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, first 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 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 therein.
Rather, they depend on a number of factors, involve various risks and uncertainties, and are based on the assumptions that may not prove to be accurate. Such risk factors particularly include those discussed on pages 111- 118 of the BASF Report 2016. The BASF report is available online at basf.com/report. BASF does not assume any obligation to update these 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 Q1 2017 results. 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 Q1 2017, while Hans will present the segment results and financial figures for the quarter in more detail. Kurt will conclude by providing BASF's outlook for 2017. Please be aware that we already posted a longer version of the speech on our website at basf.com/q1 2017. With this, I would like to hand things over to Kurt.
Yeah, thank you, Steffi. Ladies and gentlemen, good morning, and thank you for joining us. BASF had a good start to the year and finished the first quarter 2017 with considerable growth in sales and earnings compared to the prior year quarter. We were able to further increase our sales volume. The demand trend we saw in the course of 2016 continued into Q1. In some of our key value chains, supply and demand balances improved. Sales in the first quarter increased by 19% to EUR 16.9 billion. This was mainly due to higher volumes and prices. For BASF Group, volumes rose by 8%, supported by all segments. With that, we achieved increasing volume growth for the fourth consecutive quarter. Sales prices increased by 8% following higher raw material prices and favorable market conditions, especially in chemicals.
Currency effects positively impacted sales by 2%, while portfolio effects amounted to 1%. This was mainly related to our acquisition of Chemetall, which overcompensated the divestiture of smaller businesses, including industrial coatings and polyolefin catalysts. EBITDA increased by 25% to EUR 3.5 billion. EBITDA before special items increased by 23% to also EUR 3.5 billion. EBIT before special items came in at 29% higher at EUR 2.5 billion, considerably higher earnings in our chemicals business and in oil and gas drove the earnings increase. At EUR 2 billion, EBIT before special items in our chemicals business increased by EUR 536 million, respectively 37%. The increase was supported by a first insurance payment of EUR 100 million related to business interruptions and physical damages in Q4 of last year following the accident in the North Harbor in Ludwigshafen.
About three-quarters of this amount was recognized in the chemical segment. At around EUR 2.5 billion, EBIT was 31% higher than in the same period of last year. Special items amounted to EUR -6 million. From a regional perspective, we significantly improved sales and earnings in Asia-Pacific, where we succeeded in growing volumes strongly in all segments. China was a main contributor to this development. Sales prices increased, especially in chemicals. The tax rate grew from 15.4% to 22.9%, mainly due to higher taxes in Norway. At EUR 1.7 billion, net income rose by 23% compared with the prior year quarter. Earnings per share were EUR 1.86 in Q1 versus EUR 1.51 last year. Adjusted earnings per share amounted to EUR 1.97 compared to EUR 1.64 last year.
Cash provided by operating activities was EUR 833 million compared to EUR 1 billion last year. This was attributable to changes in net working capital. We saw the usual seasonal increase in trade accounts receivables as well as higher sales in the chemicals business. Nevertheless, Free Cash Flow rose from EUR 45 million-EUR 66 million in the first quarter. We continue to implement our We Create Chemistry strategy. Our commitment to research and development is core to this strategy. In early March, we inaugurated our Innovation Campus Asia-Pacific in Mumbai in India. The Innovation Campus will expand BASF's existing R&D activities in India and include regional as well as global research on a wide range of specialty chemicals. In mid-March, BASF and Hewlett Packard Enterprise announced to join in developing one of the world's largest supercomputers for industrial chemical research.
The supercomputer will support the digitalization of BASF research worldwide. This week we signed an agreement to acquire U.S.-based company ZedX, a leader in the development of digital agricultural intelligence. The company's expertise lies in the development of economic weather, crop, and pest models that can rapidly translate data into insights for more efficient agricultural production. Our current strong volume development is largely enabled by the capital expenditures of the last few years. We will continue to fill the new capacities. In addition, further investments at an average level, slightly above depreciation, will support our organic growth. In early March, we inaugurated our mobile emissions catalyst manufacturing site in Chennai, India, doubling capacity for mobile emission catalysts in that country. In mid-March, we started up our expanded production facility for dicamba in Beaumont, Texas.
Dicamba is the active ingredient for our latest herbicide product, Engenia, which is used to combat glyphosate-resistant weeds. We continue to optimize our portfolio. On March 22nd, BASF and Stahl signed an agreement to combine BASF Leather Chemicals business with Stahl Group. Under the terms of the agreement, BASF will receive a 16% minority stake in the Stahl Group, as well as a payment that will lead to a special income at closing. Furthermore, BASF will supply significant volumes of leather chemicals to Stahl under mid and long-term supply agreements. On April 6, we announced the sale of our non-core bleaching clay mineral sorbents business to EP Minerals. These activities are currently part of the process catalyst business unit of BASF's catalyst division. At the beginning of this week, we announced the acquisition of Grupo Thermotek, a leading construction chemical supplier based in Monterrey in Mexico.
Thermotek is a privately held company founded in 1992, and the leader in waterproofing systems in Mexico and Central America. I will now hand over to Hans, who will provide some more detail on the development of our segments, and at the end, I will then talk about our outlook for 2017. Hans?
Yeah. Thank you, Kurt. Ladies and gentlemen, good morning also from my side. I will start with highlighting the financial performance of each segment in comparison with the first quarter of 2016, and start with the chemicals. Sales in chemicals increased considerably. The main drivers were higher prices in petrochemicals and monomers, as well as increased volumes in all divisions. In a tight market environment, we were able to expand margins, especially in isocyanates, cracker products, and acrylics. Overall, fixed costs went up due to the startup of new plants. Improved margins, higher volumes, and increased contribution from our joint venture, BASF-YPC in Nanjing, resulted in an EBIT before special items of EUR 958 million, more than doubling the earnings of the prior year quarter.
During the first quarter, we continued to experience the negative impact associated with insufficient supply of raw materials due to the North Harbor incident. However, this impact was offset by the first insurance payment related to business interruption losses and physical damages incurred in Q4 2016. Sales in Performance Products increased by 9%, mainly due to higher volumes in dispersions and pigments, care chemicals, and performance chemicals. Slightly higher prices and positive currency effects more than compensated for negative portfolio effects. However, higher prices could not fully offset increased raw material prices and higher fixed costs. EBIT before special items, therefore, declined slightly. Sales in Functional Materials and Solutions increased significantly as a result of considerably higher volumes. This was mainly driven by strong demand from the automotive industry. Slightly higher prices and positive currency effects also contributed to the sales increase.
Portfolio effects were overall positive. The acquisitions of Chemetall, as well as Henkel's Western European building material businesses, more than offset the sales impact from the divestment of our industrial coatings and polyolefin catalyst activities. EBIT before special items for the segment was up significantly, in particular, due to the volume growth and our acquisition of Chemetall. Despite continued difficult market conditions, sales in agricultural solutions came in slightly higher than the prior year quarter. Higher volumes and positive currency effects contributed to this, while prices were flat. Sales to customers in Europe nearly matched the prior year level. Sales grew considerably in Central and Eastern Europe. In Western Europe, we saw volume decline. Sales in North America increased considerably as a result of positive currency effects and higher volumes. Volumes were up due to high demand for herbicides, especially for our new solutions, Engenia and Zidua PRO.
Sales in Asia rose considerably. Volumes grew in fungicides due to earlier demand in China and the successful market launch of Seltima in India, as well as solid herbicide sales volumes in Indonesia and Australia. In the region South America, Africa, Middle East, sales increased considerably, mainly driven by positive currency effects resulting from the Brazilian real. Higher volumes partially offset lower prices. Especially in Argentina, we have strong demand for herbicides. For insecticides, we experience strong demand in Africa and the Middle East. In comparison to very strong prior-year quarter, EBIT before special items declined slightly. This was the result of lower average margins due to a different product mix. Fixed costs rose slightly, among others, because of the startup of new plants.
Sales in oil and gas increased significantly, mainly due to higher oil and gas prices. In Q1 2017, the average Brent price or price of Brent crude was $54 per bbl in the range of our expectations and $20 higher than in the same period of 2016. In addition, gas prices on the European spot markets were significantly above the prior year quarter. The combined price and currency effect amounted to +24%. Sales volumes increased by 12%. While production volumes matched the level of the previous first quarter, sales volumes, especially of natural gas, exceeded the level of Q1 2016. Overall, EBIT before special items increased from EUR 66 million to EUR 170 million, mainly due to higher prices. Higher earnings from our participation in the Yuzhno- Russkoye gas field also contributed.
Net income in oil and gas amounted to EUR 140 million compared to EUR 47 million in Q1 2016. I come to other. EBIT before special items in other declined to EUR -250 million from EUR -219 million in the prior year quarter. This was mainly driven by our long-term incentive program. While earnings in Q1 2017 were negatively affected by an increase in provisions, the prior year quarter benefited from the release of provisions for the LTI program. Let's now turn to our cash flow. In Q1 2017, cash provided by operating activities was EUR 833 million, a decrease of EUR 213 million. This was largely due to the higher amount of cash used for net working capital purposes.
It rose mainly because of the seasonal increase in trade accounts receivable as well as higher sales in the chemicals business. At EUR 1.2 billion, cash used in investing activities was EUR 43 million lower than the prior year quarter. Payments made for tangible and intangible assets decreased by 23% and amounted to EUR 767 million. Free Cash Flow rose from EUR 45 million to EUR 66 million in the first quarter of 2017. Financing activities led to a cash inflow of EUR 831 million compared to EUR 2 billion in Q1 2016. We use the currently favorable market conditions to further optimize the financing cost of the BASF Group. With that, back to Kurt for the outlook.
Okay, Hans. Today we are confirming our sales and earnings outlook for 2017 as provided at the end of February. We expect BASF group sales to grow considerably in 2017, which means an increase of at least 6% according to our definition. We target to slightly raise EBIT before special items compared with 2016. As we previously shared, we expect this increase to be in the upper end up to 10% range. EBIT is also expected to grow slightly in 2017. We strive to once again earn a significant premium over our cost of capital in 2017. However, EBIT after cost of capital will decrease considerably due to a higher cost of capital, mostly from the acquisition of Chemetall at the end of last year.
Based on the good start to the year, our outlook may seem cautious, but we see some elevated risks with regard to macroeconomic developments and the political environment. Therefore, we confirm our full year outlook at this time. Now we 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. If you wish to remove yourself from the question queue, you may press star followed by two. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Please limit your questions to only two at a time so that everybody has a chance to ask his or her questions. Of course, you're welcome to rejoin the queue. The first question is from Andrew Stott, UBS. Please go ahead.
Yeah, morning. Thanks. Question was oil and gas. The flow-through on the EUR 200 million plus of revenue growth was a lot less than at least I expected. The D&A was up significantly. Can you just comment around why we're seeing growth in D&A of about EUR 70 million, and whether that then translates to the full year? Just give me a sight on that. Can I steal a second part on crop protection? Can you just elaborate on the mix comment? Is it more herbicides and less fungicides? Is that the problem on the gross margin? Thank you.
Yeah. Thank you, Andrew. I take the crop protection question. Yes, you are right. It's more fungicides and it's less fungicides opposite and more herbicides. That is very much also related to the very cold weather we have currently in Western Europe. You have seen in our report that also our volumes in Western Europe are below last year's numbers. Please keep in mind we are talking about Q1, and the final accounting will only be done after the conclusion of the first half of this year.
Yeah. Hello, Andrew. This is Hans. Your question on depreciation amortization in the oil and gas segment. D&A is up by EUR 70 million. This is due to the start-up of new fields. You may recall we started up the Vega Pleyade field in Argentina. Also, in the second half of last year, increased capacities in Norway in particular. This leads to higher depreciation, and you can expect this depreciation also to continue in 2017 in the quarters to come.
Okay. Thanks a lot.
The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.
Yeah. Thanks for taking my two questions, Stefanie and gentlemen. Congratulations on the results overall, and particularly congratulations to your profit performance in Asia. Could you differentiate the performance in Asia between China and other Asia? Thanks. My second question, also pertaining to Dr. Engel's comments, in Agro, can you please give us an indication how the current crop season in Europe has started? Looking at weather conditions, Q1 should have had rather easy comps actually, in my view, simply because March 2016 was very wet. I would believe that Q2 2017 will get much tougher given rather dry conditions coupled with low temperatures. Is that a correct observation? Thanks.
Hi Christian. If I knew the answer to your second question, actually, this is highly uncertain in our crop protection business. We expect overall a relatively flat market in Europe. Economic conditions are quite similar to what we have seen last year with the volatile exchange rates and relatively low commodity prices, especially in Russia and Ukraine. Nevertheless, planting intentions for theoretically high levels for grain and oil seeds in Russia and small gains in oil seeds in Western European countries, this is also due to the pricing which we see currently in the market. It's a very mixed picture, and as I said before, I think we have to wait for July to finally see how the season has developed then in 2017.
Asia, the growth comes, and I think this is a positive development, not only from China, but it comes predominantly from China. We have had good double-digit growth in China in Q1, against the background of new capacities which we have brought on stream over the last two years. I think this is also necessary to grow. We feel like we are currently growing slightly faster than the chemical market in China. That is our interpretation. As you know, in China, we have very different businesses upstream, which is certainly supply/demand driven, but then lots of downstream activities, especially automotive-driven, where we have seen a bit of a slowdown in the automotive growth rate in Q1 compared with 2016, when still higher incentives were being offered to the consumers.
However, we continue to grow very nicely in that industry, which is very important for BASF.
Okay, thanks a lot.
The next question is from Paul Walsh, Morgan Stanley. Please go ahead.
Yeah, thanks very much. Morning, Stefanie, Kurt, Hans. My two questions, please are firstly, on capacities. Can you remind me in which product lines you are still suffering, production disruption? That's my first question. My second question, in oil and gas, you guys obviously give the sensitivity to moves in oil. Can you help me understand the extent to which actually gas prices are more important as a barometer, for performance in that business and what you're seeing in gas prices, please? Thank you.
Yeah, Paul, I take your question on the oil and gas price sensitivities. You and I talked about this. I tried to explain what the difficulty is with the gas price sensitivity. It is, in particular, that we have, I'd say on the gas side, more than 2/3 of our gas activities in regulated markets. That makes it extremely difficult to provide a gas price sensitivity.
You also see when you look at our Q1 results and what we're providing there with respect to volume increase, price increase, structural impacts, you see that we have prices increase, if I recall correctly, by 24%, which is clearly less than what you're seeing when you look at the Brent price development, compare $34 in Q1 to $54 in-
Yeah.
Q1 of 2016 to $54 in Q1 2017. You also see less of an increase in prices than what you would see when you would just look at Northwestern European natural gas prices. The driver behind that is the fact that 2/3 of our production happens to be in countries with regulated prices.
Just to be clear, Hans, that is incorporated in that $20 sensitivity to every dollar in oil, correct?
What we're providing is only a sensitivity for oil. To be even more specific on that includes our production in Libya, where currently, since March 7th, we do not produce and have produced only at very low levels in the first two months of this year.
Thank you.
Okay. Paul, your question on capacity and capacity constraints and let's start with China. We are essentially sold out in Nanjing, and we had very gratifying results also due to good volumes, good utilization rates, but also higher margins. Chongqing, that is our MDI plant, not running at full capacity. We had to interrupt production again and again this year, essentially because there is lack of feedstock availability, and that is
We're a partner of BASF is working on to improve reliability with respect to that. That is certainly a bit painful in a relatively tight market for MDI. We have in Ludwigshafen our TDI still the repair completed, but the test runs now for the new reactor which we put into place for the relatively new TDI plant. I have to say that is ongoing exercise and this is an on and off work in terms of test runs now, and we expect to come back pretty soon. We have then other markets like BDO, where our margins still have to recover, where we have a bit of a production issue in Kuantan, to give you one example here, where we have not full capacity available.
Overall this year, in Q1, the cost of unplanned outages are slightly higher than in the first quarter of 2016. Finally, we have the North Harbor incident here in Ludwigshafen, where we obviously had a negative volume effect and earnings effect in Q4, continuing slightly lower into Q1, and this will also continue into Q2. This affects essentially the propylene access for our site. The C3 train is here impacted in a certain way. What is important, maybe I re-explain this again, we got this EUR 100 million insurance payment now in Q1. That payment essentially offsets the negative effect of lack of product availability in Q1. That is essentially a wash.
We expect a similar wash going into Q2, where we still then have not all capacities available and most likely will receive another EUR 100 million insurance payment. In Q3, we most likely will have completed the repair of the pipeline grid and are back to normal operations. We also do the final accounting from an insurance point of view.
That's really clear, Kurt. Just to be clear on the C3 chain, that's largely acrylics?
Yes.
Thank you very much.
Welcome.
The next question comes from Tony Jones, Redburn.
Hi. Morning, everybody. Question, partly related to Paul's, actually. It was just on some of the pluses and minuses for costs, but specifically in chemicals. I just wanted to check, is the insurance gain EUR 100 million all in the Chemicals segment, or is it spread partially over a couple of different BASF segments? Thinking about some of the shutdowns you talked about versus the ramp-up costs, which I think we had last year. I think I had in my notes that there was about EUR 200 million of EBIT impact spread over 2016. I was wondering whether we still should be thinking that that continues, at least partially, and then we've got these added shutdowns you talk about.
Finally, should we be expecting any major maintenance over the next quarter or two, maybe one of the crackers goes into maintenance for a prolonged period? Thank you.
Okay. Thank you, Tony, for your questions. The EUR 100 million, I think I said it in my little speech, about three quarters go into the Chemicals segment and the remaining quarter is distributed mainly in Performance Products, partially also in Functional Materials and Solutions. The big chunk is really chemicals, and that also holds true then for Q2, most likely. Shutdown and ramp-up costs, as you know, outages and turnarounds, these are two different categories. The turnarounds we can plan. What we see right now in 2017, the cost of planned turnarounds will be at the level of last year. Last year was around EUR 300 million. This year, today's planning is also EUR 300 million for turnarounds.
The unplanned, as I said before, are slightly higher in Q1, and we certainly aim to come back to more normal operations with respect to that as soon as possible. Want to be below than the total number of 2016, which was a bit elevated compared with, let's say, our historical average with respect to that. Maintenance, yes, we do have a couple of maintenance projects coming forward, coming on, but this is essentially covered in what I just told you about the planned turnarounds. Nothing really special compared to last year. This is normal course of business, I would say.
Great. Thank you very much.
Welcome.
The next question comes from Laurence Alexander, Jefferies. Please go ahead.
Good morning. I guess two things. First, could you give a little bit more detail on the high pressures you're seeing in Construction Chemicals and Nutrition and Health, and how you might address those? Secondly, within Functional Materials and Performance Products, how much...
Sorry, how much of each of those is product lines that are effectively nearly sold out if you continue at the volume growth that you've been seeing recently?
Laurence, thank you for your questions. I'd start with construction chemicals. I think the main reason is that we are not completely happy, that we have a very high exposure in the Middle East. The Middle East has weakened considerably, essentially due to a lack of infrastructure investments and a lack of financing availability. Plus, payment behavior of customers has changed as well. This is a let's say a little bit unfortunate combination which hits BASF probably more than others because we have a relatively high share in those countries, which essentially are very attractive for construction chemicals. Health and nutrition, anything special to report? I'm just wondering. This is Hans, if you...
In health and nutrition, Laurence, what we have obviously is the developments in vitamin prices, where we've seen peaks both in vitamin A and vitamin E in the third quarter of last year due to capacities, in particular in China, being temporarily shut in. After G20, these started up again, which led to significant price declines in both vitamin E and vitamin A. That is certainly a watch-out. Q1 prices in both are slightly higher than what we've experienced in Q1 of last year. We are pretty much back to the same level as we were in Q1 due to these capacities being back in the market.
I think this is actually, if I think about nutrition and health, this is the key watch-out there.
Capacity constraints, your last question, Laurence. As you know, we have spent quite a bit of money on CapEx over the last couple of years, so we have essentially capacity available to grow. Do we really have acute bottlenecks? I mentioned Nanjing, where we are sold out as we speak here. But overall, I think there is enough capacity available. In the downstream businesses, anyway, those investments are more of an incremental nature. I mentioned, for instance, the doubling of our automotive catalyst capacity in India, which we just completed. These are relatively small investments, which are really very much market-driven according to the business we are bidding for and most likely also gaining.
I don't think that, capacity-wise, supplier-wise, we should be concerned about lack of growth opportunities for BASF.
Thank you.
The next question comes from Jeremy Redenius, Bernstein. Please go ahead.
Yeah. Hi, it's Jeremy Redenius from Bernstein. Thanks for taking a couple questions. First of all, I noticed in the report this morning, you mentioned that European volumes have grown year- over- year. I wanted to see if you would quantify what the growth is for the business in Europe outside of oil and gas, and if that's largely linked to what I'd expect to be the auto industry? Second, you know, we've been working with a model that I think does quite a good job with your oil and gas segment. It looks like the price sensitivity or the price change that you report has been much different than what you'd infer from European spot gas prices now?
I'd heard your comments earlier about the regulatory price in many regions. That's been the case all along. I guess the question is, has there been anything changed in the nature of your contract such that the price sensitivity would be lower now than it was, let's say, last quarter or the last couple of years? Thanks very much.
Okay, Jeremy, thank you for your question. European growth, non-oil and gas, Q1 is 7%, which was slightly above market growth, most likely.
Right. Which industry has been the driver of that?
That is chemicals. Everything which is not oil and gas.
Yeah, I understand. What types of customers is that going to?
That is across the board, I'd say. I don't have specific data here, industry by industry. But as I said before, we had a good start into 2017, including Europe and 7%. It needs to be seen whether that speed can be maintained over the course of the year. We did quite well in automotive, which continued to grow in Europe. Consumers was okay from our point of view. We talked about ag, which has a slow start. If you take ag out, the growth for the non-ag, non-oil and gas businesses would be even slightly higher.
Okay. Thank you.
Hans?
Jeremy, your question on pricing mechanisms in oil and gas, no change there. I hope I explained well enough what's happening structurally and why you don't see the same type of price increases.
In our earnings as you would see when you just follow Brent and just follow Northwestern European gas prices. The two things that you may want to keep in mind is Libya, almost no production in Q1. That certainly has an impact. And then we have in Russia through the way the price models work there, the mineral extraction tax, which was increased, works its way through in our pricing mechanisms, and that may then also help to understand what you're seeing there on the price side.
Was the mineral tax a recent change?
The mineral extraction tax was increased in 2016 and also slight increase in 2017.
Okay, great. Thank you very much.
The next question comes from Andrew Benson, Citi. Please go ahead.
Thank you very much. Hopefully I haven't got my numbers wrong. I know I'm getting very early in these results today. If you assume you achieve say 9% EBIT growth before exceptionals this year, which is sort of towards top of your range, it means effectively that you don't expect to achieve any profit improvement in the coming three quarters of this year to achieve your targets given the very strong start to the year. Yet if you look at you know higher oil and gas prices the likelihood, and who knows, of lower unplanned maintenance costs, and let's hope we don't have another accident. And the
All of the other factors of new capacities are coming on stream. I just wondered what the basis for the caution was for the rest of the year. I just wanted to confirm you thought the insurance impact was roughly sort of profit neutral in the first quarter, and I know that just replaced the additional costs of all the logistics. I just wanna confirm, I wasn't quite sure when you went. Well, I think you answered that question. I didn't really understand the answer then. Thanks.
Yeah. Hi, Andrew. You're correct. Yes, this insurance payment was profit neutral because it compensates for the lack of product availability in Q1 and the same will hold true most likely in Q2. Your math is probably not wrong, so I'm not arguing about the numbers. What I talked about is really the uncertainty going into the second half of 2017. We have seen good volume growth for BASF. We had some nice margin developments, recovery of margin actually we have to say in many of our value chains. At this point in time, to make it also very clear, going into Q4, we don't see a fundamental change of business environment and sentiment.
We also said back in February at our press conference, we will update the forecast then in July when we look at our half year results, and then we have most likely, and I think hopefully also, a better visibility going into the second half of 2017.
Can I just what you're saying then is there's just a perhaps it's your instinct to want to be conservative at this point in time that that's driving your judgment here.
We are cautious. You might say we are conservative. What is on my mind, I mean, there are a couple of political risks out there. Everybody right now is very, very positive in the United States that things will move in the right direction and the business climate, investment climate will improve considerably. This might actually happen. So far, the United States have not really demonstrated a superior growth in Q1. China started strongly into 2017. Needs to be seen whether that momentum can be maintained. We have a couple of yellow and red lights in Europe looking at Italy, for instance, which is an important market for BASF. It's more the, I'd say, overall sentiment. We are certainly hoping that some markets will recover. Russia hopefully will come out of a recession.
Same with Brazil. Then look again at a country like Argentina where the recovery is probably a little bit delayed. All in all, we think for the time being it's just prudent to be cautious.
All right. Well, thank you very much.
Actually that couldn't, that shouldn't really come as a surprise to you. You know BASF.
Yeah, I know. Thanks.
Okay. The next two questions probably come from Andreas Heine, MainFirst .
Yes, two questions indeed. One is on chemicals. If I look at the main margins for the main products, then I would say that on average the second quarter margins would be less than the first quarter. Is there anything I have to have in mind not to believe that the chemicals should deliver earnings being as high as in the first quarter? That's the first question. Secondly, as Easter was this year in the second quarter and not in the first quarter, and as you very closely look into your sales numbers, from what you see now, end of April and what you see in books going forward, have you seen any Easter impact, so being Q1 looking too strong and volume-wise then Q2 having the Easter impact, especially in Europe?
Yeah, Andreas, I start with your second question, Easter impact. Actually, it's more a topic in Germany and some European countries. There is no Easter Monday in most parts of the world. If you do the counting, we had 65 business days Q1 last year, we have 65 business days Q1. This year we will probably have one business day less in those countries which are affected in Q2.
You can do a lot of math here, but frankly, I think this will average out in a certain way, and so far we have not seen coming out of the Easter break any remarkable or noticeable slowdown of economic activity, which leads me to your first question, are there reasons to be skeptical about Q2 with regard to the chemicals segment? Yes, Q1 was a very good quarter for chemicals. There's no doubt about it, especially for cracker products and for what we call monomers. It's not just isocyanates, it's also a couple of other products which developed nicely. We have done a bit of restructuring, which also seems to pay off. Caprolactam, taking capacity out of the market.
These are investments which we have made actually to rebalance the market. At this point in time, we are cautiously optimistic for Q2, but you can never rule out that there are, for instance, supply disruptions. You can never rule out that there are outages, you can never on our side or in the competitive field, and you can never rule out that people become a little bit more skeptical with regard to economic growth and be a little bit more hesitant to buy. I think there are reasons to be cautiously optimistic. Again, we do the accounting then in July, and then we see where we are with regard to the second half.
Thanks.
The next questions come from Peter Clark, Société Générale.
Yes. Good morning. Thank you. It's a question for you, Kurt, on your caution looking forward. If I take Performance Products. When I angle my questions, I mean, you mentioned again the start-up costs, which I thought were quite high last year as well in that division. Just wondering how big they were and how they dragged through the year. Then, of course, the main impact has been the raw material one with the lag of passing that through. Just wondering if you can catch that up as we go through the year because you are seeing pretty strong volume growth at the moment. I think it was 7% in the first quarter, and obviously with your bearish outlook, you might be assuming that might not last.
I'm just wondering how you see that full-year margin in Performance Products perform year-over-year and the impact of the start-up costs we saw in Q1 and through the year? Thank you.
Yeah. Yeah, looking at Performance Products, to make it very clear. We are not satisfied with the development in Q1. We have seen volume growth, yet we haven't seen earnings growth. I mean, we recognize that as well. There are a couple or two reasons, essentially slightly higher fixed costs, essentially start-up costs, which are a double-digit million number, which was to be expected. That is something we planned. On the other hand, we need to bring up margins and to recover margins we had in some of our divisions, pretty steep increases of our feedstock costs. You know also internally that we transfer at market prices. That is very important to keep in mind.
The task for the entire team is now to pass this on to the customers as quickly as possible. We have announced a series of price increases already in Q1. This will continue, reflecting our much higher feedstock cost. What we don't like in that respect is certainly volatility when all of a sudden then the oil price, it came down again quite remarkably. This certainly sends wrong signals into the marketplace and doesn't make our life much easier. What we really need is a stabilization on the feedstock cost front, and I'm pretty sure we will now see price adjustments in Q2 and Q3. Some of the pricing is what we call formula-based.
With a couple of customers and for certain volumes, we have agreements which basically mean if our raw material costs increase, then with a time lag, and that is agreed upon then with a time lag between three months and six months, our product costs also go up. There is a natural delay in that adjustment, but we are working on that with all hands on deck.
Yes, so you wouldn't want to commit to a full-year margin ahead at this point. It's just too early, and you've got to see how it progresses.
The acoustics are very bad. I couldn't understand what part were you talking about?
Yeah. Sorry. A full-year margin in performance products moving up year-on-year. It's too early to commit to anything like that given these moving parts here.
We are trying to bring them up as quickly as possible. That is for sure. That is an uphill battle obviously, because we have very, very strong customers who are not really happy about absorbing higher feedstock cost. Yeah.
Sure. Understood. Thanks.
The next question comes from Markus Mayer, Baader Bank.
Yeah. Good morning. Two questions. The first one on the catalyst business and your statements are quite optimistic on the mobile emissions and the chemical catalysts. Here a question, what is your more long-term outlook on the heavy-duty diesel market? I know that this is less important than the other automotive catalysts, but what do you expect here? On the chemical catalyst business, do you already see that the refill business and the stationary catalyst has started the recovery with this maintenance shutdowns not only at your businesses but also at others? Another question on, again, on Q2, sorry for that. On the end of the meeting you said April was a strong month, and now it looks also that May was not that bad.
Can you confirm this and then was there any kind of momentum change from April to May?
Okay, Markus, I think we are still in April, so I'm hesitating a little bit to talk about May at this point in time. As I said before, from today's point of view, we are cautiously optimistic for Q2, and that's all what I like to say. In chemical catalysts, yes, we do see refill activity that is certainly helpful, and that probably also underlines a more optimistic stance at some of our competitors and customers in that field. Heavy-duty diesel, it is an important business for the very simple reason heavy-duty diesel catalysts are very big and quite expensive and very important obviously also to clean up the diesel engine.
We have had quite a concerted effort over the last couple of years to improve our situation and our business with respect to heavy duty. I won't give you any market data, obviously. That would be a little bit too much, but I think we are making good progress with respect to that as well.
Okay. Perfect. Thanks so much.
The next question is from Mutlu Gundogan, ABN AMRO. Please go ahead.
Yes. Thank you very much for taking my questions. The first one is very short on Performance Products. Can you quantify the negative impact on the margin from higher feedstock prices? And then secondly, I'll also try to take a swing at oil and gas. Can you help me with the sequential comparison, so compared to Q4? Because if I look, your sales is down about EUR 90 million quarter-over-quarter while your EBIT is up EUR 7 million. Can you help me understand why that is?
Let me start with the margin impact. I ask you for your understanding that we do not really quantify this because we also have discussions with our customers for a very simple reason. I mean, we try to pass on higher raw material costs. There has been a margin impact, but it has been very different for very different businesses, so it's also I think would be kind of almost misleading to give you now an average across the entire segment of Performance Product. The oil and gas, Hans, the sequential?
On the sequential, to be honest with you, I didn't look in detail. I give you what my gut feeling is, and the answer on that should be price. Let me do this. I go back, check, and then we get back to you if okay.
That's okay. Thank you.
The next questions are from Martin Evans, JP Morgan. Please go ahead.
Morning. It's just one question, getting back to the Chemical Division and the outlook going forward given the strong start. Destocking, is that something that you're beginning to see now given the relative softening and loosening in supply and so on? Or is it indeed something that is partly behind your sort of cautiously optimistic outlook for the rest of the year, the potential that customers could start now from elevated levels, destocking? Thanks.
As always, Martin, it's very difficult for us to fully understand what is the customer situation with regard to inventory levels. We have no real indication that there has been restocking of a material nature. For that reason, we are also very cautious now to expect some destocking going forward. Just looking at the nature of our business, these are all high volume bulk type of products where also storage is not really what you wanna do. Sometimes the supply is even by pipeline. We don't really have any data which would indicate that now a major destocking should start for the simple reason that we haven't really had a major restocking. What is something which we would watch very carefully is obviously the volume development overall.
I mean, we had this sequential improvement, quarter- over- quarter now for the last four quarters. We cannot rule out that, with our capacity installed now and available, that we simply also have gained some market share in some cases. Yeah.
Thanks very much.
You're welcome.
The next question is from Patrick Lambert, Raymond James. Please go ahead.
Hi, good morning, everybody. Two of three questions, they're very quick. On the oil and gas production outlook for 2017, I think Q1 you said basically flat in terms of MBOE. What can you confirm still the growth of production overall for BASF in 2017 in the same range of last year? First question. Second question, be more precise on Engenia and the type of growth you're seeing. I know it's the first season, it's limited acreage. But can you already guide us a bit for next year in terms of rollout of the herbicide in North America? That's the third. And quickly the third one, when do you expect the ammonia plant in Texas to be started? Thanks.
I'll start with your question on oil and gas. You've seen a significant increase in our production last year. We went up by roughly 20 million bbl from order of magnitude 140 to above 160. The plan for this year is to stay at this volume of 160. The new fields that come on stream will compensate for what's called natural decline, so the natural reduction that we have from older fields. That's the plan that we have for 2017, which is roughly 160 million. Out of that, we have delivered exactly one quarter in Q1.
Okay.
The ammonia plant, which we built together with Yara, the startup is expected for the end of 2017. This is according to schedule. Engenia, the rollout starts, we made a pretty heavy investment actually in for this product dicamba in Texas. We probably have, but I won't give it to you. We don't have specific sales plans for this year available. What I can tell you is we start now in North America, and we'll also roll it out in South America. It's supposed to be a sizable business simply because resistance to glyphosate is such a widespread issue now. Dicamba is the product of choice to fight glyphosate resistance.
We have a follow-up question from Christian Faitz, Kepler Cheuvreux. Please go ahead.
Yes, thanks. Again, two questions if I may. First of all, sticking with Agro, would you mind updating us on your latest thoughts on agricultural M&A, also pertaining to your own ambitions? A quick question on pension provisions. They are down EUR 600 million from year-end. Where do you see them at fiscal year 2017 end? Thank you.
Yeah, thank you for the question about crop protection consolidation. I think we are certainly aware what's going on. We have a good business. I've talked about this several times. Do we like to grow the business also via M&A if this becomes available? Yes, if it makes sense, if it's a good strategic fit and financially attractive. In a normal course of business, this takes a purchaser and a seller to agree upon conditions. In what we see right now, the remedy action that actually takes three. It's a seller, it's a purchaser, and it's the regulator who have to agree upon the course of action. That's the only thing I'm gonna say about this one at this point in time. Christian, that's a tough one. On the pensions, where will they be?
If you and I can agree first on interest rates on December 31st of this year in the key countries for us, which are Germany, the U.S., Switzerland, and the U.K. If we have an agreement on that, then I can tell you whether pension provisions will go up or will go down. We've seen last year a rollercoaster ride with our pension provision. It went from EUR 6.2 in the beginning to EUR 9.6, if I recall correctly, in the end of Q2. We ended up at EUR 8.2. We are now at the end of Q1 at EUR 7.5. In the end, it's all driven by interest rates and discount rates. Should interest rates increase, then we'll see a lower pension provision.
Remains to be seen what really happens with interest rates during the course of this year.
The biggest part of the EUR 600 million delta roughly was interest rates. That's it.
That certainly has an influence. Yeah.
Okay. Thank you.
Welcome.
We have a final question, which is a follow-up question from Markus Mayer, Baader Bank. Please go ahead.
Yeah, also on M&A, but more on the divestment side. With the divestment of the leather chemicals business, are there still some non-core assets in portfolio where you consider divestment? That's the first question. Secondly, on this raw material impact on Performance Products, maybe you can shed some light on which units this was in particular the case.
Thank you, Markus. The strategy at BASF is you never have non-core businesses until the day you decide it becomes non-core.
Okay.
Leather is a relatively small business. This fits, I think, what we had said before when you looked at, for instance, textiles, textile chemicals, which we also put on the block. Is there anything big? I think this is a question really you're asking. There's constantly a pruning going on of our portfolio. Is there anything big, material, so to say? I don't see it at this point in time. We are pretty happy with our overall portfolio composition. The raw material effect we certainly felt it in home care and personal care. We also felt it in performance chemicals. Less so in nutrition and health.
Dispersion and the resins, certainly because simply, and we talked about this, we had higher C3 costs, and that translated obviously into higher raw material costs for that business. That's pretty much it, yeah.
Perfect. Thanks.
It affects in the first instance the higher volume, less specialized businesses in Performance Products.
Mm-hmm.
Ladies and gentlemen, this brings us to the end of our conference call. The annual shareholders meeting of BASF SE is scheduled for May 12 at the Rosengarten in Mannheim. On Monday, May 15, BASF shares will be traded ex-dividend. On Wednesday, May 17, the dividend will be paid. Finally, I would like to invite you to the roundtable on BASF's R&D strategy and its implementation with Dr. Martin Brudermüller. We will host this event in Ludwigshafen on June 28, 2017. Special emphasis will be put on digitization in R&D. You will receive further information in due course. Should you have any further questions, please do not hesitate to contact a member of the BASF IR team. With that, I thank you very much for joining. Goodbye for now.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.