Ladies and gentlemen, thank you for standing by. I'm Emma, your Chorus Call operator. Welcome, and thank you for joining BASF Analyst conference call, third quarter 2015. 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 on your touch-tone telephone. When preparing to ask your question, please ensure that your phone is unmuted locally. If any participant has difficulty hearing the conference, please press the star key followed by zero to reach the operator 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 those 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 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 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 Magdalena Moll, Head of Investor Relations. Please go ahead.
Yeah. Thank you, Emma, and good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our third quarter 2015 conference call. Given the challenging economic environment, BASF experienced lower sales in the third quarter due to lower prices and slightly lower volumes. EBIT before special items declined slightly. Higher earnings in Functional Materials and Solutions as well as in Chemicals could not fully compensate for lower earnings in the other segments. With me on the call today to explain the results are Kurt Bock, our Chairman and Chief Executive Officer, and Hans-Ulrich Engel, our Chief Financial Officer. Kurt will summarize the key financials and highlight important milestones.
Subsequently, Hans will review the segment results of the third quarter, and Kurt will conclude with the outlook 2015. Afterwards, both gentlemen will be happy to take your questions. For your information, we have posted a longer version of the speech and charts together with the press documents on our website. With this, I would like to hand over to Kurt.
Yeah. Thank you, Maggie, and good morning, ladies and gentlemen. Thank you for joining us here today. In the third quarter of 2015, BASF showed a mixed picture of sales and earnings. While EBITDA went up, our major performance metric, EBIT before special items, came in 10% below the level of 2014. The main reasons are lower earnings in oil and gas and in agricultural solutions, driven by weak markets for hard and soft commodities. Our chemicals businesses achieved earnings slightly above last year's level despite lower sales prices, lack of volume growth, and higher startup costs. After a flat volume development in Q2, we experienced a pronounced summer lull, and more importantly, no volume momentum in September. This has continued into October, which usually is a very strong month for us.
Major markets like Brazil are in a recession or face, like China, lower growth rates. Against this background, we now expect the global chemical production to grow at 2.5%, which is below our expectation from earlier this year of 4.2%. In oil and gas, we see an oil price of currently below $50 per barrel against our expectation of $60-$70 at the beginning of this year. At the end of September, we closed our asset swap with Gazprom, meaning that in Q4 there will be no sales and earnings from the natural gas trading business. Against this background, we adjust our guidance for 2015. Our previous expectation that our chemicals business and agricultural solutions will compensate for lower oil and gas earnings will not fully materialize.
Firstly, oil and gas earnings will be lower than planned due to the lower oil and gas prices and the assets swap with Gazprom. Secondly, the agricultural solutions business will face another tough quarter and will most likely not increase its earnings but will come in below last year's number. Most importantly, we do not foresee a quick recovery of our chemical demand given the low price environment which we will be facing for quite some time. This leads us to now expect sales and EBIT before special items to be slightly below the level of 2014. Not surprisingly, we continue to focus on cost and cash. We will deliver the increased target of our STEP program of EUR 1.3 billion of annual savings and earnings improvements by the end of this year, and we successfully increased operating cash flow and free cash flow, particularly in Q3.
The first nine months of 2015, we generated a free cash flow of EUR 4.1 billion. This marks the highest free cash flow ever during a nine-month period. Let's go quickly through the financial performance of BASF Group in the third quarter compared to last year. Sales decreased by 5% to EUR 17.4 billion. Volumes declined slightly as higher volumes in agricultural solutions and oil and gas could not fully offset lower volumes in our chemicals business. Prices were down 8%, mainly attributable to the lower oil and raw material prices. We experienced currency tailwinds of 4%. Lower raw material trading activities and other also affected sales negatively.
EBIT before special items decreased by 10% to EUR 1.6 billion. Higher earnings in Functional Materials & Solutions as well as Chemicals could not fully offset lower earnings in Oil & Gas, Performance Products, Agricultural Solutions and Other. Depreciation was up by around EUR 210 million, mainly due to our investment projects. BASF recognized positive special items in EBIT of around EUR 290 million, in particular as a result of the asset swap with Gazprom. EBIT amounted therefore to EUR 1.9 billion, an increase of 8%. EBITDA came in 14% higher at EUR 2.9 billion. The tax rate decreased from 27.6%- 26%, mainly due to the tax disposal gain of the asset swap. Net income increased by 19% to EUR 1.2 billion.
Adjusted earnings per share decreased to EUR 1.07 from EUR 1.24 last year. In Q3, operating cash flow reached almost EUR 3.4 billion, an increase of more than 50%. As I said before, free cash flow significantly increased to EUR 1.8 billion from EUR 830 million last year. Let me highlight some of the most important developments since Q2 reporting. On August 12th, we started our new world-scale resin and electrocoat plant in Shanghai. The plant is fully integrated in our new automotive coatings plant to create synergies and high production efficiency. End of August, we also started up the MDI production in Chongqing in China. This new plant enables us to serve and support our polyurethane customers in Western China.
Together with our partner Yara, we broke ground for a new world scale ammonia plant at our Verbund site in Freeport in Texas. Production startup is planned for 2017. Beginning of September, we also agreed with our strategic partner to participate with a 10% stake in the Nord Stream pipeline expansion through the Baltic Sea, which will further improve the security of natural gas supply for Western Europe. We continue to restructure our performance product segment. We completed the sale of our pharma custom synthesis business and parts of our active pharmaceutical ingredients business to Siegfried Holding AG. Furthermore, we announced the carve-out of our pigments business. On September 30th, we closed the asset swap with Gazprom. With the swap, BASF further expands its production of oil and gas and finally exits the natural gas trading and storage business.
In 2014, the divested activities contributed a total of around EUR 12.2 billion to sales and EUR 260 million to EBITDA. In the first three quarters of this year, the contribution to sales was around EUR 10 billion and the contribution to EBITDA before special items around EUR 320 million. At the end of September, we announced a new operational excellence program called Drive. It will run from 2016- 2018, and we target to achieve an earnings contribution of EUR 1 billion at the end of 2018. With this, I hand over to Hans.
Yeah. Thank you, Kurt, and good morning also from my side. I start with an overview on our segments and there with Chemicals. Sales in the Chemicals segment came in considerably lower. Declining prices in all divisions following the lower oil and raw material prices impacted sales negatively. Volumes went slightly down, mainly driven by petrochemicals. Currency effects had a positive impact on sales across the segment. The divestment of our participation in the Ellba Eastern joint operation negatively impacted sales. Strong cracker margins in Europe and higher equity results from BASF-YPC in Nanjing more than compensated for start-up costs and contributed to a slight increase in EBIT before special items. In Performance Products, sales declined slightly. Positive currency effects were offset by lower volumes and prices. Lower demand, especially in the pigments paper as well as the oil field solutions businesses, led to a volume decline.
In addition, the divestiture of textile chemicals had a negative structural effect on sales. EBIT before special items declined significantly also due to higher fixed costs, mainly caused by several production startups. In Functional Materials and Solutions, sales came in on the level of the prior year's third quarter. We experienced good demand in automotive and construction. Lower precious metals trading activities resulted in a slight decline of overall volumes. Price decreases, mainly driven by precious metals, were more than offset by favorable currency effects. EBIT before special items was considerably up with a strong contribution from Performance Materials. In Agricultural Solutions, sales increased significantly as pronounced negative currency effects were more than offset by higher volumes and prices. While our business in South America benefited from early orders, global market conditions remained challenging.
EBIT before special items strongly declined, burdened by higher costs related to increased capacities and inventory reduction measures. Business in Europe declined considerably. Volumes in fungicides decreased due to earlier demand in Western Europe in the first half of the year and low disease pressure. In addition, we sold less oilseed rape herbicides due to increasing generic competition. In North America, sales were up significantly on higher volumes and prices as well as positive currency effects. We experienced a good business development for fungicides and herbicides, especially for dicamba. Sales in South America rose significantly based on higher volumes and prices. In anticipation of a further devaluation of the Brazilian real, farmers moved orders up and accepted some price increases in local currency.
In Asia Pacific, sales dropped mainly due to a strong decrease in demand for soybean herbicides in India following a very dry season with reduced acreages and higher generic pressure. In the oil and gas segment, sales decreased slightly. This was driven by lower prices in natural gas trading. Higher production volumes in E&P, including an offshore lifting in Libya and higher contributions from Norway, more than compensated for the lower oil price and led to a considerable increase in sales. The average price for Brent crude oil in EUR decreased by 41% compared to the prior year quarter, and came in at EUR 45 per barrel. EBIT before special items in E&P came in significantly above prior year level as we realized higher production in Libya and in Norway. EBIT before special items in natural gas trading was down significantly.
The prior year quarter included higher earnings from price revisions. Special items amounted to around EUR 270 million, including a EUR 331 million disposal gain following the asset swap with Gazprom. The positive special item was partially offset by impairment charges related to a gas development project in Norway. Net income came in at EUR 625 million, an increase of around EUR 390 million. Please be reminded that due to the asset swap, today is the last time that we report our natural gas trading activities. As of October first, you have to eliminate the natural gas trading and storage activities, as well as 50% of Wintershall Noordzee B.V. from your financial models.
To give you an indication, in Q4 2014, the divested activities generated sales of EUR 3.3 billion and an EBITDA of around EUR 70 million. Sales in other decreased significantly, mainly attributable to reduced raw material trading activities and the divestment of our shares in the Ellba Eastern joint operation in Singapore. EBIT before special items in other was down strongly, caused by a lower effect from the dissolution of provisions for our long-term incentive program compared to the prior year quarter. Let me now turn to our cash flow, which developed strongly in Q3. Please be reminded that we will summarize the first nine months of 2015. At EUR 8.5 billion, cash provided by operating activities was up by EUR 3.6 billion.
Since the beginning of 2015, net working capital decreased by EUR 2.5 billion, mainly attributable to lower inventories as a result of our strict inventory management and price declines. In addition, lower accounts receivable had a positive effect on net working capital. Depreciation amounted to EUR 2.8 billion compared to EUR 2.3 billion in the prior year period. Cash used in investing activities increased by EUR 1.2 billion to around EUR 5.0 billion. Capital expenditures amounted to EUR 4.4 billion as a result of our ongoing investment projects. We incurred a net cash inflow from divestitures and acquisitions of around EUR 230 million, as for example, for the sale of our pharma custom synthesis business.
Free cash flow came in at EUR 4.1 billion, up by EUR 2.8 billion compared to the prior year period. This marks the highest free cash flow ever during the first nine months and already exceeds the full year 2014. Financing activities led to a cash outflow of EUR 3.5 billion. Thereof, the changes in financial liabilities resulted in a cash outflow of about EUR 650 million. Now to the most relevant developments in the balance sheet. Compared to the end of 2014, total assets slightly increased by around EUR 1 billion- EUR 72.3 billion. Long-term assets were up by EUR 1.8 billion and amounted to EUR 45.7 billion.
Investments accounted for using the equity method increased by EUR 1.3 billion due to the asset swap with Gazprom, reflecting our participation in the Achimov Blocks four and five, and the reclassification of our remaining 50% share in Wintershall Noordzee B.V. Short-term assets decreased by EUR 800 million- EUR 26.6 billion. Inventories amounted to EUR 9.7 billion, down by almost EUR 1.6 billion. Accounts receivable were down by EUR 700 million and stood at EUR 9.7 billion. The decline in inventories and trade accounts receivable was driven by our strict inventory management, the asset swap with Gazprom, and the lower oil and raw material prices. Following the conclusion of the agreement to divest selected upstream assets on the Norwegian continental shelf to Tellus Petroleum, we transferred the respective assets and liabilities to a disposal group.
This led to assets under disposal of EUR 1.1 billion and liabilities under disposal of EUR 500 million. Total liabilities decreased by EUR 900 million to around EUR 42.2 billion. Long-term liabilities decreased by almost EUR 1 billion, mainly driven by a shift from long to short-term financial debt, as well as the asset swap with Gazprom. Short-term liabilities were almost stable at EUR 16 billion. Net debt increased by about EUR 80 million to EUR 13.8 billion. Our equity ratio increased from 39.5% to 41.6%, and remains on a very healthy level. With that, back to you, Kurt.
Yeah. Thank you, Hans. With this, we come to the outlook. The macroeconomic environment remains challenging, and major leading indicators continued to weaken over the last couple of weeks. Therefore, we reduced our macroeconomic assumptions for 2015 as follows. Global GDP growth is expected to be lower at 2.3%. Industrial production is expected to grow by only 2%. We reduce the growth expectation for the chemical production to 3.5%. Let me remind you that at the beginning of this year, we expected GDP to grow at 2.8%, industrial production to increase by 3.6%, and chemical production by 4.2%. We also slightly adjust our dollar exchange rate to 1.12.
Our assumption for the 2015 average oil price drops to $55 per barrel Brent, about $10 below our expectation at the beginning of this year. Due to these macroeconomic headwinds, the lower-than-expected oil price, as well as the impact of the recently closed asset swap with Gazprom on our Q4 2015 results, we adjust our full-year 2015 guidance for BASF Group as follows. Without the effect of acquisitions and divestments, our target is to grow volumes in 2015. Due to the divestment of the gas trading and storage business as part of the assets of this Gazprom and the lower oil price, we now expect group sales to be slightly lower than in 2014. We expect EBIT before special items to be slightly lower than in 2014.
The chemicals business is expected to provide a larger contribution than in 2014. Earnings from crop protection will most likely come in slightly below the level of 2014 due to the more challenging business environment. In oil and gas, results will decline significantly, caused by the lower oil price and the divestment of the gas trading and storage business. We aim to earn, again, a substantial premium on our cost of capital, but on a lower level than last year, when we had a higher amount of positive special items from divestitures. Thank you now for your attention, and we are happy to take your questions.
Ladies and gentlemen, I would now like to open the call for questions and ask you to please limit your questions to only one at a time so that we can take as many questions as possible. Of course, you're always welcome to rejoin the queue for follow-up questions. We are starting with the first question from Paul Walsh, Morgan Stanley. Good morning, Paul.
Yeah, good morning, Maggie. Good morning, gentlemen. I wondered if you could just help me understand the various factors within the changing guidance. Clearly, the major piece is deconsolidating a gas storage and trading from the fourth quarter. Kurt, you've already pointed towards the fact that knocked EUR 70 million off EBITDA, maybe EUR 50, 60 million off at an EBIT pre-SI level. Is that the biggest piece or do you see similar sizable impacts from the general slowdown, the lower oil price and perhaps slightly weaker ag markets? I'm just trying to get a sense incrementally for where you think things have deteriorated most visibly.
Yeah. Hi, Paul. Thank you for that question. I think it is a combination of what you just mentioned. Clearly is the divestiture of the gas trading business. This is around EUR 100 million. This is what we had projected for Q4 to come in.
EBITDA, Kurt, or is that EBIT pre-SI?
EBIT.
Okay, thank you.
We had the lower. You know, these earnings in gas trading are kind of volatile between quarters and difficult to predict. That is essentially what was part of our forecast. The oil price certainly plays a role. It is now below $50, and that certainly, you know the math, has an impact on our bottom line. In Ag, we had overall, given the difficult environment, especially in South America, not too bad a result, I have to say.
Essentially when you compare us to our competitors. Yet we believe that in South America, we had some pre-buying simply because people were anxious to avoid a further depreciation of the Brazilian real. Forecasting Q4 is a little bit difficult, but overall, we now assume that most likely in ag we will come in below last year's EBITDA number, and our goal was to improve earnings in ag in 2015 over 2014. Now we see a slight decline, and that certainly also has an impact. Then from my point of view, because these are all factors I've just discussed, which are kind of easy to describe and to identify, the last factor is really the question of volume, momentum, and what do we see in our markets.
I think I already made it clear when we met in September, late September, that we really saw very lackluster demand development coming out of the summer lull. This has continued going into October. In October, month to date, we haven't seen any real volume growth to make this very clear. We perceive this as our customers being very, very cautious right now. They might be holding back orders in view of expecting further price reductions based on the low oil price, but maybe this is also underlying macroeconomic weakness. As I mentioned in my little speech, there are a couple of leading indicators who point into that direction.
Actually, if I look at our orders on hand and daily sales, it doesn't feel at all like there is any positive momentum. These four factors really in combination lead us to look at Q4 anew and come to the conclusion that most likely results will be slightly below last year's total number for 2015.
That's very clear. Just on those cracker spreads, those fantastic cracker spreads we're seeing at the moment, Kurt, do you think I guess you feel those are sustainable given the current tightness?
You have to be specific here. We had a terrific run in North America starting in 2014 going into 2015. Margins have come down a bit. We see in Europe now additional capacity coming on stream. We had a couple of turnaround situations, as you know. Margins in the olefins business will come down in Q4 most likely compared to Q3. Yes, we do have also not rising raw material costs, but our assumption is that margins most likely will be lower than what we have seen in the previous quarter. That also plays a role. This again, Paul, goes back to this deflationary environment which we are facing now, I think, throughout our industry.
Sure. That's very clear. Thanks very much, guys. Thank you.
You're welcome.
The next question comes from James Knight, and then we have Jeremy Redenius. James Knight from Exane.
Thank you for taking my question. Specifically on ag, could you help us quantify the pre-buying effect? I know it's difficult, but let's put it this way. Would you expect for the second half, given the overall ag environment, to show volume growth or a volume decline? Thank you.
That is a tough one, James, I have to say. The pre-buying to identify in a real number is very difficult for us. I mean, this. We are now talking South America, essentially. We do think that the South American crop protection market this year will most likely in U.S. dollar-denominated will decline by 20%-25%. That is a sizable number. This is not in South America just about volume development. It's first and foremost about price management because we have to compensate for the steep devaluation of the Brazilian real. You have seen in ag that we had quite some good price development, I think about 10% price increases in ag.
This is basically us fighting against this depreciation in South America, and this is actually make or break for the profitability of our business in that respective area. It's a combination of volumes and prices. Medium long term, you might say, okay, with the devaluation in South America, these economies become more competitive again internationally, and there should be a, let's say, renewed volume drive. For the time being, we are a little bit cautious in that respect.
Thank you.
The next question now comes from Jeremy Redenius from Bernstein.
Hi, it's Jeremy Redenius. Thanks for taking the question. I'm wondering why CapEx is up year-over-year. Can you talk about the extent that is from, let's say, your oil and gas partners continuing to spend, as you highlighted at Q2 results, versus, you know, how much of it is the divisions are spending beyond their budgets? And how much of a factor is the weaker euro playing, assuming that you're spending some of those projects in dollars and translating them back to euro into the number? Thanks.
Yeah. Thank you for the question, Jeremy. It's a combination. Oil and gas plays a role, something which we cannot fully control because I said this before, we are part of consortia, and they are essentially handing us the bills, and we have to pay. Otherwise the project will be stopped, which would be interesting. Then the stronger U.S. dollar or weaker euro also plays a role, just the translation effect of these investments. We saw a couple of projects where we were able, you might say, to implement faster than what we had expected. This is not necessarily bad news because obviously then capacities are available a little bit earlier. This is the combination of factors here.
Are cost overruns playing a role in any case here?
We had cost overruns in Brazil. I think we talked about that one. We are at the finishing line here in Ludwigshafen with the big TDI complex where we had some delays due to the complexity of that endeavor. With the delays also came slight cost overruns. Actually all in all, this doesn't really play a major role. When we look at our CapEx projects, we measure them with three criteria, which is on budget, on time, and quality. We call this triple A. If you achieve triple A, then you are on safe territory. The vast majority of our projects come in as what we call triple A projects.
This still doesn't mean that the market is always completely ready, as we have now seen in Brazil, to buy our product, if there is a recession. We have a strong focus on executing our projects well.
Great. Well, thank you very much for that.
The next question comes from Lutz Grüten, Commerzbank.
Morning. Just a quick one on cash flow. The net working capital was nicely reduced again in the third quarter. Is this now a sustainable base also for Q4, or should we expect here?
Yeah, Lutz, this is Hans. In Q3, we actually had a much lower impact from the inventory than in the prior quarters. Inventory changes predominantly in Q1 and in Q2. In Q3, stronger impact with respect to accounts receivable. Then when you look at the balance sheet, just please keep in mind that there is also a significant impact in our working capital as a result of the asset swap. Overall, thanks for noting. I think the entire team has done a great job there.
Strong focus on working capital management and overall, and you've seen that we have generated EUR 2.5 billion more in cash coming from or the EUR 2.5 billion in 2015 in the first three quarters, where last three quarters, we had actually a cash consumption in the order of magnitude of EUR 900 million in the working capital. A swing there of EUR 3.4 billion.
Thank you.
The next question now comes from Thomas Gilbert from UBS.
Yeah, good morning. Following up from Lutz's question, can you remind us, it's regarding trying to get to fish for a year-end net debt number. Can you remind us what kind of disposal proceeds we should expect for already announced disposals this year in the fourth quarter? And are there any additional impacts in the cash flow statement from the asset swap yet to come in the last three months? Thank you.
Thomas, last question first. Based on everything that I've seen, no cash impact to be expected. It could be that there is a small compensation payment still to be done, but that will not have a major impact on the cash flow statement. Your first question again was with respect to disposal proceeds from announced divestitures in Q4. The only one that we have announced, not yet closed, of a sizable nature, is the Tellus transaction. On the Tellus transaction, we have disposal proceeds in the order of magnitude of EUR 500 million-EUR 600 million. So that gives you an idea there.
Okay. In Performance Products, kaolin, textile chemicals, pharmaceutical intermediates, everything done and dusted?
We've closed the pharmaceutical transaction. We've closed the textile transaction. We still have in Q4 to close the paper hydrous kaolin transaction, but that is of a very v ery small nature.
Thank you.
The number six question comes from Laurence Alexander from Jefferies.
Good morning. Could you give a little bit of extra detail on the Nutrition and Health and Catalyst segment results? Particularly, are you seeing any sign of those businesses troughing, or should we expect that to stay weak into year-end?
Okay. Laurence, I start with Nutrition. What we've seen in Nutrition, certainly a continued price pressure in Vitamin B6, just to name one of your favorite products to ask about. We work very hard to bring prices up there, but in Q3, we still had strong price pressures which impaired our overall results. Apart from that, this is part of the Performance Products segment, obviously we had in Nutrition also some production shortages. Part of that is EO related, part of that is citral related, where we had lower shipments than what we had planned earlier this year.
With this, Catalyst?
Yeah, Laurence, to your question with respect to Catalyst, keep in mind Catalyst business typically in Q3 impacted by the summer months and their sales to the automotive industry, in particular in Europe, at a seasonal low. Our expectation for Catalyst is actually that Q4 business performance will be stronger than the business performance that we've experienced in Q3.
Okay. Thank you.
Our next question comes from Andreas Heine from MainFirst. Hello, Andreas.
Yeah. Hello. I have a question on the volume trend. In the industrial business, you have not shown a volume increase this year and only minor last year. In contrast, you have invested quite heavily in capacity additions. How do you see these capacity additions and what you plan for the coming years with basically no volume growth? What you have highlighted in the trends, obviously only going into Q4, does not show any pickup in volume. I don't know whether you can give any comment on 2016, but I would guess from today's point of view, it will not be a strong start in 2016 either.
Is it not the time to rethink whether all these capacity additions have to be scaled back or delayed a little bit so that you really run down CapEx in the coming years?
Yeah. Hi, Andreas. Thank you for your question. I think we have already indicated strongly that we wanna reduce CapEx to a level slightly above depreciation levels. Also acknowledging, as you said, that over the last couple of years, we have had an investment spree, which we still think was necessary to capture growth, essentially in emerging markets and to improve our production structure in North America and in Europe. Part of those investments are clearly about growth. That is essentially true for emerging markets. Part of those investments are about improving our Verbund structure. In the United States, it's quite obvious when we talk about topics like ammonia, which is pure backward integration, where we have no external growth coming. We're just trying to strengthen our bottom line.
The same holds true for Europe in a certain way, where we had this one big investment here in Ludwigshafen at TDI. Here again, please keep in mind, yes, we are expanding TDI in Ludwigshafen by around 300,000 tons. At the same time, we are going to shut down a capacity in Schwarzheide, which is 80,000 tons. We acquired a business about two to three years ago in Poland, which is also going out of business, which is another 75,000 tons. The net addition is 150, roughly. What I'm trying to say here is that we are very, very much aware and cognizant of supply-demand balances, and we try to play our role in those respective markets.
We certainly want to invest in technologies, and we have talked about this again and again, in technologies and for structures where we see a competitive advantage for BASF. Emerging markets, we see at least what we see is a pronounced slowdown in Asia, China. We can only talk about our business, but that is what we are seeing right now. Growth in China for us has been unsatisfactory over the last couple of quarters. There's no doubt about it. We have a couple of new capacities coming on stream. Polyamide recently, now MDI Chongqing. They are in Nanjing. They all will capture growth going forward, and there is underlying demand for these products. Most of these products actually grow below GDP, and I think we will demonstrate this going forward.
This is very much the upstream part of the business. In the downstream businesses, we have continued to invest in industries like automotive, where we perceive competitive advantage for BASF. Hans just talked about the catalyst business. Yes, we built a new plant in Poland. Yes, we're expanding capacity in India and China because we do see growth in these markets, and we have grown very nicely. I think we have demonstrated this already to you that we were able to grow our automotive business in China. Just one example, much faster than the underlying automotive market has developed. Going forward, we will remain to be cautious. I think we have also been cautious in the past.
We will analyze very, very clearly what's ahead of us at this point in time, referring to your remark about 2016. We would like to stick to our policy to update you on the 2016 outlook in February when we have our annual call. At this point in time, the outlook is a little bit rocky and very difficult to interpret. As I said before, we think that there are also some price-conscious buyers out there who, against the background of weak oil prices, are holding back. This might also be an effect from a weakening overall global economy. That's at least what we are feeling.
Thanks, Kurt.
The next question comes from Andrew Benson from Citi.
Yes, thanks, Maggie. Thanks, everyone. Historically, when you've seen these slowdowns, you've taken action in terms of perhaps constraining production, which you seem to have done successfully in net working capital reductions. Are there any further measures in terms of efficiencies above and beyond the EUR 1 billion new program that you've announced and/or constraint on costs that you think are likely that are in the planning now to defend profitability?
There are a couple of programs underway. I mean, as you all know, this is an ongoing continuous task for management. The EUR 1 billion program will start officially on January first, and this will duly be executed and implemented. You also know that in Performance Products, we have an additional program running, aiming at about EUR 500 million improvement savings by end of 2017. We are well on track to achieve that, but I have to acknowledge we also have counterweighting forces in terms of price and margin pressure in some of those businesses. I think your question is more structurally oriented. You know, it's not just, you know, do you reduce utilization rates of existing plants, or do you also have to more fundamentally rethink some of your production footprints?
I mentioned the TDI example here in Europe, where we are very much also thinking in terms of industry structure and in supply and demand. In the past, I think, BASF has always played an instrumental and positive role in that respect. We will certainly analyze which markets would require going forward more drastic actions. Again, that also needs a little bit more visibility, which at this point in time, we don't have.
Okay, thanks.
Our next question comes from Tony Jones from Redburn.
Oh, good morning, everybody. I just had a question on some of the pluses and minuses to EBIT in the quarter. I remember in Q2, you had some, and I think you referred to earlier, you had some higher fixed costs. I think you mentioned EUR 350 million in Q2. Could you talk about whether the same reoccurred in Q3? And what should we be thinking about Q4? Then also, could you help us think about what the EBIT gain was in Q3 from currency? I think it was EUR 250 million in Q2. Thank you.
We have to check on those numbers, Tony, but maybe I start with the fixed cost picture. In general, it's a major focus of our activities. I mentioned this before. We have a couple of effects here which we have to mention. One is certainly, and not to forget about, Forex currency effect. We have about 7%-8% fixed cost increase simply due to the weak euro. This is something we cannot really avoid, so we see it on both sides. See the currency effect, not just in sales, but also in fixed costs. We have additional start-up costs this year, which essentially materialize over the course of Q3 and Q4, now going slightly up in Q4, simply we know because no capacity is coming on stream.
We have, I'll say, an underlying cost management, which is essentially quite effective, which keeps fixed costs without these effects essentially at last year's level. What we could not reduce, actually we increased the number, is idle costs because starting in early Q2 we cut back on capacity realization rates, and this certainly has brought idle costs well above the level of 2014, and this is certainly not a good, but it is an explanation for the earnings shortfall in Q3, essentially. With this, I think Hans would have had enough time to think about Forex effects in Q3.
Yeah, certainly, Tony. This is Hans. Foreign exchange impact in the order of magnitude of EUR 200 million-EUR 250 million, so a bit lower than what we had seen in the prior quarters, and we expect that to, based on what I'm seeing with respect to currency developments, further diminishing in Q4.
Thank you. Appreciate it.
The next question is coming from Peter Clark, Société Générale.
Yes, good morning. Thank you. I was just looking at the macro cuts you're forecasting now with the IP going down. I think that was slashed 30% - 2%, but the chemical production still remaining, it was cut, I think 10% or so to 3.5%. Obviously, that's a big gap. We don't normally see a gap like that between IP and chemical production. I'm just wondering if there's something you see as a delay factor there in terms of the hits to the chemical industry. Does it indicate, as you seem to be suggesting, quite a sluggish outlook ahead? What are the customer industries doing? Everyone seems to be indicating inventory levels, as far as they can tell, are being pulled down, so they are pretty low.
It's a number that stands out because we've had you give this every time, and the gap between chemical production and the IP is quite substantial. Thank you.
No, duly observed, obviously. I think we already gave the answer, Peter. There might be some delay, and inventory management certainly also plays an important role. That is what I described before. I mean, we see this slow order entry pattern, which from our point of view indicates that our customers are simply uncertain about what they have to expect, and therefore they are holding back placing orders and might be holding back in the future.
Okay. Thank you.
Welcome.
The next question comes from Markus Mayer from Baader Bank.
Yeah, good morning. Thank you. You already elaborated on the idle costs. Could you maybe give us an indication on the start-up costs you had in Q3 and what you're also expecting for Q4 for the start-up costs there?
Marcus, happy to do this. This is Hans. What we've experienced during, you know, the course of 2015, and this is exactly as we had planned it, is an increase of start-up costs quarter-over-quarter. Q3 so far the highest with the start-up that we will have of the TDI plant next month. Start-up costs in Q4 will even increase a little bit, be above what we have experienced in Q3. Overall, you recall we've given guidance there for the Chemicals segment only, where we said that the start-up costs are in the range of EUR 150 million-EUR 200 million. Again, that's for Chemicals only. We will be in that range, more towards the upper range, and have to give you a little bit more help, significantly less than 50% of the start-up cost in Q1 and Q2.
Perfect. Thanks.
Now the next question is coming from Christian Faitz from Kepler Cheuvreux.
Yes, good morning. Thanks for taking my one question. When I look at your regions, in particular, Germany saw significant sales and profit decrease. Can you qualify which segments or customer groups this came from, or was it just gas trading? Thank you.
Faitz, this is Hans. What we have on the sales side, that is in fact, in particular, gas trading in Western Europe and there in particular in Germany, that has increased and driven sales up. When you ask the same question with respect to earnings before special items, we are certainly benefiting there from, you know, the very strong margin environment in petrochemicals that we've experienced in Q3, and with two crackers in Germany, that also helps.
Sorry, just to ask again, but EBIT was down 28% in Germany from EUR 592 to EUR 426. What's behind that?
Give me a second. I need to look into that, and I'll answer that in a second.
Thanks.
Maybe in the meantime, we go on with the next question from Oliver Schwarz from Warburg. Oliver?
Yeah, thank you. Just a quick one on the ag business. If we exclude South America, could you give us your view on how prices and volumes are likely to progress into Q3, Q4? How is the inventory level at your customers there? Do you expect some form of pre-buying or are customers basically holding out hoping for lower prices in 2016? Thank you.
Yeah, Oliver, as you know, Q3 is very much a southern hemisphere quarter. It's kind of difficult to now speculate on Q4 and essentially then Q1 of 2015. We have had a pretty robust business this year. We had some specific issues which we really cannot foresee, like droughts, a very dry season in some parts of Europe. Fundamentally, I'm still optimistic for these markets because underlyingly they should develop nicely. We have a very special situation in South America due to currency and due to the large crops, soy and corn, which are essentially export products for South America to Asia, and this is not the case in Europe. Marcus, this is again Hans. Sometimes it helps to look at the numbers and refresh the memory.
What do we have? This is again Germany effects. One is last year we had in the gas trading business a price revision which we didn't have this year. As a result of that, the results in gas trading significantly lower than where they were last year. The second impact that we have, we've described that, is our long-term incentive program, where we had a reversal of the provision this year, but we also had a much, much higher reversal of the provision last year. That is then the explanation for the reduction in the order of magnitude of EUR 160 million that you see in EBIT before special items for Germany.
Yes. Now we are moving on with the next question from Evgenia Molotova from Berenberg.
Hello, good morning. Thanks a lot for taking my question. I just wanted to ask, if possible, on the idle costs and the fact that you are bringing capacities at the moment into the slightly or not so slightly oversupplied markets, and the demand pickup is probably developing slower. What will it do to the return capital employed over the lifetime of these assets? How does it fall within your strategy of the asset growth? Just some clarifications. EUR 200 million, EUR 150 million-EUR 200 million in chemicals. If you could give guidance on the start-up costs and performance products as well. Also, do these EUR 200 million include idle costs as well, or idle costs come on top? Thank you.
Thank you, Evgenia, for your question. Start-up costs in Performance Products in Q3 have been in the order of magnitude of about EUR 20 million, but so that is a much smaller number, obviously than in chemicals. Your first question is really the more fundamental question about what is the outlook for the investments which you have made. Obviously, and this was asked before, we expect now growth to pick up for some of these new plants because they are now starting to produce. Actually, market environment might be a little bit more difficult with that. I'm again talking here upstream.
To make this very clear with that. There might be some margin pressure. In terms of overall profitability, what we try to do is when we approve projects, we do not rely on one single case. We look at scenarios, trying to understand how our investments would perform under different circumstances. We certainly will not approve a project based on peak margins and endless growth scenarios. We also have to take into account that some of these products by nature are
Cyclical.
Cyclical, and some of that cyclicality we now witness in 2015.
Thank you. Just a clarification. Do start-up costs include idle costs?
No, that's a separate item.
You wouldn't quantify those?
I don't think so. Nope.
Okay. Thank you.
Thank you.
This brings us to the next question from Patrick Lambert from Raymond James.
Hi, Maggie. Thanks. One quick question regarding oil and gas again. A lot of company are finding difficult to invest. I was just wondering about Gazprom, especially in Achimov One. Do you see the same urgency of ramping up Achimov One as you do? Or basically what is the situation in terms of expanding in those fields? Thanks.
Your question, this is Hans, Patrick, with respect to what do we see in Achimov One. We've laid out the development plan for that field in 2011 and 2012. Since then we are implementing exactly according to plan. There will be a total of, if I recall the number correctly, between 120 and 130 wells producing there. We are ramping up exactly in line with the plan that we've developed. I don't have the exact figure, but I think at this point in time there's 90 wells up and running, and we haven't seen a slowdown.
By the way, in our joint ventures we've also not seen any type of impact on the production plans that were developed for the year 2015. Also there, everything is working exactly according to plan. With respect to the new fields, Achimov 4 and 5, I can tell you that the working teams met for the first time a week ago. They are developing the plans. I'll get to see that most probably by the beginning of next year, the first time, and then I'll know more.
Okay.
No indication for any time, any type of delay.
The current oversupply of gas in Russia is not an issue for Gazprom?
I cannot.
You.
I think that's a question in the end that will have to be asked of Gazprom. I can only speak with respect to the projects that we are involved in. Again, Achimov 1, which is the one where we're currently drilling new holes, is moving forward exactly as planned.
Thank you.
We are moving on to Jaideep Pandya from Goldman.
Thank you. Sorry, I joined the call a bit late. One question really on natural gas. Could you tell us that if fundamentally natural gas prices in Europe go down, what implication does it have on your upstream business? And if your Ludwigshafen and Antwerp crackers have the flexibility to crack naphtha and natural gas? That's my first question. And my second question is basically on the upstream business. Could you just put in perspective, you know, in petrochemicals, you the profitability that you saw in Q3 in context of the last one and a half year, how good has it been, basically? Is this the best quarter that you've seen in petrochemicals in Q3? Thank you.
Let me start with the last question about petrochemicals. Q3 was a good quarter, but it was not the best quarter for petrochemicals. We have had a strong run starting in 2014 going into 2015. All of the quarters were quite excellent. I said this earlier. I don't know if you were earlier on the call then. We also had some special factors. There was, for instance, a couple of turnaround situations in Europe which helped to improve margins. But overall, we have seen a pretty steady development until recently. Now margins tend somehow lower.
With regard to the crackers here in Ludwigshafen, these crackers are actually tuned to use naphtha because that is essentially what we need as a feedstock for our Verbund structure. We have no plans to flexibilize them like we did in North America, where we actually take advantage of the cheaper natural gas. As you know, natural gas in Europe is in relative terms less attractive than in North America. Overall, the market situation for natural gas in Europe, Hans, you wanna say a few words about that? What we currently see, Jaideep, is certainly what I would call depressed prices for natural gas. I think the average price on a U.S. dollar basis in Q3 was at $6.80.
Let's compare that to where we were a year ago. There we were in the range of nine to 10, if I recall that correctly. Going into the fourth quarter, we see a bit of a further decline of natural gas prices in Europe. Not only in Europe, when I checked this morning, also the Henry Hub price had come down significantly in the U.S. Overall for natural gas, at this time depressed environment, let's see what kind of a winter we'll experience in the northern hemisphere. A few cold days, as we all know, have a tendency to change natural gas prices rather quickly.
Thank you. If I can just sneak in one follow-up on performance.
Oh, Jaideep , sorry, but we are a little bit running out of time.
Okay, no problem.
There are so many other people waiting.
Thank you. Thank you.
Okay. We touch base with you after the call. The next one is now, Laurent Favre from Bank of America Merrill Lynch.
Yes. Thank you, Maggie. Good morning. My question is actually fairly boring on the tax rate. If I look at the notes to the EPS calculation, it looks like your tax rate on an adjusted basis was 34% in Q3. I see that, you know, U.S. earnings were down less than everything else, and Germany earnings were down more. Can you basically give us some kind of sense of where that tax rate will settle now that the Gazprom swap is done, and assuming that the current split of geographical earnings stays. Is it still above 30%, or does it go back to closer to 26% and there was something exceptional in Q3? Thank you.
No, let's start maybe at the lower end in Q3. Laurent, I think, the tax rate was at 26.0%, which compares to 26.7% or 27.6%. 27.6% in the prior year quarter. Obviously, an impact there from the gains from the asset swap, which were not taxed. Our general guidance with respect to tax rate does not change. We expect our tax rate to be in the range of 25%-30%. That is with the current regional setup that we have and the current business setup that we have. Should that change, that may have an impact, but we'll stick to our general guidance, and you know that we've slightly moved that up as a result of the stronger weight that our highly taxed Norwegian oil and gas activities have.
Page 40 in the calculation of adjusted earnings, it shows a tax of EUR 537 on a pre-tax of EUR 1,577. All on an adjusted basis, which is 34%. Is there something exceptional, exceptionally negative in the -537?
Not that I'm aware of, but let's do this. Let's take that offline.
Thank you.
Look it up and, investor relations will get back to you.
Thank you.
Now we come to the last two questions, one from Martin Evans, JPMorgan.
Yeah, thanks. One of the strong performers in the third quarter was the functional materials division, and you do refer specifically here to good demand in automotive and construction. Just sort of hearing your comments about how the quarter ended and activity levels into the fourth quarter, does your caution just in general terms extend to those two industries, auto and construction? Or do you see them holding out for longer until the sort of general macro pressures bite? Because it's encouraging to see, for example, a recovery in construction chemicals demand in Europe, but we do see these sorts of indicators weakening as well very quickly. Thanks.
Martin, I think this is a question of what is the market and what is really our own measures to improve our business. We do believe or we do think that automotive still will grow slightly this year, very small increase overall globally. That doesn't sound too exciting, but we have increased our penetration rate quite successfully, especially in China, including, which is very important, including the national companies. It's not just the joint ventures and foreign-owned automotive companies. They have had a very good run with national accounts as well, and they are looking for a better technology. Actually, they want to have best in class technology. And they are turning to companies like BASF because they know they get what they want.
In construction, we are all aware, we have talked about this here for a couple of years, that the development in construction wasn't really satisfying for quite some time. I think we have done our homework here. We now see the effects in 2015. Again, still a relatively weak background, for instance, in Europe. We do manage our business quite effectively, creating some growth and more importantly, earnings. We had a particularly good run in the Middle East, where we have strong market positions, where we still also see some good underlying growth. Essentially, I think we have done our homework in that business.
Thanks very much.
The final question, second question from Markus Mayer from Baader Bank.
Yeah, basic question was asked. Thanks.
Now then, ladies and gentlemen, with this, we come to the end of our conference call. We will next report on our full year 2015 results on February 26th, 2016. I would like to thank you for joining us this morning. Should you have any further questions, please contact any member of the IR team, and we will be happy to help you. With this, Kurt Bock, Hans-Ulrich Engel, and the Investor Relations team would like to say goodbye and wish you a nice day.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.