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 Q1 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 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 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 the forward-looking statements. The information contained in this presentation is subject to change without notice and BASF does not undertake any duty to update the 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. Please go ahead.
Good morning, ladies and gentlemen. Welcome to the BASF conference call on the first quarter of 2016. My name is Stefanie Wettberg. With me on the call today are Hans-Ulrich Engel, BASF's Chief Financial Officer, and Marc Ehrhardt, President of the Finance Division. Hans will start to explain the financial highlights and important milestones. Then Marc will present the segment results of the first quarter. Hans will conclude with the outlook 2016. Afterwards, both gentlemen will be happy to take your questions. Today's conference call is limited to one hour since our annual shareholders meeting starts right after this call. We already posted a longer version of the speech on our website at basf.com/share. With this, I would like to hand over to Hans.
Thank you very much, Stefanie. Good morning, ladies and gentlemen, also from my side and welcome to our Q1 conference call. Since the publication of our full year 2015 results end of February, the macroeconomic environment has not materially changed. It is characterized by low growth, high volatility, and deflationary pressure from the low prices of oil and gas as well as other commodities. We continue to work on those areas we can directly influence. We have achieved further productivity improvements and remain focused on cost and cash management. We are implementing our three-year operational excellence program called DRIVE. Compared with baseline 2015, it targets an annual earnings contribution of EUR 1 billion as of the end of 2018. The ongoing restructuring measures in the Performance Products segment are progressing well and are effective.
We are confident to achieve the targeted run rate of EUR 400 million in annual earnings contribution compared with baseline 2012 by the end of this year. Let me now discuss BASF business performance in Q1 2016. The base for comparison is an operationally strong first quarter of 2015 in the chemicals business and in our Agricultural Solutions segment, which was primarily offset by high provisions for our long-term incentive LTI program in other. In Q1 2016, the demand trends we saw at the end of 2015 continued. In the first two months of the year, customers maintained a very cautious ordering approach. In March, however, business picked up in many of our divisions. Turning to the results compared to Q1 2015 in more detail.
Sales in the first quarter of 2016 decreased by 29% to EUR 14.2 billion, driven by portfolio effects of -22%. This was mainly related to the asset swap with Gazprom, which we completed at the end of September 2015. The disposed gas trading and storage activities had accounted for EUR 4.2 billion of sales in the prior year quarter. In Q1 2016, prices declined by 6%, and we saw negative currency effects of -1%. Volumes were stable on group level with a slight increase in our chemicals business. The latter was mainly driven by strong demand in Functional Materials & Solutions. EBITDA declined by 3% to EUR 2.8 billion overall. However, we saw an increase in the Performance Products and Agricultural Solutions segments.
EBIT before special items came in 8% lower at EUR 1.9 billion. Performance Products and Agricultural Solutions developed positively, as did Functional Materials & Solutions. The earnings development on segment level in Q1 2016 is in line with our full year outlook. In the Chemicals and Oil & Gas segments, earnings declined significantly, while in Performance Products, Functional Materials & Solutions, and Agricultural Solutions, EBIT before special items slightly increased. Earnings in Other improved considerably. At around EUR 1.9 billion, EBIT was 6% lower. We incurred special items of -EUR 40 million, mainly from restructuring measures. Income taxes dropped by half and amounted to EUR 258 million.
The tax rate fell to 15.4% from 29.7% in the first quarter of 2015. This was triggered by lower earnings from highly taxed activities, in particular the oil and gas business in Norway. At EUR 1.4 billion, net income rose by 18% compared with the prior year quarter. Earnings per share increased to EUR 1.55 in Q1 2016 versus EUR 1.28 in the same period last year. Adjusted earnings per share were EUR 1.64 compared with EUR 1.43 in the prior year quarter. Cash provided by operating activities was EUR 1 billion in Q1 2016, a decrease of around EUR 1.3 billion compared to the first quarter of 2015.
Payments related to plant, property, equipment, and intangible assets were reduced by almost EUR 300 million to EUR 1 billion as several major investment projects concluded. Ladies and gentlemen, let me highlight a few milestones of Q1 2016. We have continued to strengthen our asset base. In Korla, China, the butanediol plant and the integrated PolyTHF complex was started up. It is operated by our joint venture partner, Xinjiang Markor. We also announced plans to form new joint ventures and joint operations. Together with Avantium, we want to establish a joint venture for the production and marketing of FDCA. FDCA is produced from renewable resources and is the essential chemical building block for the production of PEF. Compared to conventional plastics like PET, PEF provides improved barrier properties for gases like carbon dioxide and oxygen.
We intend to construct an FDCA production plant with capacity up to 50,000 metric tons per year at BASF's Verbund site in Antwerp, Belgium. With Kolon Plastics, we agreed to establish a 50/50 joint operation in South Korea to manufacture POM, an engineering plastic used in industrial transportation, construction, and consumer markets. Operations are scheduled to start at Kolon's site in Gimcheon, South Korea, in the second half of 2018, providing annual production capacity of 70,000 metric tons. Following the start-up of this plant, we will discontinue the production of POM in Ludwigshafen. We continue to optimize our portfolio. As announced on April 22nd, we signed an agreement to sell our global polyolefin catalyst business to W.R. Grace & Co. We expect to close the transaction in the third quarter of 2016.
In February, we agreed to sell our Industrial Coatings business to AkzoNobel for EUR 475 million. The closing of this transaction is expected by the end of 2016. On April 20th, we announced our plan to acquire the assets of Guangdong Yinfan Chemistry in China. This transaction will allow BASF to establish a stronger automotive refinish coatings production footprint in China. It also broadens our portfolio by adding the Yinfan product line to our global brands. Our investments in research and development effectively support our future growth. We updated you in late February that the projected peak sales potential of product launches in Agricultural Solutions between 2015 and 2025 is EUR 3 billion compared to EUR 2.3 billion between 2010 and 2020. This illustrates the strength of our crop protection pipeline.
Together with the International Automotive Components Group, BASF has developed the first roof frame for cars that is entirely made of natural fiber. Our Acrodur 950 L binder ensures the necessary loading capacity and heat resistance of this lightweight component. This is just one example of the innovative solutions BASF is offering as the largest chemical supplier to the automotive industry. In 2015, our sales to this industry were more than EUR 10 billion. Between 2007 and 2015, the annual compounded growth rate of BASF sales to the automotive industry, excluding precious metals and refinish coatings was 6.7%. For comparison, in the same period, the number of vehicles produced increased by an average of 2.8% per year. Now, Marc Ehrhardt, the head of our finance division at BASF, will comment on the segments.
Thank you, Hans, and good morning from my side, ladies and gentlemen. Sales in Chemicals came in considerably lower in the first quarter of 2016. All divisions were impacted by the effect of lower raw material costs on prices. While we saw high margins in the previous year quarter, we experienced pressure in several businesses in Q1 2016 caused by oversupplied markets. Fixed costs increased, particularly due to the start-up of plants. Overall, EBIT before special items decreased considerably. Sales in Performance Products declined significantly. A slight volume increase was more than offset by lower prices, portfolio effects from divestiture of several businesses and currency headwinds. We were able to increase EBIT before special items by 6%, supported by successful restructuring measures and strict cost management as well as higher volumes. Sales in Functional Materials and Solutions decreased slightly.
Good demand for the automotive and construction industries led to an increase in volumes. Prices decreased mainly to the lower precious metal prices. In addition, we experienced currency headwinds. EBIT before special items increased by 6%, supported by improved margins and higher volumes in Performance Materials and Construction Chemicals. Sales in Agricultural Solutions came in significantly below Q1 2015. Volumes decreased as channel inventories were high. Currency effects were negative. Higher prices could not offset these impacts. Despite the challenging market environment, we were able to slightly increase EBIT before special items. Our strict fixed cost management and improved margins contributed to this. Sales to customers in Europe almost reached the level of the prior year quarter. Prices and volumes were higher, particularly for herbicides in Eastern Europe and for specialty crop fungicides in Southern Europe.
This nearly compensated for lower fungicides volumes in Western Europe and negative currency effects. Sales in North America declined considerably, especially in herbicides and fungicides. This was the result of high channel inventories and the cautious ordering behavior of our customers. Sales in Asia were considerably lower compared to prior-year quarter. Volumes decreased mainly due to higher customer inventories, particularly in Japan and China. Sales in South America decreased significantly as a result of the lower volumes and negative currency effects. We experienced lower demand in Brazil, especially for insecticides and fungicides. High inventories and the challenging market environment for our customers in Brazil negatively impacted our business. We will continue to strengthen our portfolio with innovative solutions in all indications. Recently, we submitted the regulatory dossier for a new active ingredient, Revysol, to the European Union. This fungicide is expected to become a new blockbuster.
We're also working on the launch of a new insecticide, Inscalis. First registration dossiers have been submitted to the authorities in the U.S. and Canada for use on a wide range of crops. We plan to introduce another insecticide active ingredient, Broflanilide, by the end of the decade. Sales in oil and gas decreased significantly, mainly due to the missing contributions from the natural gas trading and storage business following the asset swap with Gazprom at the end of September 2015. In addition, lower oil and gas prices contributed to the drop and could not be offset by higher production volumes, especially from Norway. In the continuing oil and gas business, volumes grew by 12% compared to the first quarter of 2015, whereas price and currency effects were -27%.
The average oil price of Brent Crude in Q1 2016 was $34 per barrel, compared to $54 in the same period last year. Gas prices on the European spot markets also fell sharply compared to the prior year quarter. Consequently, EBIT before special items declined from EUR 437 million to EUR 66 million. Please keep in mind that throughout 2016, we will have lower earnings from our share in the Yuzhno-Russkoye natural gas field. This year, the excess amounts received over the last 10 years will be offset by lower volumes as contractually agreed with Gazprom. Net income in oil and gas decreased from EUR 359 million to EUR 47 million. Sales in Other decreased to EUR 477 million, mainly due to lower contributions from raw material trading.
EBIT before special items improved to EUR -219 million. This is mainly attributable to two factors. In Q1 2016, we released provisions from the long-term incentive program, while we incurred significant provisions in the same period of last year. Unlike the prior year period, the currency result was slightly positive in Q1 2016. Special items in other amounted to EUR -26 million compared to EUR -82 million in Q1 2015. The prior year quarter included an employee bonus of around EUR 100 million paid out in recognition of BASF's 150th anniversary. Let me now address the cash flow development. In Q1 2016, cash provided by operating activities was EUR 1 billion, a decrease of around EUR 1.3 billion. This was attributable to changes in the net working capital, which rose due to a seasonal increase in trade accounts receivable.
The prior year quarter significantly benefited from a reduction of inventories, especially in the gas storage business, which we have since divested. In addition, the operating cash flow in the first quarter of 2015 was supported by an increase in operating liabilities and provision. At EUR 1.3 billion, cash used in investing activities was EUR 244 million lower than the prior year quarter. Payments related to tangible and intangible assets decreased by EUR 277 million and amounted to EUR 1 billion. This is only slightly above the level of depreciation. Free cash flow came in significantly lower than the same period of 2015 and was EUR 45 million. Financing activities led to a cash inflow of EUR 2 billion compared to an outflow of EUR 400 million in Q1 2015.
We used the currently favorable financing conditions to further optimize the financing cost of the BASF Group. Finally, let's look at our balance sheet. Compared to the end of 2015, total assets grew by EUR 2.9 billion to EUR 73.7 billion, mainly due to a higher cash position ahead of the dividend payout in May and a seasonally driven increase in trade accounts receivable. Long-term assets were slightly lower due to currency effects. They amounted to EUR 45.6 billion. On the liability side, provisions for pension obligations increased by EUR 2 billion, reflecting the lower interest rate environment. Short-term liabilities increased from EUR 14.2 billion to EUR 17.1 billion, mainly caused by a higher utilization of our commercial paper program and the reclassification of bonds from long to short-term.
Financial debt rose by EUR 1.6 billion to EUR 16.8 billion. Net debt decreased by roughly EUR 200 million to EUR 12.8 billion. Our equity ratio remained at a healthy level and amounted to 42%. With that, back to you, Hans, for the outlook.
Yeah, thank you, Marc. On the outlook, we can confirm our sales and earnings outlook for 2016 as provided to you at the end of February. Sales in 2016 will be considerably lower than 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 divestiture, we continue to expect higher volumes in all segments, supported by our increased capacities. We estimate EBIT before special items to be slightly below the previous year. Based on our oil and gas price scenario, we will see a drastic reduction of oil and gas earnings, which cannot be offset by higher earnings in our chemicals business and in the Agricultural Solutions segment. We also expect a slightly lower EBIT than in 2015.
EBIT after cost of capital will be significantly below prior year, but we still expect to earn a premium on our cost of capital. Our expectations for the global economic environment in 2016 remain unchanged. We continue to expect an average oil price of $40 per barrel Brent and an average exchange rate of $1.10 per euro. The global economy will presumably grow at a level approximating that of 2016. In the current volatile and challenging macroeconomic environment, we continue to regard our targets for 2016 as ambitious and particularly dependent on oil price developments. However, the Q1 results provide a good base to achieve these targets. With that, I thank you for your attention, and we are now happy to take your questions.
I would like to-
Ladies and gentlemen, at this time, we will begin the question and answer session. 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. One moment for the first question, please.
I would like to open the call for your questions and ask you to please limit your questions to only one at a time so that everybody has a chance to ask a question. The first question comes from Paul Walsh, Morgan Stanley. Please go ahead.
Good morning, guys. Thank you very much for taking my question. It's a simple one, really. You know, I think sales have obviously come down meaningfully year-on-year in the first quarter, but profits up. If I look at the three downstream divisions, Performance Products, Functional Materials & Solutions, and Agricultural Solutions, all reporting mid-single-digit sales declines year-on-year, but conversely, all reporting single-digit EBIT improvements year-on-year as well. My question is pretty simple. Within that framework, can you talk about where the margin beats have come from, i.e., how much do you think is down to lower raw material prices, and can you keep it?
How much is down to the fixed cost saving programs, and how much is down to sort of mix and disposals within that as well? The question really is around the sustainability of the strong margins you've reported in the first quarter. Thanks very much.
Yeah. Hello, Paul. This is Hans. As you rightfully say, nice development with respect to the profits in the three segments, Performance Products, Functional Materials & Solutions, and also in Ag. As you know, market environment has been relatively difficult. When you think about in Q1, when you think about these three segments, they actually are, you know, dependent on raw materials to a lesser extent than our upstream chemical segment. Raw materials and the decline in raw material pricing in Q1 may have helped in this situation a little bit.
I think we also see in particular the self-help measures that we started to implement in particular in Performance Products starting late 2012 early 2013. That's one of the explanations for the good performance that we see in Performance Products. When you think about Functional Materials & Solutions, we actually had a situation with nice demand in the automotive industry, also in Q1. We see this reflected in particular in our OEM coatings business, but also in our emission catalyst business. We also had nice development overall in the construction industry even in Asia, and in particular in China, where we saw a more difficult environment in particular in the second half of 2015.
We saw an improved situation. That certainly helped in Functional Materials & Solutions. We have an overall good margin situation in Performance Materials, also a division that caters to the construction industry and the automotive industry. AG is a slightly different story. There it is in particular innovative products that we launched recently. In addition to that, it is self-help measures, cost containment measures that we put in place starting early in 2015 and that show some results. To what extent this will be sustainable, I'd say remains to be seen. As we said, what we have under our control, I think we managed the way you would expect us to manage it.
I think that's also a good basis going forward.
That's very clear. Thanks a lot, Hans.
Sure.
The next question is from James Knight, Exane. Please go ahead.
Morning. Thanks for taking my question. Looking at the volume side of that, if I'm understanding your comments right, March seems to have been a big pickup from January and February. Predictable question, but has that momentum continued into April? Can you detect whether it's a restocking related demand related to the oil price? Or what do you think customer inventories are like at the moment? Thank you.
Yeah, James, thanks for the question. As always, the restocking, the destocking cycles, the inventories at our customers are very difficult to say where they actually are. They don't share them with us to the full extent. I think we've explained a number of times that what we see is order behavior that is focused on orders with smaller lots, smaller quantities, more frequent. But then you see certain points in time where, in my words, the customer has to come back to the drinking hole. We experienced that from week two on in March. Typically, the third month in a quarter over the last three-four years was the weakest month.
Here again, we have a month, the last month in the quarter, where we see the strongest demand. There may be another explanation for the increase in demand that we've seen from week two on in March and that may have to do with oil price development and with that following raw material costs. I think when I checked this morning, the oil price was at $48. It's not too long ago, i.e., the week of January 20th, when we saw oil prices below $26. That may drive to a certain extent then also customer behavior. Your question on what do we see in April.
Based on what we have so far, which are our daily sales figures, we obviously do not yet have the full analysis, i.e., volume figures and the like. It looks like the good demand that we've seen in the second half of March continues also in April. When I look at our order book, that also reflects that.
Thank you very.
Sure.
The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.
Yes, good morning. Thanks for taking my two questions. First of all, are there any channel inventories outside of Brazil in Agro? Can you please elucidate that a bit? I might have missed the question because I was thrown off the call, but North America and Europe, what's the inventory situation like in Agro? And then second of all, can you please explain the technicality of the Norwegian tax system? That seems to be one of the key reasons why your group tax rate was at such a low level in Q1. Thank you.
Yeah, Christian, thanks for your two questions. Now, inventory situation, relatively high, channel inventories, not only in Brazil, as mentioned by you, but also in North America. Europe seems to be a little better, but frankly, based on the recent weather developments, which resembled more, you know, winter-like developments, remains to be seen what's going to happen in this season. I can tell you that the activity that we've seen over the last 10 days in Europe was certainly slower than what you usually would expect at this point in time in the season. Again, also in North America, relatively high channel inventories. Your second question on the Norwegian tax situation. Yes.
In fact, that is a key contributor or that is the contributor to our very low tax rate of only 15.4% in Q1. What's happening there, Norway taxes the hydrocarbon income at 78%. We had profits in Q1 2015. We don't have profits in Norway in Q1 2016 as a result of the extremely low oil prices and also natural gas prices. In addition to that, there is a peculiarity that has to do with deferred taxes. The Norwegian kroner has appreciated quite a bit between the end of 2015 and the end of March 2016, and that led to a reduction in deferred taxes.
In other words, an accounting event that you see there, no cash impact, but it leads to, in combination to the significant reduction in our tax rate, which otherwise would have been in the range, as expected by you, which is in the mid to upper 20s.
Thanks very much, and I wish you a good and short AGM.
Thank you very much.
Okay. The next question comes from Jeremy Redenius, Bernstein.
Hi. Thanks for taking my question. Could you talk about the effects of a couple things on the oil and gas earnings throughout the year? First, I'm wondering if the usual Sequoia adjustment had an impact on Q1, and how do you expect that to play out throughout the year? Then secondly, we know that part of your gas sales, at least in Europe, are lagged to six to nine months off the Western European spot price. I'm wondering, with you know gas prices falling even more in April, does that mean we're going to see you know considerably lower gas prices locked in for the rest of the year for this business?
Mm-hmm.
Thank you.
Okay, Jeremy. Happy to answer the questions. Now, the usual depreciation is one that we spread evenly over the quarters. You see the same impact there in Q2, Q3 and Q4 as you've seen it in Q1 of this year. On natural gas, the time lag, in fact, had a big impact in the past at times where the majority of contracts were based on oil price formulas, let's say five to six years ago. Over time, more and more of the contracts are market spot price based. Yes, there could be an impact in the remaining oil price-based portfolio, but that should be relatively small.
Okay. When you price off of gas price, now it's pretty close to spot price then as opposed to spot price with a lag.
Yes.
Okay.
Majority.
All right. Thank you very much.
The next question comes from Lutz Grüten, Commerzbank.
Yeah. Hi, good morning. Thanks for taking my question on the cash flow. I don't wanna be too picky on a quarterly cash flow, but just coming back to the effects on the working capital and the free cash flow just being EUR 45 million after Q1. I understand that there was a one-off situation last year, and there's a base effect, but it would be great to get you also some grip on what you think the working capital will be in the second, third, and fourth quarter. Year-end working capital, should we assume that this will be similar to year-end 2015, or will there be other effects throughout the remaining quarters? Thank you.
Lutz, that's a pretty loaded question there, and I think we'll take that in maybe in three parts. Part one, I'll address high level cash flow, and then Mark will go into a bit more details. Part two, or part three, then after Mark, I'll talk about working capital development in general. In cash flow, what you see there in general is what I call the new seasonality. As you know, we divested the gas trading and gas storage business, which had high cash usage at the point in time where we filled the storage capacity, i.e., Q3 and Q4, and then high cash inflows in Q1 when we sold most of the gas. That's something that we need to factor in.
I think I remember your question from last year's call, which was, "will you be able to repeat cash flow developments as we've seen it in Q1?". Back then, I think I said that will be very difficult, and with the seasonality change that we have in the portfolio, you see the outcome of that. I think with that, Marc, if you shed a bit more light on cash flow development there.
Sure. As you guys have probably already seen, the effect comes from the change in net working capital. As Hans has also said, you're gonna see a new seasonality in our cash flow. We're gonna have less inventory build-up from our gas storage business in before the heating season and then obviously no release of that those funds then as the winter draws to a close. What we do have in the first quarter is a seasonality an increase in accounts receivables that will stay. That's where we go into the high season of our selling season in the ag business in the Northern Hemisphere. That remains as is.
If you just look at it from a very high level, we're now at a depreciation level between EUR 900 million and EUR 1 billion. That came from our big investments that we've done. We've told you that we're gonna reduce our CapEx, so that's gonna come down from the level that you've seen in the past back to a normal level of investment. Those are countering situations. We have a lot of movement that should not be repeated in the net working capital, especially coming out of the movements in that we attribute to the release of funds or consumption of funds and long-term incentives. Those are all numbers that will not swing that way as in compared to 2015 return to a normal level.
Thanks, Marc. Lutz, your third part that I wanted to address is inventory development. You saw us bringing down inventories quite a bit during the year of 2015. The balance sheet position was at EUR 9.7 billion, end of 2015. End of Q1 we are at 9.6 billion. Now what's gonna happen there, I mean, we told you that we are managing our working capital and in particular, our inventories with a high focus. Shown that in 2015. What's gonna happen there will also depend on what we will see with respect to raw material pricing.
There is clearly a raw material impact in our inventories that helped us to bring the balance sheet position down in 2015. We will now have to see what's gonna happen with raw material prices in 2016. The clear target is to keep managing our working capital and our inventory in particular as stringently in 2016 as we've done that in 2015.
Very helpful. Thanks, and thanks for the reminder. Thank you.
Sure.
The next question comes from Peter Clark, Société Générale.
Yes, good morning. Thank you. Thank you for the question. It seems to be a step up in the portfolio focus, in recent months, and just wondering particularly downstream, obviously we've seen a few deals, particularly in Functional Materials & Solutions. Just wondering if that's something that we should expect this pace to continue. Obviously there's a very big portfolio, particularly in Performance Products actually, but this focus and certainly some of the comments in the press have indicated that you seem more focused at looking at the portfolio. Thank you.
Peter, thanks for your question. I would not say that we are more focused on our portfolio. I think we're always very focused on our portfolio. You saw us doing a number of what I would call these smaller type transactions in 2015. Our custom synthesis business, which we divested, comes to mind. Our paper hydrous kaolin business comes to mind. Our textile business comes to mind in 2015. I'm sure I've got three that we have a couple smaller divestitures done more in 2015. Now, this year, we have the automotive refinish transaction in China. Smaller transaction, but one that helps us to improve our footprint in automotive refinish significantly.
We announced this week the divestiture of our polyolefin catalyst business to W.R. Grace , which is a transaction that follows the logic of yes, we are a polyolefin catalyst producer, but we don't produce polyolefins anymore ourselves. We divested that business long time ago, so technology access there is not what others have. That's what I would call a logical step we're making there. We're divesting our industrial coatings business to Akzo. Again, I would not say higher focus on portfolio, same focus that we always have, the same pruning of the portfolio that we always do and that you can expect us to also continue to do going forward.
Okay. Thank you.
Okay. The next question comes from Andrew Benson, Citi.
Yes. Thanks very much. Could I perhaps be a little bit competitive with some of our peers? On the Performance Products side, can you give more detail on the performance and the outlook and perhaps a little bit of focus on the Care Chemicals, SAP, vitamins and the such like, just give us a little bit of help on how you see the outlook?
Mm-hmm.
Perhaps if I can try a second. Are there any sort of costs that have been absorbed within EBIT in the first quarter as a restructuring start-up costs? Can you just give us an update on what those are likely to be in the full year that are absorbed within your ongoing adjusted EBIT number?
Okay. Why don't I do this and start with the start-up cost question? On start-up costs, we said at the February call that we have about the same order of magnitude of start-up costs in 2016 as we had it in 2015. We also said that we saw the peak of start-up costs with more than EUR 100 million in Q4 of 2015 and from there we will see a gradual decline of start-up costs during the course of the year 2016. That, Andrew, should give you an idea on what's happening with respect to the start-up costs. Performance Products questions. Vitamin always an interesting one.
In particular Vitamin E. What do we see with respect to Vitamin E? We saw new lows during Q1. I think the average price, the average published price is, if I recall that correctly, in the 460 range, that's EUR 460 per kilogram. We also saw a very interesting development towards the end of the quarter and going into the month of April. Significant increase in prices, in particular, in China. Apparently, a number of shutdowns there, announced as being of temporary nature, and that has moved Vitamin E prices up significantly. What's going to happen there remains to be seen whether the supply will come back or not. Frankly, at this point in time, I don't know.
The superabsorbent business has become more competitive over the last 12-18 months. We see price pressure accordingly and margin pressure following that. I can also tell you that SAP is a good business for BASF. We will launch in a relatively short time or sell as commercial products the SAVIVA products, which we already showed you, I think, a year or 1.5 years ago in one of our meetings. We think that will help us to stay in the SAP business where we are or even improve our situation.
We have a few more participants in the queue. Therefore, please limit yourself to one question only. The next question comes from Tony Jones, Redburn.
Morning, Hans. You had pretty good cost control in the quarter, and if I add up R&D and SG&A, it looks like that core OpEx was down about 4% year-over-year. My question is, how much of this could reoccur? In this quarter, could you maybe split out how much came from currency effects and also what the total gross cost savings were in Q1? Thanks.
Tony, I'm not sure that I can provide you with this detail right now. Maybe we'll do this via investor relations. What I can tell you is that yes, there is a small impact on our cost improvement that's coming from foreign exchange. Actually, Q1 2016 is the first quarter since, if I recall that correctly, Q2 2014, where from a sales perspective, we have currency headwinds, but that obviously then also comes with some support on the cost side. That is relatively small compared to the impact that's coming from our various measures addressing fixed cost. You're aware of the program that we have in Performance Products. You're aware of our group, BASF Group-wide, program, which is called DRIVE.
You clearly see the impacts of that. Yes, SG&A costs slightly down. R&D costs down by, if I recall correctly, EUR 14 million in the quarter. Expect us to have a very firm grip on fixed cost development as we always have.
Thanks very much, Hans.
You're welcome.
The next question comes from Andreas Heine, MainFirst. Go ahead, please.
Yes, thank you for taking my question. It's basically on chemicals and the volume here. It was down 3%. As you were referring to some customers starting to restock, which obviously would first happen in chemicals, where you are closest to the oil price. Having in mind that all the startups you have done in the second half of last year should also add to the volume. Why is here volume down and not up? How is the ramp-up of these large, big plants in this segment going?
Thanks for your question, Andreas. The overall - 3% that we have in the chemical segment sees some or is influenced by some, what I would call special effects. Number one, on the volume side, actually, the biggest impact comes from running the splitter that we have in Port Arthur. That is the condensate splitter, and that feeds naphtha into the cracker, or we sell it into the market in Port Arthur. Huge volumes that run through that machine, which ran in Q1 of last year and didn't run in Q1 of this year due to the fact that condensate prices, as a result of lower condensate production in the U.S., were not attractive enough to run the big machine there.
That has an impact in the order of magnitude on the chemical segment of 1 percentage point. It could be even slightly higher than that. We then have caprolactam sales which used to go to third parties which we now consume internally as a result of the startup of the new Polyamide 6 plant in China. That is another impact on our volumes that we're showing here because what we're showing is volumes to third parties. Taking out these effects, volume growth in Q1 is flattish. We have one other major impact, and that is the big turnaround that we had at the Geismar site.
Geismar site in the U.S., every five years goes through a major turnaround where we're shutting down the entire site. It was down for this year, I believe, 55 or 60 days. That also has a major impact then on volumes. Your question with respect to the new capacities. The new capacities that we started up, we grow into these capacities. There are positive contributions to volume development coming from these capacities as to be expected. Overall, as mentioned already, on our calls in Q3 and Q4 last year and our earnings call for the full year. We're growing into these capacities as a result of overall slower growth more slowly than what we had originally expected.
Okay. The next question is from Patrick Lambert, Raymond James. Please go ahead.
Hi. Good morning, everybody. Quick one. I know, following Jeremy's questions on oil and gas, I don't know if you really answered the risk or risk state adjustments. Should we take that into our model in terms of EBIT? Is it just the volumes of Russia contribution going down as reported or a special event on EBIT per se? And maybe I can. That should be a quick one. Could you comment on the same question as Andreas on chemicals volumes? If I look at USA in particular, isocyanates, I think if I compared to your peers, your volumes were slightly up in MDI but clearly below Huntsman and Covestro.
Is it also because of internal use versus third party or some delays in ramp-ups of some of your plants? Thanks.
Now, first of all, your Yuzhno- Russkoye question. Put things in perspective. As a result of this make up year that we have, we get about half the volumes out of Yuzhno- Russkoye compared to the prior years or the prior year in 2016. That then also has a significant EBIT impact. This EBIT impact is spread over the four quarters evenly. On the isocyanates, I'm not sure where you're getting this information from that our MDI and TDI volumes are developing below what we see at competitors. What is certainly correct is that we have an impact in Q1 as a result of the turnaround that we have in Geismar.
As already mentioned, Geismar was down for almost two months. This is MDI capacity that we have in Geismar. There's also TDI capacity that we have in Geismar that was down over two months. Yes, that has an impact. Overall, I think this will even out during the course of the year because others will also go through their turnaround cycles. As I say, that should then even out. Other than that, in monomers, we have the impact on volumes that comes from caprolactam, which we don't sell to the market anymore. Certain quantities of caprolactam, which we now consume internally as a result of starting up our polyamide 6 plant in Shanghai.
Would you quantify the Yuzhno-Russkoye adjustment in Q1?
I think I cannot because that is subject to, it's covered by the confidentiality agreement that we have with Gazprom. Sorry.
Okay.
The next que-
It is
Yeah.
Let me help you there. It is a lower triple-digit million figure, just to help you there a little bit.
Great. Thank you. For the full year or for the
For the full year.
Okay.
The next question comes from Markus-
Patrick, no more questions.
Yeah, I know. We have four more questions and not even 10 minutes to go, so please limit yourself to one question. Markus Mayer is next from Baader.
Yeah. Good morning. Again, a question on your chemical processing catalyst, and this is the polyolefin catalyst divests. The fact that you approach Grace or basically sold this asset on an auction process. With this comment you made on the reason why you sold it, should we also think that there might be further divestment such as, for example, the fine chemicals, the core business you sold recently? That's my question, basically.
Okay. Why don't I take your question on the polyolefin catalyst? This was not what I would call a full auction process. This is a highly competitive offer that we got from Grace. If you look around and ask yourself the question, how many potential buyers are out there for business like that, who would be best suited to buy that business? I think we found the perfect buyer for that business. Your second question is on. Could you do me a favor, Markus? I was-
Yeah, sorry. Basically with this, what you said, why you sold the polyolefin catalyst, as you're also not active in polyolefins.
Mm-hmm.
Is this also could be another thing that you basically sold part of your fine chemistry business and therefore also your fine chemical catalyst might be the western candidate or basically are they saying that now we are happy with our chemical processing catalyst and therefore we should not anymore expect any kind of actions there.
No, I think the answer to that is we are very happy with our chemical catalyst business for this one here, for the polyolefin catalyst. There is the rationale that I gave you. I don't see that in other parts of the chemical catalyst portfolio.
Okay, perfect.
Sure.
Okay. The next question comes from Laurent Favre, Bank of America, Merrill Lynch.
Yes, good morning, thank you for taking my only question. It's back to the M&A theme. I mean, I think that back when we were asking you two years ago, three years ago, every time on conference calls, you were pointing to high valuations in the sector, preventing you from having a look at M&A and focusing on organic CapEx. Obviously, valuations have gone up since then. It's been a seller's market. You've been selling very well. I'm struggling to understand now the shift of tone, certainly in the press, for instance, in the interview that we were sent last night by IR, on the will to do M&A.
Could you maybe just, you know, frame for us your thinking right now on acquisitions and especially ones that could be bigger than what we've seen on Pronova and Staten, et c. Thank you.
I mean, on M&A, I think we've been very consistent there in what we said, and we didn't only say it, but we were also consistent in our actions. Now, is there a change in the tone? I know, quote quote, that you are referring to, but I would not necessarily describe that as a change of tone. I think we always said that if there are interesting opportunities we would certainly look at them.
We put that in the context of our acquisition criteria, and I think we came to the conclusion that at least bigger transactions than the one that you just described with Pronova BioPharma, as an example, or Becker Underwood, we did not see that would have A, met our acquisition criteria and B, been seen as being attractive for BASF. I think you can assume that this will be the same also in the future.
Thank you, Hans. That's certainly.
The next question is from Laurence Alexander, Jefferies.
Good morning. Hopefully a quick one. In terms of the portfolio shuffling that you've been doing, to come back to one of the earlier questions, has your thinking changed around the sustainability of technology barriers to entry, and the, you know, and therefore the need to have other competitive advantages, including vertical integration, to justify staying in businesses? Or are you applying the same assumptions but just a different sort of growth assumptions and market dynamics?
I think, Laurence, our approach and our criteria for acquisitions have not changed. I actually don't see that they will change. You're absolutely right. The growth environment is slower than what we had expected three or four years back. I don't see that there is a need to change our acquisition criteria.
Okay. Thank you.
Sure.
The next question is from John Klein, Berenberg.
Yeah. Hi, good morning. Just a very quick one. I'm actually just looking for a quick comment on your view on Acrylic Acid. We've seen Propylene prices rising in April. Can you hike Acrylic Acid prices? Will those price hikes stick or would that just mean an increase in imports? Thank you.
We've seen Acrylic Acid prices in cross-country for quite some time now. Propylene prices increasing should provide us with the opportunity to increase prices. If I recall correctly, we announced price increases already. Whether or not they will stick, frankly, I do not know yet. Remains to be seen.
Thank you.
Welcome.
With that, we answered all questions. There's one follow-up question. However, since the annual meeting really starts shortly, we would like to conclude this conference call, and investor relations will take care of this one follow-up question. We will report on our second quarter 2016 results on 27 July 2016. After the summer break, BASF will host an analyst and investor event. We would like to invite you to attend our Round Table Asia Pacific on September 23 in London. Next week, you will receive a save the date. Thank you for joining us. Should you have any further questions, please contact a member of the IR team, and we will be happy to help you. Goodbye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.