Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining the BASF Analyst Second Quarter 2015 conference call. 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 touchtone 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 for operator assistance. This presentation contains forward-looking statements. These statements are based on current estimates and projections of BASF management and currently available information.
They are not guarantees of future performance, involve certain risks and uncertainties that are difficult to predict and are based upon assumptions as to future events that may not be accurate. Many factors could cause the actual results, performance, or achievements of BASF to be materially different from those that may be expressed or implied by such statements. BASF does not assume any obligation to update these forward-looking statements contained in this release. 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 second quarter 2015 conference call. In the second quarter, BASF slightly increased sales despite the sharp drop in oil price and somewhat lower growth than expected. Earnings also grew slightly, driven by contributions from Functional Materials & Solutions as well as other. 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. Then Hans will review the segment results of the second quarter.
Kurt will finally conclude with the outlook 2015, and afterwards, both gentlemen will be available to take your questions. For your information, we have posted a longer version of this speech and charts together with the press documents on our website. In addition, ladies and gentlemen, I would like to inform you that as of today, we have made the new BASF Factbook 2015 available on the website. With this, I would like to hand over to Kurt.
Yeah. Thank you, Maggie, and also good morning from my side. Welcome to our call. In the second quarter of 2015, BASF showed improved sales and earnings. As of June, we are on track to achieve our full year guidance, namely slightly higher sales than in 2014 and EBIT before special items matching the level of last year. As expected, the weaker euro is a net positive for sales and earnings. The oil price 44% below last year's level led to lower earnings in Oil and Gas. Furthermore, we also saw some margin compression in our Chemicals business, both upstream and downstream. The prices came down compared to the start of this year. Most importantly, we saw very little growth in our markets. Not considering Oil and Gas, volumes in the remaining businesses were essentially flat.
In Agricultural Solutions, we experienced a more difficult market environment after a strong start into 2015. Overall, we experienced a disappointing development in the macroeconomic environment. Against this background, we now expect the global chemical production to grow by about 3.8% compared to 4.2% previously forecasted. The Chinese economy continues to grow, but at a slower rate than the previous year. The construction industry declined in the first half of 2015, and even the automotive industry showed a weaker development. In North America, the business environment improved after a disappointing first quarter, but not as fast as we had anticipated. The economic development in South America stagnated. Brazil remained in a recession as the weaker commodity markets and the slowdown in key export markets negatively impacted the country's growth. Including Russia, two of the BRIC countries are in recession.
Despite all the discussions about Greece, European economies continue to grow modestly. In this environment, we continue to focus on cost management and operational excellence. We are well on track to deliver the increased target of our step program of EUR 1.3 billion of annual earnings improvement by the end of this year. Our measures to trim working capital were successful. Operating as well as free cash flow improved nicely. In particular, we saw the following developments in Q2. We increased sales slightly by 3% to EUR 19.1 billion. Higher volumes in the Oil and Gas segment and positive currency effects in all segments were the main drivers. Volumes were up by 2%, driven by the higher gas trading activities in Oil and Gas. In the Chemicals business, volumes were flat.
Prices declined by 8% as we had to pass on lower raw material cost to our customers. However, in Agricultural Solutions, we were able to increase prices. The devaluation of the euro against major currency positively impacted BASF's top line by 9%. EBITDA went up significantly by 11% to EUR 3 billion. EBIT before special items increased by 2% to EUR 2 billion. Functional Materials & Solutions strongly contributed to this increase. In other, we saw a significant improvement as a provision for our long-term incentive program came down following the share price development. A positive disposal gain from the divestment of our textile chemicals business was partly offset by restructuring costs and minor asset impairment measures. EBIT grew by 5% to EUR 2 billion. Income taxes went up slightly to EUR 506 million because of higher pretax earnings.
The tax rate was 26.8%. At EUR 1.3 billion, net income came in on the same level as in the second quarter of last year. Reported earnings per share increased slightly to EUR 1.38 in Q2 after one cent less last year. Adjusted EPS declined slightly to EUR 1.49. At EUR 2.8 billion, operating cash flow in Q2 was much higher than last year. We adjusted inventories to reflect lower growth and reduced our net working capital, currency adjusted by approximately EUR 600 million. Especially in Performance Products, Agricultural Solutions, and Oil and Gas, we reduced inventories significantly. However, in the short term, this resulted in lower plant utilization and higher idle costs. Free cash flow came in at EUR 1.2 billion.
Let me now provide you with an overview about some of the major milestones that we achieved this quarter. We started up our new world-scale acrylics complex in Camaçari in Brazil. It comprises the only acrylic acid and superabsorbent polymer plants in South America and will provide us with a first-mover advantage in this region. The new complex also strengthens our position as a global leader in the acrylic acid value chain. In June, we broke ground for our new chemical catalyst manufacturing plant in Shanghai. The plant will enhance our global manufacturing footprint for base metal catalysts, custom catalysts, and adsorbents. With increased customer proximity, we will further improve our position to meet the growing demand in that region. To strengthen our crop protection business, we opened a new agricultural research station in Pune in India.
This research and development center will focus on herbicides, fungicides, and insecticides, as well as on solutions that go beyond classical crop protection. We also progressed with our portfolio optimization measures as we closed the divestment of our textile chemicals business. In addition, we concluded contracts or closed transactions to divest further businesses that do not have a good fit with our strategy anymore. By selling our 25% share in the joint venture SolVin, we continue to focus our activities in chemicals on value chains where we can differentiate ourselves. We plan to focus our pharmaceutical ingredients and service business on pharmaceutical excipients.
Therefore, we agreed with Holding AG to sell our custom synthesis business and parts of our active pharmaceutical ingredients business. We continue to optimize our setup in paper chemicals. Thus, on June 8, we signed a contract to sell our global paper hydrous kaolin business. In order to focus our exploration and production activities on own-operated fields, we entered into a contract with Tellus Petroleum to divest selected assets on the Norwegian Continental Shelf. Now I would like to turn over to Hans, who will comment on the performance of the individual business segments. Hans?
Thank you, Kurt. Good morning, ladies and gentlemen, also from my side. Let me highlight the financial performance of each segment in comparison to the second quarter of 2015. I'll start with Chemicals. Sales in the Chemicals segment came in considerably lower. Declining prices in all divisions following the lower oil price were the main driver for this development. Volumes went slightly down in Petrochemicals and Monomers, whereas they increased considerably in Intermediates. Currency effects had a positive impact on sales in all businesses. High cracker margins in Europe could not fully compensate for approximately EUR 50 million of startup costs for new plants. Therefore, EBIT before special items went down slightly. Sales in Performance Products came in slightly above prior year levels. Overall, prices declined in some businesses as lower raw material costs had to be passed on to customers.
An unplanned outage of our polyisobutene plant in Antwerp, shortages for ethylene oxide-based products, as well as lackluster demand in Oilfield Solutions and paper chemicals resulted in slightly lower volumes. Strong positive currency results could offset the decline in prices and volumes. Product margins declined. Fixed costs went up as a consequence of the startup of new plants, as well as strict inventory management in all businesses and negative currency effects. EBIT before special items decreased strongly. We incurred positive special items from the divestiture of the textile chemicals business. On to Functional Materials and Solutions. Sales in Functional Materials and Solutions increased considerably. Positive currency effects in all divisions and stable volumes contributed to this development. We realized higher sales with the construction industry, and our business with the automotive industry remained strong. Prices were slightly down, driven by lower raw material costs.
Stable volumes and higher margins resulted in the highest quarterly EBIT before special items ever achieved in Functional Materials & Solutions. In Agricultural Solutions, sales came in on the level of Q2 2014. Higher prices and positive foreign exchange effects were offset by a decrease in volumes. EBIT before special items decreased significantly due to lower volumes and higher fixed costs, which were triggered by the startup of new production assets. Looking at the first half of 2015, sales increased by 8%. EBIT before special items reached the same high level as in the prior year, despite a more challenging market environment. Sales in Oil and Gas increased considerably, mainly due to higher natural gas trading activities on the European spot markets. Volumes in Exploration and Production were up.
The acquisition of producing fields in Norway, as well as higher production in Russia, more than offset lower production volumes in Libya. Sales in exploration and production, however, declined considerably as a result of the lower oil and natural gas prices. The average price for Brent crude oil decreased by 44% to $62 per barrel in the second quarter of 2015. EBIT before special items declined from EUR 546 million- EUR 431 million since there was no offshore lifting in this quarter compared to last year, and we faced lower oil and gas prices. Net income went down by 29% to EUR 250 million. The next aperiodic offshore lifting is planned for Q3, 2015. Sales in other decreased by 11% to EUR 800 million.
Main reasons were the force majeure at the Ellba joint operation in Moerdijk, Netherlands, as well as a divestiture of our 50% share in ELLBA Eastern in Singapore. EBIT before special items came in at minus EUR 63 million. The considerable improvement of EUR 265 million compared to prior year was mainly driven by the dissolution of provisions in the amount of approximately EUR 170 million for our long-term incentive program, which was triggered by the lower price of BASF share. In addition, we incurred lower expenses from currency effects. Let me now turn to our cash flow. Please be reminded that we summarized the first half of 2015. At EUR 5.1 billion, we generated the highest cash flow from operating activities ever in the first half year. A positive swing in net working capital contributed to this.
We reduced inventories by EUR 1.3 billion, especially in Performance Products, Agricultural Solutions, and Oil and Gas. At EUR 3.3 billion, cash used in investing activities exceeded the prior year figure by roughly EUR 1 billion. Payments related to tangible and intangible assets amounted to EUR 2.8 billion, mainly driven by our investment projects. Acquisitions and divestitures resulted in a small net cash outflow of EUR 15 million. In the previous year, we had realized a significant cash inflow from the divestiture of selected E&P assets to the Hungarian company, MOL. Financing activities led to a cash outflow of around EUR 1 billion, mainly due to the payment of the dividend. Free cash flow amounted to EUR 2.3 billion. This means in the first half of 2015, we already exceeded the free cash flow of the full year 2014 by far. Now to the most relevant developments in the balance sheet.
Compared to the end of 2014, total assets grew by EUR 4.3 billion- EUR 75.7 billion, mainly attributable to currency effects, investments, and the seasonal effect on accounts receivable. Long-term assets were up by EUR 2.1 billion and amounted to EUR 46 billion. Investment projects contributed to an increase in the value of property, plant, and equipment by EUR 1.4 billion. Short-term assets increased by EUR 2.3 billion to about EUR 30 billion. Accounts receivable were up by EUR 1.1 billion, mainly due to the seasonal Agricultural Solutions business. Inventories amounted to EUR 10.3 billion, down by almost EUR 1 billion, reflecting our strict inventory management. 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 increased by EUR 1.9 billion to around EUR 45 billion. Long-term liabilities decreased by EUR 1 billion, mainly driven by the dissolution of provisions for pensions as a consequence of higher interest rates. Short-term liabilities increased by roughly EUR 3 billion due to payment of dividends in the amount of EUR 2.8 billion. Net debt increased by EUR 1.4 billion to EUR 15.1 billion. At 40.4%, our equity ratio remains on a healthy level. With that, back to you, Kurt.
Yeah, finally, the outlook for the entire year. As we already outlined, the macroeconomic environment does not develop as we had expected. Compared to our assessment in Q1 reporting, we reduce our assumptions for 2015 as follows Global GDP growth is expected to be lower at 2.4%. Industrial production is expected to grow by 2.9%. We reduce the growth expectation for the chemical production to 3.8%. We adjust our exchange rate forecast to 1.15, and our assumption for the oil price remains unchanged at a level of $60-$70 per barrel Brent. Despite these economic headwinds, we are on track to meet our full year 2015 guidance for BASF Group. Therefore, we confirm our outlook. Overall, we will continue to grow volumes and sales in 2015.
Sales are expected to be slightly higher than in 2014, driven by higher sales in the Performance Products and Functional Materials and Solution segments. EBIT before special items will likely match the level of last year. We anticipate larger contributions from our Chemicals and crop protection businesses, whereas earnings in the Oil and Gas segments are expected to decrease considerably due to the lower oil price. We aim to earn, again, a substantial premium on our cost of capital, but on a lower level than in 2014 when we had a number of special effects from divestitures. Now, thank you for your attention. We are happy to take your questions.
Yeah. Thank you, Kurt and Hans. I would now, ladies and gentlemen, like to open the call for questions. I wanted to ask you to please limit your question to one at a time, so we can take as many questions as possible. Of course, you're always welcome to rejoin the queue for a follow-up question. We would start the Q&A session with James Knight from Exane. Good morning, James.
Morning. Thank you for taking my question. It's Performance Products. Can you quantify some of the one-off-ish type impacts in the quarter, so the startup costs, inventory reductions, et cetera? Thank you.
Yeah. Thank you, James, for that question. When you look at the deviation from last year, it's about EUR 130 million, which certainly is not pleasant. I think there are lots of one-times, which we have to keep in mind. We talked about the unplanned outages, [PBI], we mentioned in our presentation. We had some product charges, for instance, we had force majeure on ethylene oxide, which also impacted our downstream businesses. We had a very strict inventory management, which increased idle cost considerably, and we had some start-up costs. All in all, this accounts for approximately or more than two-thirds of the deviation from last year.
Apart from that, we had a couple of market developments, which are not completely new, like the very lackluster demand in Oilfield Solutions and paper chemicals. We have talked about that earlier. We had some pricing issues, which are also well known. Vitamin E probably the most prominent one, where now the price, the official price is below, even below EUR 5 kg , which we have never seen before. Two-thirds one-time, one-third market-related. Let me add, because I think that is important, that we are in full swing to implement the restructuring measures which we have announced before, achieving EUR 500 million earnings improvement by 2017. Everything is on track, but obviously, the market was not really helpful in Q2, especially compared to a relatively good start into the new year when we had a strong performance in Q1.
Thank you very much.
We're moving on to the next question from [ Lutz Grützeck], Commerzbank. Good morning, Lutz.
Yeah. Hi, good morning. One question on Asia and especially on China. The operating margin in that region is down to 1.4%. You might help us on trading updates here on the region. What's your current feeling there in the region? Maybe also break down what of that margin deterioration is one-time and what is really market-related. Thank you.
Performance in Asia is not satisfying, that is for sure. We had a weak Q2. We have a mixed picture actually, whereas we explained earlier already, everything which is related to automotive industry develops very nicely, and we have good volume growth in that respect. You know, we are investing heavily in that space, catalysts, coatings, et cetera, and we will continue to grow that business. Even in view of relatively lower growth in the Chinese automotive industry than last year, we see good reasons to be optimistic about that business in China and in Asia. Where we got hit, obviously, is everything which is cyclical, supply-demand-driven in China. Margins have come down for acrylics.
They have come down slightly for MDI, and that certainly is a drag on our performance. That is the major reason why we are where we are right now. What I would like to add here is a note of caution because you only look at the regional EBIT, the regional earnings which we publish. Obviously, we also have a relatively strong export business from North America and from Europe into Asia, which adds considerably to our overall earnings in the Asian market. That development was quite positive, actually. Our operations on the ground, especially in the upstream, are not delivering at this point in time, which is made even more difficult because, as you said before, we have a couple of start-up costs in China with new plants coming on stream.
That's helpful. Thank you.
Welcome.
The next question now comes from Paul Walsh from Morgan Stanley. Hello, Paul.
Good morning, Maggie. Morning, Kurt. Morning, Hans. Thanks for taking my questions. Just first one's on CapEx. Can you just remind me where you are with CapEx? Obviously, we've seen a number of adjacent industries cutting CapEx quite aggressively in the face of a global growth environment that looks to be a little bit weaker, and just what your intentions are around capital investment. I know there's probably a few other things other than organic CapEx in the first half, but I did notice your total spend was up year on year. Just a second question, if I can. Can you just quantify what the FX impact was on EBIT pre special items in Q2? What did it add to EBIT? That would be helpful. Thank you.
Yeah. Hi, Paul. Thanks for your questions. CapEx, we are cutting back this year compared to last year. We have guided you that there should be about a EUR 1 billion reduction in CapEx. As it looks right now, that reduction might be only half of that EUR 1 billion for essentially two structural reasons. One is simply the exchange rate, the stronger dollar, which really impacts our CapEx, which is then Denominated again in euro later on. That is about half of the deviation, and the other one is non-operated Oil and Gas fields where we are not in the driver's seat actually to determine how much is spent and how fast.
This is very often in the Oil and Gas business, more a timing decision than a decision about the actual total spending. So in some cases, we have seen now with the costs of rigs, et cetera, coming down, that it might be sensible even to accelerate certain projects, and that had been the case. But again, in these projects, we are not in the driver's seat, and we are simply handed the invoices by our consortia leader, and we have to recognize this in our accounts.
CapEx will come down a little bit less than what we had expected earlier this year, essentially currency related and oil and gas. Going forward, given the market circumstances, given the high level of investment which we have made over the last couple of years, it's quite clear that we will have a very, very strict capital discipline.
Paul, this is Hans. I'm addressing your question on the FX impact on EBIT in Q2. As you know, we've got quite a basket of currencies, US dollar predominantly of very positive impact as a result of the euro weakening. But then we also have currencies which are quite important for us, like the Brazilian real, the Norwegian krone, and the Russian ruble. If you take all of these currencies, the positive impact is in the order of magnitude of roughly EUR 250 million in Q2.
That's brilliant, Hans. Thank you very much. Kurt.
Now we're moving on to Jeremy Redenius from Sanford Bernstein. Hello, Jeremy.
Yeah. Hi, it's Jeremy Redenius. Thanks for taking the questions. I guess I've seen D&A jump quite a bit year-over-year in Q2. Can you talk us through why that is? I'm wondering, is that a sign of just the startups that are coming through and perhaps that leads to better sales in H2? Thanks very much.
Jeremy, this is Hans. If I understood correctly, you're asking with respect to depreciation, amortization going up.
That's right.
That's clearly the result. You know that we ramped up our CapEx program starting in 2011. A number of plants that came on stream already last year, like the acrylic acid complex in China in Nanjing, a new catalyst plant in Poland. All of these coming on stream in the second half of the year. A number of additional plants coming on stream in Q1 and Q2 of this year. That then leads to the increase in depreciation and amortization.
Okay. Could you, is that largely falling in Chemicals businesses, or is Oil and Gas a major part of that as well?
Oil and Gas is predominantly upstream in Chemicals, but also in Oil and Gas. Keep in mind that in Oil and Gas, we also did the acquisition of additional assets from Statoil that closed in Q4 of last year. We didn't have that depreciation and amortization in our P&L in the first half of last year. When you compare, yes, Oil and Gas also plays a role there.
Okay. Thank you very much.
Finally, the fifth one is Tony Jones from Redburn. Good morning, Tony.
Good morning, everybody. I just wanted to ask a question about end markets and cost savings. It's been obviously a mixed picture over the first half of the year. The auto industry, as you've indicated, has been very strong. We are picking up from other suppliers into the same industry that they're not as upbeat about what's coming in the second half of the year. I was gonna ask you, how do you see the cycle evolving? Linking that to cost savings, well, what would be the trigger for you to start to think about more significant initiatives to trim back on costs and raise that cost-saving target from your current targets this year? Thank you.
Hi, Tony. Thank you for your questions. Auto, yes, growth of the automotive industry this year is probably something between 2% and 3%. That is not really breathtaking. Still, Asia grows faster, which is good news. United States has achieved or will probably achieve this year a new record again after about 10 years of very low growth and sometimes slumping demand. We share that feeling that caution is advised for the second half for the overall market situation. However, you have to keep in mind that every company has its own competitive positioning here. At this point in time, we have made good progress in enlarging, I think, our share with major customers. Those customers also seem to have sometimes higher growth rates than the average market. So far, this is not risk-free what we are seeing. Not at all. We are not just for
Transport, assuming that the first half is a proxy for the second half, but we are cautiously optimistic for the automotive industry. Now cost savings, I mentioned the STEP program, which we will conclude by the end of this year. Actually, as you know, we had increased the savings from EUR 1 billion to EUR 1.3 billion about a year ago. And it's quite clear that this will never stop, and we have to think how to communicate with you what will be next. But you can safely assure that the cost trimming within BASF is a continuous task and there is no reason to relax at all. And at this point in time, we are already thinking about the next possible steps, how to improve further on.
Thank you. I appreciate that.
You're welcome.
This brings us now to Christian Faitz from Kepler Cheuvreux. Good morning, Christian.
Yes, good morning, Maggie. Good morning, gentlemen. Just one question, please. Can you please quantify those sales you alluded to that are geared from NAFTA and Europe into Asia?
No, Christian, thanks for the question, but actually we never have done this, and we will not now start to talk about specifically the, what we call pre-profits, which we make exporting into those regions. The only message I try to convey is, yes, we had a considerable earnings decline in Asia. If you take into account the full picture, what we have not just produced in Asia, but what we also exported into Asia and where we have pre-profits, the picture looks better. Still, we are not satisfied to make that very, very clear.
Okay, thank you.
The next question comes from Lawrence Alexander from Jefferies.
Hi, could you quantify how much of a drag on your EBIT was the inventory reductions, in terms of higher fixed cost absorption?
12+.
Okay. Also, can you talk a little bit about polyurethane trends, heading into the back half of the year?
Yes. Give me a second. We have seen some margins squeezing in Asia. I think I alluded to that. We have startups which is certainly Chongqing coming into the market, which is certainly an interesting experience in a market which is slightly long at this point in time. We have a situation in Europe where margins are not where they're supposed to be, and we will start up now the TDI production here in Ludwigshafen. Against the background of a market which is consolidating, there is competitors' capacity which is also taken out of the market. You know that when we would start up Ludwigshafen, we will more or less simultaneously then shut down our 80,000 tons in TDI in Schwarzheide, which should essentially help to balance the market in Europe. Essentially going forward, we see a kind of flattish price margin development.
Thank you.
You're welcome.
Now we come to Andrew Benson from Citi. Good morning, Andrew.
Morning, everyone. I didn't understand that last question. Perhaps if you just say on the EBIT benefit. I didn't get that. Could you also explain why you were destocking as much as you were? I mean, normally, it's sort of year-end rather than mid-year. Secondly, can you provide any insights into the agricultural market and how you think that will develop?
Yeah. Thank you. Hi, Andrew. Thank you for your questions.
Thanks.
Destocking. When we started into the year, we simply had the impression that our inventory levels might be a little bit too high compared to market demand. For that reason, we put the foot on the brake, so to say, and deliberately reduced capacity utilization rates, and that obviously then leads to higher idle costs. It improves cash flow, by the way, which we have seen in Q1 and Q2. This was, I think, a necessary measure in light of a relatively soft market environment which we have seen. In a certain way, it's a one-off, but it's necessary. We don't really do it to the end of the year. I mean, this is an ongoing task, which is a big priority right now for our operations.
Ag, there is softness in the commodity markets, obviously, and you have seen now a couple of numbers also from competitors. I can only repeat what we have continuously said in the past. When you judge Ag, you should really look at the first half results and not at individual quarters because it's almost a coincidence how you cut the quarters, depending on many shifting issues. We had a very strong start into 2015, essentially because we had a very strong season in Europe. It was quite clear for us that this cannot continue into Q2. In Q2, we saw softer demand for our products.
There's a couple of factors which I think affected everybody in our industry. What is important when you look at the first half, we have been able to increase prices, very important. We have seen flattish sales volumes minus 1%, which I think is quite good, at least compared to what we have seen so far in the marketplace. We had certainly positive currency effects, and we had a strong EBITDA improvement as well, which is also interesting, which is another example of what Hans described earlier on, that we have increasing depreciation and amortization in 2015, which I think should also be taken into account when looking at earnings.
With this now the season in the Northern Hemisphere has come to a conclusion very much, and now we'll start up in Brazil, or Argentina and Brazil, which is very difficult to read at this point in time, I have to say. There are lots of ambiguities and uncertainties, and I've spoken about the recession in Brazil, the very soft economic environment. It needs to be seen how this will develop. From a competitive point of view, I think BASF is well-positioned in those markets.
Thanks very much.
Now we're moving on to Peter Clark from Société Générale.
Yes, good morning. Thank you. It's going back to China, and in the commentary, you talk about the volumes flat, obviously, in Asia and China still growing. I don't know if that's the first half or the second quarter, just on the second quarter there. Allied to that, the margin. In the past, you made it quite clear the Chinese margin is better than the rest of Asia. Just wondering if that was still the case in the second quarter. Thank you.
Yeah. Hi, Peter. What we said in China specifically is that our petrochemical margin seems to be better than what our competitors produce in China. That is a very, very small relief I have to say, because the absolute level of the margins is absolutely not satisfactory. Yes, for instance, Nanjing, where we had a major turnaround, which was completed entire site six weeks on budget on time, is producing positive results, but not at a level where it needs to be. We seem to perform better with these sites than some of our competitors. We are not satisfied with the absolute level. I think that is a message which I tried to convey in the past as well.
Okay. Thank you.
Welcome.
Yeah. Thank you, Peter. Now moving on to another Peter Spengler from DZ Bank. Hello?
Yeah. Guten Morgen, Frau Moll. Good morning, gentlemen. You mentioned the new TDI plant before. Could you update us on the progress with the TDI plant in Ludwigshafen? Is there a delay? Did you consider ramp-up costs already in Q2? What can we expect for the second half of the year? Thanks.
Yeah. Hi, Peter. Startup will now happen in Q3. Essentially, there is a slight delay. That is correct. We will incur higher start-up costs obviously than in the second half, especially in our Chemicals segment and more specifically in the Monomers business, where you have TDI, MDI, and then on top of that, they also have a couple of more challenging businesses like caprolactam, where we don't invest to make that very clear, but where we have quite depressed margins. I hope that's it.
Thank you.
Yeah.
Thank you very much.
Next question comes from Martin Evans from JP Morgan.
Yeah, thanks. Just on the Construction Chemicals comment, which is quite an optimistic one. You talk about significantly higher volumes, especially in Southern and Eastern Europe. Do you feel then that now at last that market has genuinely bottomed and there's some decent restocking going on, or is this maybe just a one-quarter effect in Construction Chemicals? Thanks.
Martin, I think our comment is probably more about the performance of our business than about the overall development of the industry. Yes, we see very different environments across the world, but more importantly after years of restructuring and refocusing their businesses, I think we are now in 2015 on track to improve earnings. We have seen a nice improvements over the last couple of quarters, and we work very, very hard to continue on that path.
This is more about taking out costs, adjusting our product portfolio, adjusting our regional portfolio, focusing on markets where we have competitive advantage and where we can create value for BASF, and that seems to work quite nicely right now. This is different from region to region in that sense that we have some markets where we have very strong market positions, like the Middle East, very important business for BASF. Essentially this is about self-help measures, and that works right now.
Okay. Rather than sort of underlying demand then.
Martin, there is underlying growth in some of the markets, but the real question is how much of what is your share of that growth? I think we are in a better position today to grab a higher share of that growth than in the past. We are better positioned.
Okay. Thanks very much.
Thank you.
Now we come to [Laura Farese] from Bank of America Merrill Lynch. Good morning.
Yes. Good morning, all. My question is on Functional Materials & Solutions. Like in Q1, it looks like the big divisional improvement in earnings was really driven by Performance Materials. It looks like in there you've got positive impact from your own actions, but also positive impact from the environment, especially on raw material deflation. Could you talk about basically those two sides? On one side, can you basically tell us what you're doing in terms of moving to specialties? On the other side, whether or not we should be expecting some kind of normalization of gross margin as raw material prices have started to go up, and maybe your selling prices have a bit of a lag on that. Thank you.
Laura, this is Hans. First of all, yes, a very nice improvement in our Performance Materials business, both in Q1 and also in Q2. What are the key drivers here? I'd say, there are probably three key drivers. Number one, that is one of the operating divisions that sells to a large extent into the automotive industry. Automotive, as Kurt has alluded to already earlier, is doing well, in particular the OEMs that we are supplying. Number two, it sells into the construction industry. Also there, we've seen some improvements over prior year. Number three, yes, there is a raw material price impact. It always depends on how you shape your price formulas for the respective businesses.
There is some benefit in Q2 due to the way that lags and leads work in these price formulas. These three aspects overall, combined with another operational excellence program that we run in our Performance Materials segment, help to generate these type of returns and profits.
Sorry, can I ask Nicky a second question, which is on Petrochemicals, or let's say European cracker margins. There's been a record season in the first half of force majeure unplanned, you know, shutdowns, one of them in Moerdijk, which restarted. Can you talk about your view on margins for the second half? We started the year with you basically saying that there could be a short-term benefit, but in the long run, those margins would be driven by supply and demand, and demand has not been exactly good. Should we assume that margins correct in the second half?
This is Kurt, Lauren. In Europe, margins have been good. It's probably fair to assume that there might be a little bit of a softening going into the second half. The big question is always when does it start? Frankly, every good month is a really good month in the cracker business in Europe right now. In North America, based on also, let's say, publicly available data, we assume relatively stable margins going forward. The volatility in Asia Pacific is certainly the highest one. That makes forecasts very, very challenging. On top of this, what you mentioned is very important. We have seen a couple of force majeures and turnarounds in that industry, which obviously are very difficult to predict. Sometimes it just happens. Overall, that cracker business has been a good business in the second half, and we are slightly optimistic for the second half.
Thank you. Thanks a lot.
Welcome.
The next question now comes from Mutlu Gundogan from ABN AMRO. Good morning.
Good morning. I have actually one question, apologies. It's on demand. Can you talk about how demand has evolved throughout the quarter? Did you see some weakening towards the end of the quarter, and how has the third quarter started? Mainly focusing in Europe, how is the summer lull this year?
Can you do us a favor? We did not quite catch the first part of your question, so, what would you like us to comment on?
On the general demand that you've seen. How has the demand evolved throughout the quarter? Did the quarter start out well? How was the end of the quarter, and how has the third quarter started?
Yeah. I think that's an important point. Thanks for the question. It's a very interesting pattern we have seen so far this year. We had a, frankly, pretty slow start in January, February. Then March was a very good month. We had again, relatively slow start into the second quarter with April and May being kind of okay, but not really impressive. And then to the end of the quarter, volumes recovered and growth accelerated a little bit. The big question is now, is this really a pattern, or is this just a coincidence?
The only thing I can say, we are now starting into the low season, especially in Europe, and it's very hard to predict how July and August will be. The real question is then obviously September, when everybody is going back to school, so to say, and the factories are starting up again, and that is very difficult to predict. Overall we have seen, I think I mentioned this, relatively sluggish demand across the board in some of our major markets.
Thank you very much. Very helpful.
Now we're moving on to Evgenia Molotova from BNP Paribas. Hello, Evgenia.
Hello. Thanks a lot. I'll try. I have two questions, if I may. One is on capacity utilization rates, which were affected by the inventory reduction. If you can comment where the most of inventory reduction happened and what rates do you have now? Do I understand correctly that it's mostly in Performance Products? Can you comment on the utilization rates in Chemicals, Performance Products, and Functional Materials? The second one is on your separating pigments in a separate unit. Does it mean that it's becoming a non-core business for you and you would be potentially open to divest that?
Yes, Evgenia Molotova. Thank you for your questions. Capitalization rates, I beg your understanding, but we don't really provide a percentage now because we have such a diverse portfolio across the board that one single number doesn't really make an awful lot of sense. The inventory reduction measures were across the board. There was some synergy built in, as Hans mentioned, but all which is important to us, all businesses contributed to those working capital trimming exercise. Pigments, the decision which has been taken now is that we will form a what we call global business unit. So far, this business is run in a regional way. There is some global coordination, obviously, because some of those products are only produced in one plant globally, or most of them actually. Yet, I think we will refocus the business and making sure that we get more.
The rubber hits the road, really, in terms of market presence, aggressiveness in the market and growth orientation. In that respect, this global setup will help. We will then most likely carve it out these activities into a separate legal entity, which immediately leads to the question, is this now, as you asked, non-core, or what does it mean for the future of the business? To make it very clear at this point in time, we have very high fighting spirits here, and our goal is to make this a better business. We are global leader in pigments. We have some very strong parts in that business. We have some weaker spots in that business.
We have to make sure that we restructure successfully, that we, as I said before, grow the business in a faster way, and then we see where we are. Then we see where we are, and then we can still make decisions. At this point in time, we are very determined to make the business better. It's a good business, but it's not really a great business. It has some structural deficiencies which we are working on, have been working on, with this next step now. We will focus again management's attention on the most important task here and make sure that it improves further on, and then we see where we are.
Thank you.
You're welcome.
We're moving on now to Oliver Schwarz from Warburg. Hello, Oliver.
Hello, Maggie. Hello, gentlemen. Thank you for taking my question. Just a quick one on the natural gas trading business. I guess it's almost a copy-paste from Q1. Volumes up strongly, EBIT up even more. What's the reason behind that in that let's say environment of lower natural gas prices and rather let's say warm weather as well as as you described this sluggish demand in overall industries that shouldn't lead to an excessive use of gas as a raw material or as a source of energy to the industry?
Yeah, Oliver, this is Hans. Rightfully you say, sales up in the natural gas trading business, also earnings up in the natural gas trading business. Key driver on the sales side is really the additional volumes that we sold. These are vast majority are spot sales. What we do is we simply use our trading platform and use it to the full extent. It's a low margin business, but still, turning the wheel a few times more often helps to generate more sales and also more profit.
Now, the exceptional increase that we have in profit, and you alluded already to Q1, same reason here. We had a price revision in Q2, and that certainly boosted the earnings of the natural gas trading business in Q2. You know what? Actually, when I look at the development that we have there in the first half of the year, I don't feel sorry about that. I actually like to see that.
Understandable. Thank you.
Now we are coming down to the last three questions. The first one comes from Markus Mayer from Baader Bank.
Yeah, good morning. Coming back to the pigments question. Do we or should we expect carve-out costs or other costs then in the Q3 reporting? From a theoretical standpoint, would be a joint venture with other player, is this from antitrust perspective, would this be possible?
I don't think we will have any carve out costs in 2015, and then even in 2016. There's some legal restructuring, but that is not really material from our point of view. The second question about possible combinations and the preconditions for that, I think this is far too early on based on what I've said, answer to an earlier question, to speculate on this at this point in time, frankly.
Okay. Thanks.
The next question comes from Bernd Rommelspacher from MainFirst.
Thank you, Maggie. Actually, my question was also about the pigments business and has been answered. Thank you, Maggie.
We are going on with Neil Tyler from Redburn.
Yeah, good morning. Just one sort of aggregate, aggregating question from me, please, just to make sure that I've understood the various comments you've made around costs in the quarter. As I understand it, you said that there were approximately EUR 50 million of costs associated with new asset startups around about EUR 200 million step up in fixed costs as a consequence of inventory reduction. Then some more on top of that with relation to turnarounds. I've sort of in my mind got a number of perhaps EUR 50 million-[EUR 200] million. Is that the correct understanding is really the question?
Neil, that is pretty much correct. The number on turnarounds is slightly lower. That is more in the order of magnitude of 50.
Okay. Just, you know, so the second part of the question is in Q3, how much of that do you expect to be repeated?
That might be the same order of magnitude inventory reduction measure that needs to be seen whether we will add. In terms of turnarounds, it's pretty much the level of last year, I would say.
Okay, very helpful.
Thank you.
Thank you.
Good ladies and gentlemen, this brings us to the end of the conference call, but before you are going off into vacation, I would like to invite you for our Investor Day in Ludwigshafen on September 28 and 29. During this 2-day event, we will showcase BASF Group as one company from a strategic as well as operational perspective. We'll provide you during the breakout sessions with access to lots of senior and operational management. Additionally, we will be highlighting the innovation power of BASF and give you a comprehensive tour of the world's largest Verbund site.
I sincerely hope to be able to welcome all of you at our Investor Day in September. If you haven't signed up yet, please do so. Also, I wanted to inform you that we will next report on our third quarter 2015 results on October 27. With this, 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. Goodbye and have 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.