BASF, then somebody else does the same.
This is not unheard of, and we are quite confident that we can continue to grow the business, especially in Asia and in China, where we do have a leading market position. For instance, in China, the diesel technology doesn't play any role at all for light duty vehicles, passenger cars.
Thank you.
The next question is from Sebastian Bray, Berenberg. Please go ahead.
Good morning and thanks for taking my questions. I would have two, both on agriculture. Firstly, could you please give some sense of the differential in terms of pricing development in different geographies? So if I were to guess, for example, that Europe were, I don't know, down 3%-4%. What exactly in relative terms would Brazil and LATAM be down? Which regions have suffered, aside from Brazil, the most pronounced mixed and/or pricing effects? And secondly, just on the acquisition of the Bayer assets. Are there any plans, and if so, when exactly would we start to see the fruits of these? I think it was mentioned in terms of biologics to bundle things like Becker Underwood biologic treatment solutions with the seeds portfolio Bayer. Thank you.
Yeah. Thank you, Sebastian, for the questions. The Bayer acquisition, first of all, we have to close it. This is still an ongoing process. We have an integration team in place, which is very important because the timelines for all of this are very, very short and very demanding. Obviously part of the story on our side is also to combine this now with our knowledge both in trait research, very, very important, but also in crop protection and especially in biologicals, where we do see an opportunity to combine our knowledge for the benefit of farmers and then ultimately also to the benefit or for the benefit of BASF.
We have quite a few good ideas in that respect, but I would propose that we brief you on more details and really in 2018 after we have closed. I think this is an appropriate point in time to give you a little bit more background with regard to why we believe this is a good growth story for BASF. Pricing per region. Yes, prices in Europe very small quarter again and slightly up small single-digit . Pricing in North America, essentially stable. Pricing in Asia up by a two-digit and pricing in South America, most importantly, down by two-digit , which is painful, and I think I already explained that this is also effect of mix and portfolio.
What we have to keep in mind, especially for South America, we should look at Q3 and Q4 then in combination because that then would really cover the entire season in the southern hemisphere.
Thank you very much.
You're welcome.
Now we have a final one or two questions from Mutlu Gundogan from ABN AMRO. Please go ahead.
Yes. Good afternoon, everyone. Two questions on catalysts, please. First of all, on precious metals trading, can you tell me why you had lower volumes here? Was that relating to the higher palladium price that you alluded to? Do you see hoarding in the vertical channel? Then secondly, on the catalyst business excluding metal trading, if my calculations are correct, that was up 4% year-on-year, despite negative volumes and also despite negative FX, i.e., you had a very strong price mix. Can you explain to me why that was?
Yeah. Let me start with your question on the precious metal trading. Yep, that's exactly the reason. Automotive buyers decided looking at the high prices that we have in Q3 and the price increases, in particular in palladium, to postpone their purchases. This is, we've seen this also in prior periods with similar developments. From my perspective, I look at this and say to myself, "This is not lost business.
This is business that will come at a different point in time." If I understood you correctly, there was a bit of background noise, but if you came to the conclusion that taking out the effects that we've seen in the precious metal trading business, that the catalyst business has done reasonably in Q3, I would confirm that.
Yes. The question was that it was mainly related to price mix. Is that the case? Can you tell me why price mix so strong?
Prices overall in catalysts have seen a nice increase. That is driven, well, I have to say I don't have the details here. Overall there is 8% price increase in Q3, which is a good solid number.
Okay. That's very helpful. Thank you.
Ladies and gentlemen, this brings us to the end of our conference call. We will report on our 2017 full year results on February 27th. Should you have any further questions, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and goodbye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.