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 Q3 2016. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd like to ask a question, you may press * 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 may contain forward-looking statements that are subject to risks and uncertainties, including those pertaining to the anticipated benefits to be realized from the proposals described herein. Forward-looking statements may include, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, and supply and demand.
BASF has based these forward-looking statements on its views and assumptions with respect to future events and financial performance. Actual financial performance could differ materially from that projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts, and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, readers should not put any undue reliance on any forward-looking statements. The information contained in this presentation is subject to change without notice, and BASF does not undertake any duty to update these forward-looking statements and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations. I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.
Thank you very much. Good afternoon, ladies and gentlemen. Welcome to the BASF conference call on the Q3 of 2016. With me on the call today are Kurt Bock, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, BASF Chief Financial Officer. As mentioned during our conference call end of July, the German legal requirements for financial reporting on Q1 and Q3 have been eased. Based on this new legislation, we today published our quarterly results in a condensed format. The quarterly statement continues to provide you with the relevant financial information. On our call today, Kurt Bock will address the fire at the North Harbor in Ludwigshafen that continues to occupy our thoughts. He will then explain the financial performance of BASF Group while Hans Engel will present the segment results and financial figures in more detail.
Kurt Bock will conclude his remarks by providing our outlook for 2016. Following their speech, both gentlemen would be glad to answer your questions and provide you with further information. Please be aware that we have already posted a longer version of the speech on our website at basf.com Q3 2016. With this, I would like to hand over to Kurt Bock.
Yeah. Thank you, Steffi. Ladies and gentlemen, also welcome from my side to our Q3 conference call. Thank you for joining us. First, I would like to address the accident that took place last week at the North Harbor in Ludwigshafen. Two BASF firemen and a crew member of a barge lost their lives. Several people were injured, some of them severely. I would like to express my deepest sympathy to the families and friends of those who passed away during the fire at our site. I also share my best wishes for a full recovery to those who were injured. Our thoughts are with all of those who were impacted and their families during this difficult time. BASF continues to closely support the relevant authorities in investigating the cause of the accident. Let me briefly describe the course of events and the consequences.
Due to the fire at the North Harbor and the interruption in raw material supply, both steam crackers and more than 20 further plants were idled on October 17. The fire damaged various pipelines, including those for the delivery of raw materials such as naphtha, propylene, and ethylene. The North Harbor is not operational until further notice. Therefore, we are temporarily shifting logistics from ships and pipelines to trucks and trains wherever possible. Production plants at BASF Verbund site in Ludwigshafen were not damaged by the fire. The riverside harbor, the harbor on Friesenheim Island, and the tank farms are all operational. As of today, 8 plants are still temporarily shut down. Others run at reduced utilization rates. We have delivery delays, mainly with respect to propylene and ethylene-based products. Various measures are being taken to minimize the impact on customer deliverables. Our main focus is now on normalizing operations.
The larger steam cracker has been started up successfully. Preparation for the startup of the smaller steam cracker are ongoing. We will gradually and as quickly as possible restart or increase production at most of the affected plants. This will improve product availability. Let me also share the preliminary findings published yesterday by the District Attorney of Frankenthal, Rhineland-Palatinate and the regional police headquarters. According to their news release, there was a cut made in a pipeline. This was apparently done with a cutting disk. Maintenance work using an angle grinder was in progress on an adjacent pipeline. The cut pipeline was not part of the work. This pipeline contained flammable raffinate. Investigation teams and experts are now concentrating on the process of the maintenance work and the safety measures taken before maintenance started. The clarification of the connection between the cut and the explosion requires further extensive investigations.
End of quote. As investigations by the relevant authorities are ongoing, please understand that I will not further comment on the cause of the fire at this time. We will inform you as soon as possible about any additional findings and the respective conclusions. Furthermore, please understand that we cannot provide you with a detailed assessment of the financial impact at this point in time. So far, we have made good progress to bring our production back to more normal levels. Yet we are facing a number of uncertainties. As the facts become more clear over the next days and weeks, we will be in a better position to provide you with information on the financial impact. We have obviously adequate insurance coverage for property damage, business interruption, and liability.
Concluding this section, I would also like to thank those of you who sent us emails and called us to show their support. We were very grateful and that you expressed your sympathy during this difficult time. Let me now address BASF business performance in Q3. As Steffi said, on October 11, we released preliminary figures for the Q3, as the earnings of BASF Group considerably exceeded the average analyst estimates. Today, we will provide the comprehensive overview of our performance in the Q3 and our outlook for the full year. BASF's volumes rose by 4% compared to the same period last year. In our chemicals business, which comprises the chemicals, performance products, and functional materials and solutions segments, volumes increased by 6%. Continued robust demand from the automotive and construction industries contributed to this increase.
Let me briefly look at the economic development in the regions. In Europe, we saw moderate growth across all sectors. The summer lull in July and August was less pronounced than in prior years. The U.K.'s Brexit decision had so far no material impact. In Asia, the upward trend since the end of Q1 2016 continued. Growth in China was slightly higher than we had expected at the beginning of the year. Demand in North America developed modestly. However, we experienced continued positive momentum in the automotive and construction industries. Economic development in South America remained weak and business confidence remained low. Volumes decreased, especially in Brazil, our largest market. Let me now highlight BASF's performance in Q3. Sales in the Q3 of 2016 decreased by almost 20% to EUR 40 billion, in particular due to portfolio effects of -18%.
These were related to the asset swap with Gazprom, which we completed at the end of September, 2015. The disposed gas trading and storage activities had amounted to EUR 2.9 billion of sales in the prior year quarter. As mentioned, sales volumes rose by 4%. All operating segments, except Agricultural Solutions, contributed to this increase. The functional materials and solutions and chemical segments reported particularly higher volumes. Sales prices declined by 5% following lower raw material prices. Currency effects were almost neutral. EBITDA declined by 15% to EUR 2.4 billion. Income from operations before special items came in at EUR 1.5 billion, 5% lower than in the prior year quarter. Excluding Oil & Gas and other, EBIT before special items of BASF Group considerably exceeded the last year's level.
This resulted from considerable increases in performance products, functional materials and solutions, as well as agricultural solutions. In oil and gas, chemicals, and in other earnings decreased sharply. Special items in EBIT amounted to -EUR 52 million and were mainly related to restructuring measures. Please keep in mind that in the prior year quarter, we booked disposal gains following the assets swap with Gazprom. Therefore, EBIT declined by 22% to EUR 1.5 billion. Income taxes amounted to EUR 204 million. The tax rate was 17.3% compared to 26% in the prior year quarter. This decrease resulted mainly from the release of tax provisions for previous years, as well as higher income from deferred taxes due to currency effects in the oil and gas segment.
Net income at around EUR 900 million came in 27% lower than the Q3 of last year. Reported earnings per share decreased from EUR 1.39 - EUR 0.97. Adjusted EPS, which is more important, however, increased to EUR 1.10. This compares to EUR 1.07 last year. At EUR 2.5 billion, operating cash flow in the Q3 was below the same period of 2015, when we had a higher impact from measures to reduce net working capital. In Q3 2016, payments related to tangible and intangible assets were down by 39% and amounted to EUR 936 million. Free cash flow came in at EUR 1.6 billion compared to EUR 1.8 billion last year.
Our fixed cost management continues to pay off and significantly contributed to the financial performance of our business in the Q3 . Ladies and gentlemen, we continue to invest in future growth. With the completion of several large projects, capital expenditures will decline by about EUR 1 billion this year. Going forward, we are shifting our investments as planned from upstream building blocks to downstream businesses. Let me mention a few recent developments. In early August, we confirmed negotiations with Toda Kogyo Corporation to collaborate in producing battery materials in North America. The proposed collaboration would focus on a broad range of cathode active materials and precursors for use in lithium-ion batteries for the automotive, consumer electronics, and stationary energy storage markets. In late September, we commissioned a complex for the production of PVP at the BASF site in Shanghai in China.
The plant will produce a polymer used as a pharma excipient in detergents, cosmetics, and other technical applications. Earlier this month, we announced plans to build a new world-scale plant for vitamin A in Ludwigshafen. The facility will increase BASF's total annual production capacity by 1,500 metric tons, and is scheduled to come on stream in 2020. At the same time, we are continuing to strengthen and further develop our Verbund site. At the end of September, we announced plans to build a world-scale production plant for acetylene in Ludwigshafen, replacing our existing facility. The new plant is scheduled to start up at the end of 2019, and will have the capacity to produce 90,000 metric tons. Aside from butadiene, around 20 productive facilities at the Ludwigshafen site use acetylene as a starting material for many products and value chains.
Furthermore, we continue to improve our structures and processes to support profitable growth. We realign our caprolactam production in Europe and gradually reduce capacity by 100,000 metric tons to 400,000 tons. This will happen over the next 18 months. In Ludwigshafen, part of the caprolactam production, as well as plants producing precursors, will be closed. This will allow us to further strengthen the competitiveness of BASF's Polyamide 6 value chain. Our global research and development organization works on long-term strategic topics as well as product and process development to meet the current needs of our customers. As part of our ongoing structural review, we have decided to discontinue R&D activities at a small facility in Singapore, and to restructure our research units in Basel and in Düsseldorf, allowing us to better support the operating divisions at those sites.
This transition will be phased in over time, resulting in a reduction of about 200 positions by the end of 2018. Before Hans presents the Q3 figures in more detail, let me briefly share a tangible example of BASF's innovative power and the way we collaborate with our partners in the automotive industry. As you know, BASF is the largest chemical supplier to the automotive industry, with more than EUR 10 billion in sales. Hyundai Motor Company and BASF have partnered once again to create an exceptional concept car. The RN30 combines key solutions for the chemical industry with aerodynamic design and specialized high-performance technologies. BASF contributes significantly with lightweight metal plastics, various design possibilities, as well as durable and eco-friendly materials.
Jointly developed components of the RN30 include the clear coat iGloss, the fender and the spoiler made from Elastollan, and the seat covering using our unique surface technology, Velour, just to name a few. Now, Hans will comment on the performance of our segment. Hans?
Thank you, Kurt. Good afternoon, ladies and gentlemen also from my side. Let me highlight the financial performance of each segment in comparison with the Q3 2015. Sales in the Chemicals segment declined considerably. This was driven by lower prices, especially in the Petrochemicals and Intermediates divisions, following lower raw material prices. We increased volumes supported by new capacities. Lower margins in the Petrochemicals division and some Intermediates businesses were only partially offset by higher margins in isocyanates. Fixed costs increased, particularly due to the expanded asset base. Overall, EBIT before special items decreased considerably. Sales in Performance Products declined slightly. Prices decreased as a result of lower raw material costs and continued competitive pressure in the hygiene business. Portfolio effects caused by several divestitures in 2015 also contributed to the sales decline. However, we were able to increase volumes in all operating divisions.
EBIT before special items rose considerably, supported by strongly reduced fixed costs, higher volumes, and overall improved margins. Sales in Functional Materials and Solutions grew slightly, driven by higher volumes. Demand for our products and solutions further increased in the automotive market and remained on a high level in construction. Lower prices, currency headwinds, and portfolio effects negatively affected sales. The positive volume development and fixed cost reductions led to considerable increase in EBIT before special items. The Agricultural Solutions segment continues to face challenging market conditions. Sales decreased slightly, as lower volumes in South America could not be offset by higher volumes in all other regions. Prices were stable and currency effects slightly positive. In Europe, sales fell slightly, mainly as a result of negative currency effects from the British pound and slightly lower sales prices. Sales volumes grew, especially in the herbicides business in Western and Northern Europe.
Sales decreased considerably in North America, essentially on account of lower sales prices. We were able to raise volumes, especially of the herbicides Kixor and dicamba. Sales also declined considerably in South America as a result of the ongoing difficult macroeconomic environment. High customer inventory levels, the weakened market for insecticides, and the still tense economic situation for farmers, especially in Brazil, all contributed to a considerable decline in sales volumes. Substantial price increases and currency effects both helped support sales. We raised our sales considerably in Asia, thanks in particular to higher volumes in India. There, after a weak Q3 in 2015, an increase in sales volumes for herbicides was the primary driver for sales growth. EBIT before special items came in significantly higher than in the same period of last year.
Improved margins through a more favorable product mix in Europe, Asia and South America, and lower fixed costs contributed to this result. Sales in oil and gas decreased significantly, mainly due to the lack of contributions from the natural gas trading and storage business following the asset swap with Gazprom. In addition, lower oil and in particular lower gas prices contributed to the drop in sales. The average price of Brent Crude in Q3 2016 was $46 per barrel, compared with $50 in the prior year quarter. Gas prices on the European spot markets fell sharply compared with the same period in 2015. In the continuing oil and gas business, price and currency effects together were -15% in the Q3 2016.
Production rose by 13% year-on-year, mainly driven by higher production in Russia and Norway. Compared to the prior-year period, there was no offshore lifting in Libya in Q3 2016. This year, the lifting took place in October. Overall, EBIT before special items decreased from EUR 371 million - EUR 194 million. Net income in oil and gas decreased from EUR 625 million to just EUR 33 million. As a result of the asset swap with Gazprom, the prior-year quarter benefited from disposal gains of EUR 331 million. EBIT before special items in Other declined to -EUR 233 million, down from -EUR 98 million.
This was driven by lower sales, but also by a swing of over EUR 100 million related to our long-term incentive program. While earnings in Q3 2016 were negatively affected by an increase in provisions, the prior year quarter benefited from the release of provision for our LTI program. Let me now turn to our cash flow development for the first nine months of 2016. Cash provided by operating activities decreased to EUR 5.8 billion. Please keep in mind our working capital reduction initiative in 2015. This reduction cannot be repeated, but we continue to run our business on the reduced net working capital level. With EUR 2.8 billion, we used EUR 2.2 billion less cash in investing activities.
Payments related to tangible and intangible assets amounted to EUR 2.9 billion compared to EUR 4.4 billion in the first nine months of 2015. Acquisitions and divestitures resulted in a net cash inflow of EUR 212 million. Financing led to a cash outflow of around EUR 1.9 billion, mainly due to the payment of the dividend. Free cash flow amounted to EUR 2.9 billion compared to EUR 4.1 billion in the same period of 2015. Lower payments related to tangible and intangible assets partly offset the decline in cash provided by operating activities. Finally, let's look at our balance sheet. Compared to year-end 2015, total assets grew by EUR 2.3 billion- EUR 73.1 billion.
This was mainly driven by higher cash and cash equivalents in preparation for the planned acquisition of Chemetall, which is expected to close in Q4 2016. Long-term assets were almost stable at EUR 46.5 billion. Total equity decreased by EUR 1.8 billion - EUR 29.7 billion due to non-cash actuarial losses related to provisions for pension obligations following the decline in interest rates. As a result of the lower interest rates, provisions for pensions and similar obligations increased by about EUR 3.6 billion compared with December 31, 2015. While financial debt rose by 0.6 or EUR 600 million to EUR 15.8 billion, net debt decreased by EUR 600 million to EUR 12.3 billion. Our equity ratio remained at a healthy level of 41%.
With that, back to you, Kurt, for the outlook.
Okay, the outlook. We adjusted our average oil price assumption for 2016 from $40 per barrel to $45, given the recent increase of the spot prices. Our other assumptions for the global economic environment in 2016 remain unchanged. We are confirming our 2016 sales and EBIT before special items outlook for BASF Group. Sales in 2016 will be considerably below prior year due to the divestiture of the natural gas trading and storage activities, as well as lower oil and gas prices. Excluding the effects of acquisitions and divestitures, we aim to increase sales volumes supported by our increased capacities. We expect EBIT before special items to be slightly below the previous year level due to significantly lower earnings in oil and gas.
This remains an ambitious goal in the current volatile and challenging environment and in light of the fire of October 17, and its consequences. Now we are ready 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 touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Please limit your questions to only two at a time so that everybody has a chance to ask a question. Of course, you are welcome to rejoin the queue. Now the first question is from James Knight of Exane BNP Paribas. Please go ahead.
Afternoon. I've got a couple of questions around chemicals, please. Firstly, TDI, could you give us some kind of feel and preferably some numbers, but at least some qualitative feel about the ramp-up of your new plant and where we are in terms of the timing or thinking about closing the older plant in Schwarzheide. And then secondly, on the polyamide chain, we've had a few capacity closures announced, including your own, and we're hearing some more positive noises both in caprolactam and I think PA-6 as well. Where do you think we are in that cycle? Is there a realistic chance we see a significant pickup over the next three, six, 12 months? Thank you.
Yeah. Thank you. To answer the two questions, TDI utilization rates are going up here in Ludwigshafen. We are not yet at full capacity. This will happen over the next couple of months as we are phasing product into the market. The market is relatively benign given lack of capacity in some cases, apparently, and margins have developed actually quite nicely in TDI. Polyamide value chain caprolactam, obviously there are overcapacities in Europe. We try to address this by reducing our capacity by about 20% from 500,000 - 400,000 tons. It needs to be seen what kind of effect this will have on the overall supply and demand balance. I can only assure you that we will do whatever we deem necessary from our point of view.
It's a little bit difficult to speculate on margin development, right now. We have seen a low in Asia, for instance, earlier this year in Q1. Q2 margins have gone up. Again, margins have been relatively stable in Europe, but still unsatisfactory. You have to be very, very precise talking about this and obviously the huge overcapacities in Asia have had a detrimental effect on margins overall for Capro. As you know, we traditionally had exported some of our product, European production to Asia. We're addressing this with the capacity reduction.
Thanks. Could I just quickly follow up on TDI? Is there a chance or a rationale in running the Schwarzheide plant for longer given the current tightness in the market?
This is a very operational decision, obviously, at what point in time it's best to shut it down. We have delayed this, as you know, but I don't foresee that this production will continue indefinitely. It will be shut down eventually, as soon as we have reached full capacity here in Ludwigshafen, and this is an ongoing process.
Okay, thank you very much.
You're welcome.
The next question is from Lutz Grütjen, Commerzbank. Please go ahead.
Yeah. Thanks for taking my two questions. One is on volumes. You stated that volumes in Asia have been up considerably in the Q3 . One of your competitors stated that volumes in China, in fact, have been up 25% in the Q3 . It would be great to get any better grip on actual numbers here for, at least for Asia, double-digit or some quantitative statements here. The second question is on the cost savings you've achieved in the Q3 year-on-year. It would also be good if you get a number here on that one. These are my two questions. Thank you.
Yeah. Thank you, Lutz. Volumes in Asia, about 15%, up, and China, above 20%. That is what we have seen. As you all know, Q3 is not the strongest quarter, so we have to see whether this continuing at the same pace. From today's point of view, we are quite optimistic that we have made some inroads in some markets. Cost savings, I think Hans will explain.
Yeah, Lutz, on your question with respect to cost savings, just give you a general idea there. As you know, last year, at this time, we announced our new program Drive for the entire BASF Group. Target there, EUR 1 billion impact on EBIT in the year 2018. For the year 2016, we are forecasting EUR 300 million. I don't have exact figure of what's been achieved there in Q3. You also know that we have a major program also in Performance Products that will fully deliver in the year 2017. Our total target there is EUR 500 million. And in the year 2016, we will see an incremental EBIT effect there of at least EUR 100 million. Thank you.
Welcome.
The next question is from Andrew Benson, Citi. Please go ahead.
Yeah, thanks very much. You know, deepest sympathies for what's going on. I saw the YouTube. It's very distressing. Anyway, just to move on to the numbers. The Q4 of last year was impacted by relatively weak markets and destocking associated with lower oil price. Can you give some sense of your vision of the Q4 now in terms of the benefits, if that sort of reverses, if there's some sort of restocking, what the group volume growth can be? Some sort of indication of your ability to meet that, given obviously the difficulties in Ludwigshafen at the moment. Secondly, just a minor on the, you had some associate write-downs.
I just wanna quiz on the financing line and just understand the breakdown of that and how we should think about total financing costs into 2017. Thanks.
Yeah. Andrew, first of all, thank you for your kind remark. In Q4, you're right, it wasn't really a strong quarter. 2015 was actually a pretty weak quarter for us, and there was some destocking apparently. We compare against a relatively low base. As you know, we don't provide guidance for individual quarters. We really only provide guidance for the entire year. For the time being, we stick to what we have said, slightly below. Slightly below means up to 10%. Minus, it needs to be seen where and how we are coming in. There's certainly increased uncertainty now due to the partial production reductions here in Ludwigshafen. Restocking, that was your question.
Actually, we don't really have any indication that this is happening. Europe, in terms of growth, has been relatively slow. Same for North America. We see, and we mentioned this, good demand overall for our products in Asia, which I think has been overdue because we had to bring up with the new capacities now being available in Asia, we simply had to bring up volumes growth. I think it's almost a natural development, what we are seeing here. With regard to financial items and depreciation, Hans will explain this to you.
Yeah, sure, Andrew. Your question on the financial result. Yes, we had a write-down in the order of magnitude of EUR 40 million. That affects the financial result. What is that? You may recall that earlier in the year, we announced the restructuring of our biotechnology activities, and that's exactly a write-down that takes place in a non-consolidated company and then shows up in our financial result. As I said, 40, I believe the correct number is EUR 39 million . We also have a slight decline in our interest result, which has to do with the overall, on the one hand side, lower interest rate, but a bit higher financing, in particular, higher financing outside of Europe, and to be more specific, in Brazil. That comes with higher interest expense.
Last but not least, what we also have as a result of overall lower startups that we have in 2016 compared to 2015, we have also, you know, lower capitalized interest. In other words, there sits more interest than in prior years in our interest line, and that explains what's happening in financial results.
That sort of level should continue into 2017. Is that reasonable to, roughly speaking, believe that?
For the write-down that you saw.
Okay, thanks very much.
Sure.
The next question is from Jeremy Redenius, Sanford Bernstein. Please go ahead.
Yeah, hi. It's Jeremy Redenius from Bernstein. Thanks for taking the questions. Firstly, on the ag businesses, you know, strong improvement year-over-year in the Q3 . I'm just wondering if you could comment on how much of that might have been, let's say, kind of deferrals from Q2 into Q3 from, you know, the bad weather we had affecting fungicide sprays in Q2, and how much of that might have been pulled forward from Q4 into Q3, as a lot can move between the quarters. I'm just trying to get a sense of this quarter's performance being the underlying or some shifting between quarters, please.
Secondly, in the oil and gas business, in the better than expected result there, could you help clarify if there was anything in particular kind of one-off in nature that helped boosted the results? For example, was there some more deferral of the contractual adjustment with Yuzhno or Achimgaz that might have pushed more of that volume adjustment into the Q4 ? Thanks very much.
Yeah. Thank you for the question, Jeremy. I would try to explain the situation in crop protection, and Hans will talk about oil and gas timing issues. Difficult to say. I'm not aware that we have been pushing volumes, which traditionally is a relatively weak quarter. Q3 for the entire industry is a relatively weak quarter. We had, in all fairness, a weak performance in 2015. Traditionally, we are at about EUR 70 million-EUR 100 million in Q3. Last year from my point of view was really an exception. This year in terms of volume development, we have seen especially lots of market pressure in Brazil, where volumes came down quite significantly. Brazil has relatively high importance in Q3.
In other markets, volumes were okay and at last year's level, so no indications really that we have had timing shifts between Q2, Q3, and Q4. Hans?
Jeremy, this is Hans. Now, on the results in oil and gas, which frankly were also better than what we had expected. There are mainly four reasons for that. The first one is, during the month of September, we saw quite an increase in both oil and gas prices. The second one is, in the middle of September, we were asked by the Libyan NOC to sell and ship 800,000 barrels of oil that sat in a tank in Ras Lanuf for more than a year. In fact, three days later, we were able to ship this quantity.
The third reason is, I already mentioned that in the beginning of the year, we did everything to reduce fixed costs in the business, including renegotiating all contracts that we have with our suppliers. As a result of our efforts, there were certain one-time compensation payments during Q3. Last but not least, we had lower exploration costs in Q3 than we usually have. There will be a catch-up for these lower exploration costs in Q4. These four reasons explain why the performance was better than what you had expected and what we had expected ourselves.
Thank you for that. Is it fair to say the last three of those four were then actually quite one-off in nature and, you know, if possible, could you put a value on those?
That is absolutely correct. These are one-off in nature, but they are not special items. The order of magnitude here in Q3 is roughly EUR 50 million.
EUR 50 million?
Mm-hmm. 50.
Okay. Great. Yeah. Thank you much for clarifying that.
Welcome.
The next question is from Andrew Stott, UBS. Please go ahead.
Yeah, thanks. I've got two. Just following on oil and gas from Jeremy's question. Just looking at Q4, can you give a number on the effect of Libya with the lifting coming in October, if you're prepared to give an EBIT number? Can you just reconfirm the Yuzhno impact, the negative impact was spread evenly through the year? That was your previous comments. Just wanna check that is still the case. That's the first question. The second question is on margin growth in functional materials. It's accelerated pretty rapidly through the year. You know, you're at 90 basis points year-on-year in Q1, by Q3, you're at 250.
I just wondered if you could maybe just put more detail around the individual business units and what specifically are driving that scale of margin growth and how you feel about that going into 2017. Thank you.
Thank you, Andrew. Hans will start with oil and gas, and then I will talk about functional materials and solutions.
Happy to do that, Andrew. Your first question, I think, was on the offshore lifting and the value of that. In light of current oil prices, I'd say that is in the range of roughly EUR 25 million. On Yuzhno-Russkoye, I can confirm what we said already at the prior conferences. The impact will be evenly spread over the year 2016, so evenly spread over the four quarters. You'll see the same impact that we had in Q1 through Q3 also in Q4.
Andrew, talking about functional materials and solutions, I think what is interesting, yes, we do have a margin increase improvement in Q3 compared to last year. About half of that is probably from lower raw material costs, which we do pass on. The other half is really, and that is what Hans already alluded to, is savings in fixed costs, which is also important. Obviously those are supposed to stay with us. The margin development is a little bit volatile. We have seen steady increase over the course of 2016. I think it is too early to speculate about 2017, but our objective obviously is to keep margins at this level.
This against a background of relatively good volume growth, which we have seen over the last couple of quarters. What is also important, all operating divisions have contributed to that development. The one business which faces a little bit of a headwind is really Construction Chemicals. They have been doing very well over the last couple of years. Right now, some markets like Middle East, Saudi Arabia, have become a little bit more difficult, and that certainly has an impact because just to give you an idea here, out of magnitude, it's one of the five largest markets we are serving in Construction Chemicals, and that is certainly an impact which we see. Above, across the board, all businesses are doing very well this year.
Great. Thank you very much.
The next question is from Laurence Alexander, Jefferies. Please ask your question.
Good morning. Two quick questions. Can you give some detail about the PVP capacity addition? Is that purely for the domestic market? Do you see the demand available to absorb it, or will it be a multi-year ramp? Secondly, can you give a little bit of detail on what you're seeing in the automotive refinish market and the softness you've seen there? Is that an end market demand issue or is that a competitive pressure?
Let me start with automotive refinish. Q3, we have seen slightly lower sales due to lower volumes both in Europe and in South America, while higher sales in North America. The numbers are always impacted also by FX effects because we have a very high share of business outside of Europe, especially also in South America. Overall, not an unknown development. The markets in automotive refinish are characterized by structural changes. Insurance players have a bigger impact today, a different scheme for how you run the business around the globe. Overall, it has been a good business for BASF and an important earnings contributor. PVP, I think capacity increase is supposed to come on stream in 2018, something like this.
The production, or the demand is around the globe, so I can't give you any specifics at this point in time. I think it would be best if you just call us later on, and we can give you some more details if you want.
Thank you.
You're welcome.
The next question is from Martin Rödiger, Kepler Cheuvreux. Please go ahead.
Yes, thanks for taking my two questions. Coming back to oil and gas, I just want to understand better the difference between the performance and the reported EBIT line for oil and gas and the net profit in oil and gas, because there is a delta in your year performance of EUR 130 million, worse on the net profit line than on the reported EBIT line. This is despite the fact that you had a favorable tax effect for, so income from deferred taxes in oil and gas. Can you explain to me that discrepancy here? Was it also related with equity earnings Russia? And why is the tax item not visible in your oil and gas reporting, on the net profit line? Second, on vitamins. Can you provide us with an update in the situation here?
Do you see that your Chinese competitors being back on the market after the G20 summit and thus fully operational? Thanks.
Hans, are you ready to start?
Yeah.
Oil and gas?
If you want me to, I can also start with the vitamins. On the vitamins, we've seen significant price increases, in particular in Vitamin E. Spot prices increasing up to a level of EUR 8.30-EUR 8.50. We've seen some of the capacities or volumes, Chinese volumes back in the market, and as a result of that, in October starting a decrease of prices remains to be seen. This decrease of prices at this point in time is EUR 7.50-EUR 7.60 on a spot level. Remains to be seen how this develops going forward. Was certainly very good to experience how prices moved back after reaching levels which were below EUR 5 per kilogram.
I think the missing link in EBIT, but on your oil and gas question, from EBIT to net income sits in the NOK, so oil and gas finance line, and is the result of a loan in NOK for our Norwegian activities. Where one, we have the interest expense, and two, as a result of the increase of the Norwegian krone, we show actually an even higher impact than just the interest. That's the explanation for the difference that you see between EBIT development and the development of net income.
Thank you.
We have nine more questions on the line and 15 minutes to go. If possible, please limit yourself to only one question, or ask quick questions. The next question comes from Neil Tyler, Redburn. Please go ahead.
Good afternoon. The one I'll ask in that case is on the sentence in your outlook statement that refers to the lower level of tied down operating capital and therefore the change in your expectation, the EBIT post cost capital. Firstly, is that lower level of operating capital down to the lower production consequent from the explosion in Ludwigshafen? Secondly, how does that change in the EBITDA cost of capital influence thinking around the dividend or can you sort of perhaps embellish a little bit the link between that and the dividend? Thank you.
Yeah. Thank you, Neil. Very quickly, I mean, you know that it's a key metric for us, earnings after cost of capital. Last year's numbers were certainly not at a sufficient level. We are now slightly more optimistic that we will come in well above last year's number due to essentially also due to reduced capital employed. This is no effect of the recent situation in Ludwigshafen, completely independent from that. This metric is not really related to dividend. This is for us a health check, the earnings after cost of capital, because it really demonstrates where we create value from a shareholder's point of view. We have a clear dividend policy as you know it, to increase dividend year over year unless something very dramatic has happened.
Okay. Thank you. Would you mind helping me understand the lower level of tied down capital in that case? When you just look in the balance sheet, there doesn't seem to be a great deal of movement in the assets and liabilities relative, you know, to last year.
What you have to keep in mind here, Neil, is that this was part of the guidance. Actually, when we gave the guidance earlier this year, and did our cost of capital calculation, we had done the calculation with overall higher raw material costs. Our expectation was that actually the value, the net working capital value on the balance sheet, would be higher than what we are currently experiencing.
I see. Okay.
The other thing that we need to keep in mind is at an EBIT after cost of capital of, if I recall correctly, EUR 194 million in the year 2015, it doesn't need an awful lot of change to get to 10% more, which then is considerably more in our definition.
Okay. No, that's clear. Thank you.
The next question is from Paul Walsh, Morgan Stanley. Please go ahead.
Yes, thanks. Afternoon, Bert and Stefanie. I just echo Andrew's comments around the North Harbor port. My question is about China. It's been pretty spectacular for everybody in the Q3 . I think a lot of that is the year-on-year comp being soft. But can you really give some insights into what you think is going on to drive that volume growth? And the sort of unchanged language around the guidance, would it insinuate at least that maybe you sniff that there are some temporary aspects to that? I wondered if you were seeing anything in China right now that undermined the strength that we were seeing in Q3 into Q4. Thank you.
Yeah. Thank you, Paul. I think it's very difficult to read the Chinese market. We have seen good automotive demand, which is a very important industry for BASF. As I said before, please keep in mind we also have new capacity installed in China, which is now coming to the market, and that is very important from our point of view. It was overdue to sell those volumes. It's not just market growth, it's also we fighting for our market share at attractive margins.
Is that MDI specifically, Kurt, on the new capacities?
Excuse me?
Is that MDI, specifically the Chongqing facility that you're referring to when you say new capacity?
Chongqing includes polyamide in Shanghai. It includes also automotive related to capacities, catalysts, coatings. We have brought up quite a few-
Yeah
new plants, PTHF, based on butanediol. We have lots of new capacity available, and that was always our discussion. When do we see the volume growth? It's coming now.
Okay. Anything that would undermine confidence in China moving into the Q4 ? 'Cause in my mind, the comps are still very weak in China in the Q4 .
I can only talk about what we have seen in October, and so far we haven't seen anything which changes the picture from what we have experienced in Q3.
That's great. Thanks very much.
No problem.
The next question is from Mutlu Gündoğan, ABN AMRO. Please go ahead.
Yes. Thank you. Two questions. First on batteries for electric vehicles. Can you tell us how this business is doing in terms of contract wins? So for how many platforms have you been selected? And also could you give us an idea of your revenue split? Is it mainly Japan, or are you also able to tap into the high growth of the Chinese market? And then secondly is on your coatings business. Can I just ask what the strategic importance of this business is? Because we know that you sold some assets to AkzoNobel, but there have also been some other larger transactions in the industry. So can you tell me whether we should see BASF as a buyer or as a seller of coating assets? Thanks.
Yeah. I think recently we have we came out as a buyer of assets in coatings because we have acquired Chemetall, which is a surface treatment which is related to the coatings business and which will be part of the Coatings Division, yes. We have stepped out of a smaller industrial coatings business, which we are divesting now to AkzoNobel because they see higher synergy and growth potential from their point of view. Overall, it's a good business, very core business for our automotive offerings overall and a very successful business as well. Batteries, I ask you for understanding that we don't really talk about individual contract wins. The business is developing quite nicely. It's a business which requires lots of resources as we speak in terms of R&D, developing next generation materials.
We have talked also in my speech about our joint venture with Toda in North America for cathode materials. We are investing quite a bit, including in Asia. Obviously, the big chunk of business is in Asia, and that's where we are competing.
Would it be possible to get a revenue number, just a broad number on this business?
Nope, because we don't provide revenue numbers below the level of operating divisions. Batteries is not yet an operating division. It's part of the Catalysts business.
Understood. Okay, thank you.
The next question is from Peter Spengler, DZ Bank.
Yeah, good afternoon. Thank you for taking my question. A very short one. Do you consider to shut down or write down the Libya business, the onshore business, completely within the next one year or so?
Nope.
Okay. Thank you.
We sincerely hope that we have a going concern in Libya. That depends on political circumstances, obviously. That needs to be closely watched. We were taken by surprise that we could restart in mid-September, as Hans explained earlier on. Everything else needs to be decided when circumstances change, and we will hope they change for the better.
Very clear. Thank you.
Welcome.
The next question is from Peter Clark, Société Générale. Please go ahead.
Yes, thanks. It's very quickly on Performance Products. At the second quarter, you gave us the line that the raw materials were about half the benefit you were seeing year-on-year. I just want to check, that's obviously still the case in Q3. Within the quarter, how big was the vitamin impact year-on-year in terms of the pricing? I think the EBIT increase was EUR 140-odd million year-on-year, just to give a flavor for that, if you would. Thank you very much.
Yeah. Just to give you a flavor, margin improvement majority comes from fixed cost management. It's not really overall raw material costs. It's really fixed cost improvements, which Hans also explained earlier on.
The next question is from Andreas Heine, MainFirst. Please go ahead.
Yeah, two quick ones. In Chongqing, the MDI plant, how long will it take that you fix the supply issues? And secondly, if you look when the oil price came down, how long did it take until you have seen the relief in your downstream activities? And how do you think this will be if the oil price goes up next year further on? Thanks.
I'll start with Andreas, it's Hans. I'll start with oil price and how it works itself through the system. Always depends on the type of pricing formulas that we have. Upstream, obviously much more closely tied to the oil price. What we typically experience is that we have a 30-45 delay in our pricing mechanisms, which we pass on oil price or oil derivative prices. That should in theory be similar on the way down as it is on the way up, but obviously always then depends on what's the current market environment. So what is the supply-demand situation? How does that look like? That can give you more or less pricing power.
You can hold on to certain raw material price advantages, for longer or for less long. Remains to be seen, but as a general rule, there's always a bit of a time lag.
Mm-hmm.
Chongqing, as you alluded to, we are not running at full capacity simply due to raw material supply constraints. We have temporary solutions which allow us to produce at a level which is profitable, let me put it that way. Yet we also looking for more structural and more permanent solutions, and this is underway as we speak.
That takes a year or half a year or only some months. Is that?
No, the structural adjustment will take a little bit more simply a bit because it will also include an investment. Yeah.
Mm-hmm. Thanks.
The next question comes from Patrick Lambert, Raymond James. Please go ahead.
Hi. Good afternoon. Thanks. Two very quick ones. Oil and gas production up 13% in Q3. Could you give us the year-to-date increase? And also, are you still targeting the 10% growth in production for full year? First question. Second question, I think Peter asked it, the vitamin EBIT impact, if you could quantify that a bit in the Performance Products.
This is Kurt talking about vitamins. I understand there's always keen interest to understand the vitamin market because it's such a big chunk of our overall business. It has had a positive impact in Q3, but even for that operating division, which has the nutrition, the majority, to make it very clear, the majority of improvements come from fixed cost management. In the larger scheme of things, it has had a relatively minor impact for BASF.
Okay.
Production development in year to date.
Yeah, production development year to date is obviously up and not quite to the same tune as the 13% in production increase that we've seen. It's a high single digit number. Expectation is that we'll see that also on a full year basis.
The final question comes from Markus Mayer, Baader Helvea. Please go ahead.
Yeah, good afternoon. Two questions as well. Firstly, can you remind us on the interest and inflation rates you're currently using for your pensions? Secondly, you have elaborated already on the automotive catalyst, which had a great performance. Could you shed more light on the chemical processing catalyst as well, please?
This is Kurt, Markus. Chemical catalyst is quite a volatile business because it really depends on how, let's say, the invoicing is happening. It's a project-driven business, both internally and actually, as you know, we also have captive demand for process catalysts. If I remember correctly, we had a relatively good Q3 in chemical catalysts. Overall, we are slightly optimistic for 2016. Hans, interest rates?
Yeah, on the interest rates for pension purposes, they came down. I mean, main areas for us are Germany, the U.S., the U.K., and Switzerland. The numbers for the interest rates for Germany, I remember by heart because they were at the end of 2015 at 2.5%. For the end of Q3, we used 1.3%. For the U.S., end of 2015, 4.2%, dropping to 3.3% by the end of Q3 2016. U.K. and Switzerland also dropped, if I recall that correctly, in the range of 50 to 80 basis points.
I don't have the exact figures there, but I hope that answers your question.
Oh, that's perfect. Thanks.
Thanks.
Ladies and gentlemen, this brings us to the end of our conference call. We will report on our 2016 full year results on February 24. As this is a Friday, we will organize the Investor and Analyst Conference as a telephone conference. Following the reporting season, we would like to invite you to attend our analyst dinner with members of the Board of Executive Directors on March 30 in Ludwigshafen. The dinner will be preceded by presentations on BASF Research and Production for Verbund. We will send you an email to save the date shortly. 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 for now.