Ladies and gentlemen, thank you for standing by. I'm Cleo, your Chorus Call operator. Welcome, and thank you for joining BASF Analysts Q3 2014 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 would 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 on your telephone 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.
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Please go ahead.
Yeah, thank you and good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our third quarter 2014 conference call. Due to the more challenging macroeconomic environment, we saw lower volume dynamics in the chemical business in the third quarter. Despite this decline in demand, overall, BASF has been able to increase sales and earnings. 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 financial and highlight important milestones. Then Hans will review the segment results of the third quarter. Kurt will conclude with the outlook 2014, and then he will also comment on our financial targets for 2015. Afterwards, both gentlemen will be happy to take your questions.
For your information, we have posted the long version of the speech, the charts, and the press documents on our website under www.basf.com/share. With this, I would like to hand over to Kurt.
Yeah, thank you, Maggie. Good morning from my side, ladies and gentlemen. Thanks for joining us. Today, we will present to you our Q3 results, which are solid amidst a noticeable weakening of markets in Europe. We will also brief you on our preliminary view on 2015. As promised to you earlier this year, we will update you on how we see our strategic targets in view of the current economic environment. Let's start with Q3. BASF operated in an increasingly challenging environment in the third quarter. Geopolitical tensions and an elevated level of uncertainty surrounding the global macroeconomic development significantly affected demand in the chemical markets. Especially in the Eurozone, macro indicators turned negative. The ongoing tensions between Russia and the Ukraine directly impacted the economy in those two countries and business sentiment in the region.
In Latin America, Brazil is technically in a recession after two consecutive quarters of negative GDP. On the positive side, North American GDP continued to expand somewhat faster than expected. In China, the impact of economic stimuli weakened, and recovery in Japan was modest. The oil price was impacted by weaker demand as well as dampened growth expectations. On a euro basis, the average price for Brent oil was 8% lower than in Q3 of last year. BASF generated sales of EUR 18.3 billion, up 3%. Volumes grew by 7%, driven by higher gas trading volumes. On a group level, prices were down 4%, but contrary to previous quarters, we experienced no negative currency effects anymore. To better understand what happened in Q3, we should take a closer look at our price volume currency development.
Without oil and gas, we saw no volume growth globally. In Europe, BASF sales even declined by 4%. However, we were able to maintain our prices overall and therefore also margins. Currency has lost its negative impact. However, it did not yet provide tailwind in the third quarter. EBITDA came in at last year's level with EUR 25 billion and before special items increased by 9% to EUR 1.8 billion, supported by considerably higher earnings in chemicals and oil and gas. We saw a slight increase in Functional Materials and Solutions and stable earnings in Performance Products. Agricultural Solutions reported a strong earnings decrease due to lower volumes and higher fixed costs. EBIT before special items and other improved significantly. The share price development led to the dissolution of provisions for our long-term incentive program.
BASF recognized special items in EBIT of EUR -32 million, essentially for restructuring and Performance Products. Therefore, EBIT amounted to EUR 1.8 billion, an increase of 8%. The tax rate was at 28%, compared to 23% in the third quarter of last year. In the prior year quarter, the tax rate was affected by a tax-free one-time gain from the divestment of the 15% stake in the Norwegian Edvard Grieg gas field. Net income decreased by 5% to EUR 1 billion, and earnings per share adjusted were 1.27 at last year's level. Operating cash flow in Q3 reached EUR 2.1 billion, an increase of around EUR 170 million. Finally, free cash flow slightly increased to EUR 820 million despite higher CAPEX.
We continue to take measures directed at further improving our portfolio and strengthening earnings. Let me highlight some of the most important developments since the last reporting in July. On September 12, we announced an agreement with Statoil of Norway that will strengthen our partnership and enhance BASF earnings and cash flow generation in our core region, Europe. Reserves and resources will rise by approximately 170 million barrels of oil equivalent, and our production in Norway will increase from currently about 40,000- 60,000 barrels per day. The purchase price of the assets amounts to $1.25 billion. Closing is expected by the end of 2014, with the effective date of January 1st of this year. We continue to restructure our Performance Products segment.
Four weeks ago, we published our plan to dissolve the Paper Chemicals division. Structural changes in the market for graphical papers require further adjustments to our positioning. We aim to enhance value chain synergies by combining the main product line with the corresponding operations in our Performance Chemicals and Dispersions & Pigments division. These changes will be effective from January 1st. Furthermore, we are evaluating strategic options for parts of our kaolin business, which is in the United States. This adjustment allows to further optimize our asset base by maintaining our commitment to the paper industry. As announced just last week, we have agreed to sell our global textile chemical business to Archroma. The parties have agreed to not disclose financial details. About 300 people are employed by that business, and closing should be in Q1 of next year.
Before we come to the business performance of our segments, let me briefly inform you about the next step that we will take to enhance BASF's innovation power. We are developing the organization of our research platforms and will bundle competencies, further globalize research, and thereby strengthen our worldwide R&D Verbund. The new organization will be based on three global platforms starting on January 1st. Process research and chemical engineering will continue to be headquartered in Ludwigshafen. Our bioscience research will be managed from Research Triangle Park in North Carolina. Finally, the headquarters of Advanced Materials and Systems Research will be moved to our innovation campus in Shanghai by early 2016. These measures will strengthen our network with research partners and customers and make BASF's R&D even more effective and efficient. With that, I would like to hand over to Hans.
Thanks, Kurt, and good morning, ladies and gentlemen, also from my side. I'll start with a brief overview on our segments, and I'll start with the Chemicals segment. Sales in the Chemicals segment were on prior year level with the overall flat volumes and slightly lower prices. Higher earnings in Petrochemicals, driven by strong profitability in the cracker business, were partly offset by lower results in monomers, especially in Asia. EBIT before special items came in considerably higher. In Performance Products, sales were almost unchanged. Volumes and prices were flat, but we faced slightly negative currency effects. EBIT before special items came in on prior year level, benefiting from strict fixed cost control. The ongoing restructuring measures resulted in negative special items of EUR 10 million. In Functional Materials and Solutions, sales were up slightly, supported by continued robust demand from the automotive industry.
We realized higher volumes and prices, but still faced negative currency effects in all divisions. EBIT before special items slightly increased due to higher contributions from coatings and catalysts. In Agricultural Solutions, we experienced a disappointing business in the seasonably slow quarter. Excellent crop conditions led to good harvests for key crops globally, strongly pushing down crop commodity prices. Our sales decreased by 3% versus the very strong prior year quarter, mainly due to lower volumes in North America and Europe. Nevertheless, we were able to increase prices in all regions. Business in Europe declined considerably. Lower prices for oilseed rape led to reduced acreage, and consequently, demand for oilseed herbicides declined. In North America, sales dropped significantly as excellent crop conditions and low commodity prices adversely impacted demand, especially for our yield-boosting plant health products. Sales in South America were slightly up, supported by higher volumes and prices.
Our recent launches of Kixor and Xemium developed well, while there was tough competition in insecticides. In Asia Pacific, sales slightly increased thanks to higher prices across the region. EBIT before special items in Q3 2014 fell considerably on lower volumes, less favorable product mix, and higher fixed costs. For the remainder of the year, we see business momentum building up in South America, and we currently experience no significant negative exchange rate impact on earnings. Market response to our Xemium-based fungicide solutions is positive. With our positioning and strong product pipeline, we are optimistic that we are able to continue our success story in Agricultural Solutions. Now to oil and gas. In the oil and gas segment, sales grew considerably. This was driven by higher volumes in natural gas trading. EBIT before special items significantly exceeded prior year results attributable to higher contributions from natural gas trading.
Net income came in at EUR 265 million, a decrease of EUR 186 million. In Q3 2013, we had recognized the disposal gain of EUR 164 million from the divestment of a 15% stake in the Edvard Grieg field in the North Sea. Sales in exploration and production decreased considerably due to lower volumes as well as lower oil and gas prices. The average price for Brent crude oil decreased by 8% to $102 per barrel. In euro terms, it was also 8% lower. Volume was about 10% lower. EBIT before special items declined by 14% to EUR 310 million on lower volumes and prices. Contrary to prior year, we did not have an onshore lifting in Libya.
These missing contributions could not be compensated by higher earnings in Norway. Sales in the natural gas trading business grew considerably due to higher volumes, especially on the European spot markets. EBIT before special items recovered strongly after a relatively weak first half, 2014. Now to Other. EBIT before special items in Other improved strongly from EUR -105 million to EUR -7 million, driven by better currency result and the recent share price development, which led to the dissolution of provisions for our long-term incentive program. Let me turn to our cash flow. Please be reminded that we will summarize the first nine months of 2014. At EUR 4.8 billion, cash provided by operating activities was down by EUR 1.2 billion.
This was due to a cash outflow in net working capital of EUR 700 million related to the reduction of trade accounts payable, as well as a planned buildup in inventories to prepare for maintenance shutdowns. Cash used in investing activities declined by EUR 1 billion - EUR 3.6 billion. While CAPEX increased by EUR 400 million - EUR 3.4 billion, cash payments for acquisitions decreased considerably. In the same period of 2013, we had incurred cash outflows of EUR 1.1 billion for the acquisition of assets from Statoil, as well as the acquisition of Pronova BioPharma. Free cash flow amounted to EUR 1.3 billion in Q1 through Q3 2014. On a sequential basis, we recognize the positive trend in cash flow.
While in the first half 2014, free cash flow amounted to about EUR 500 million, we generated EUR 820 million of free cash flow in the third quarter alone. Coming back to the first nine months of 2014, financing activities led to a cash outflow of EUR 995 million compared with an outflow of EUR 1.3 billion in the first three quarters of 2013. The cash inflow resulting from the change in financial liabilities amounted to EUR 1.7 billion. This was mainly attributable to BASF issuing several bonds with a principal amount of around EUR 1.6 billion, as well as taking out bank loans. The repayment of a bond with a principal amount of EUR 1.25 billion had a counterbalancing effect.
Net debt amounted to EUR 13.9 billion, representing an increase of EUR 1.3 billion in comparison to prior year. At 39%, our equity ratio remained at a very healthy level. With that, back to you, Kurt.
Okay, ladies and gentlemen, let's come to the outlook for 2014. While our business in the third quarter was solid, we remain cautious regarding the development of the macroeconomic environment in the fourth quarter. We don't expect an increase of demand, assume ongoing economic volatility, and a more modest global GDP growth for the remainder of the year. Compared to the last reporting in July, we reduced some of our macroeconomic assumptions for 2014 as follows. Global GDP growth is seen slightly lower now at 2.3%. Industrial production is expected to grow by about 3.4%. The chemical production reduced by almost 0.5%, now 4.0%. We continue to see the average exchange rate, dollar exchange rate at 1.33. That is the average for quarters, obviously.
Regarding the oil price, we now forecast $105 per barrel at an average compared to previously $110 per barrel. Despite this challenging environment, BASF strives to slightly increase EBIT before special items for the full year 2014. Now I would like to update you on our We create chemistry strategy and the respective financial targets, which we published three years ago in 2011. Our strategy is based on long-term trends, growth of emerging markets and certain customer industries, the growing relevance of innovation, shift in feedstock costs and industry dynamics, to name just a few. We increased our investments in selected growth markets, intensified and globalized R&D, accelerated the pruning of our portfolio, and sharpened the meaning of sustainability for BASF.
We also laid out our operational excellence program, which is called STEP, which aims to achieve savings of EUR 1 billion by the end of 2015. We announced specific financial targets for 2015 and 2020 in terms of sales and earnings. We felt this to be necessary also to allow you to hold us accountable. Today, well before starting the new year, we want to update you where we stand. With regard to our strategy, we are pretty much on track. The decision to further globalize our R&D platforms mentioned earlier is just one example of a series of initiatives and changes. Our portfolio optimization is ongoing, resulting in more than 20 divestitures since 2011, which we've balanced with selected smaller acquisitions, many of them technology-driven. Our operational excellence program STEP is ahead of schedule.
By the end of 2015, we will most likely achieve EUR 1.3 billion, EUR 300 million more than planned. Yet it looks like we will not achieve all of our ambitious financial targets next year. We worked very hard to reach them. However, early this year, we told you that hitting these targets would require an economic recovery in major markets, especially in Europe, and a marginal improvement for some of our major basic products. It is pretty obvious that this has not happened. We have seen a further weakening. Comparing the previously expected GDP industry and chemical production growth rate 2010 to 2015 with what we see today underlines these growing gaps. The average annual growth of global GDP we now see about 0.8 percentage points lower than expected.
Even more importantly, we now assume growth of chemical production will be 4% instead of 4.9% per year. This is still well above GDP and industrial production. We all know the reason for this development, reduced growth dynamics of emerging markets and the delayed recovery in Europe. Aside from lower demand growth, which has adversely impacted our business, we have experienced margin pressures in some of our major product lines, especially in China. To give you just one example, the margin of caprolactam in Asia today is more than 50% lower than in 2011. We did not project such peak margins into the future. However, the current margin squeeze is beyond what we had anticipated. Performance Products, we have seen a typical commoditization in selected product lines.
This is why we initiated an additional restructuring program, which will deliver about EUR 500 million to earnings from 2017 onwards. We have summarized these effects in one slide. Lower market growth and lower margins cost us more than EUR 1 billion of EBITDA each. The planned divestiture of our gas trading and storage business was not considered in 2011 and lower sales by approximately EUR 12 billion and EBITDA by EUR 500 million. That will generate additional earnings of EUR 300 million. The other positive factor amounting to around EUR 4 million is the exchange rate since we expected a weaker U.S. dollar than what we currently see.
However, let me add, we did not foresee back then the weakening of many currencies of emerging markets from India to Argentina to Turkey, which hit us quite severely over the last two- three years. Most probably, we also see slightly lower growth going forward, and we do not expect an immediate cyclical recovery. We now expect 2015 sales and EBITDA to be in line with current financial market expectations. Analysts currently foresee 2015 EBITDA between EUR 10 billion and EUR 12 billion. Clearly, we aim to achieve the upper range. However, we will, as usual, provide you with the outlook for 2015 at our annual analyst and investors conference on February 27th here in Ludwigshafen. That day, we will also discuss our updated long-term targets. Be assured that we will remain committed to growing our business profitably and further improving earnings resilience in the coming years.
With that, we are ready to take your questions.
Yeah, ladies and gentlemen, this brings us to the question and answer session. I would suggest that you all please ask one question at a time, and then you always have the opportunity to requeue, and I will promise you to take your follow-up question. We start with James Knight from Exane.
Morning. Thank you for taking my question. Can I start on the very short-term view? You've talked of destocking. We can all see the share price. I mean, the oil price, not the share price, Freudian slip. You're quoted on Bloomberg as saying October's okay so far. Can you just add a little bit more color as to what you mean by okay? Thank you.
Yeah. Thanks for the question, James. What we have seen in Q3 was a very slow July and August, and then in September, eventually business came back in a certain way. This is continuing into October, but frankly, this is now less than 15 working days. I think it's simply too early to say how this will develop further on. What we have seen so far is the reason why we reiterated essentially our guidance for 2014 and achieving an EBITDA slightly above last year's number. At this point in time, no further deterioration, but certainly overall, especially in Europe, no positive momentum to feel.
Okay. Thank you.
We move on with Lutz Grueten from Commerzbank. Good morning, Lutz.
for taking my question here. You're talking about inventory build-up in preparation for a maintenance shutdown. Is this the only reason, or is this also reflecting some destocking on the customer side?
Morning, Lutz. This is Hans. Looking at the overall inventory development, you're familiar with the situation that we experienced by the end of Q2, where I explained what the reasons were for the inventory build-up, in particular also, the build-up that we saw in our precious metal inventory, as a result of the strikes in South Africa.
Now that has worked its way through the system, but not yet fully. That's one of the reasons that you're still seeing. My expectation is it will have worked its way fully through the system during the fourth quarter. We have the usual planned turnarounds in Q4. We need to prepare for that. That also leads to slight increase in our inventories. Do we see destocking? I think we've experienced destocking at our customers in Q3. First indications from the month of October are that inventories at our customers are low.
I think that also, as explained by Kurt, then led to a situation in the first half of October, as we've experienced it pretty much in line with the second half of September.
Thank you.
Now this brings us to the next question from Thomas Gilbert, UBS. Hello, Thomas.
Good morning. Thank you for taking my one question. Staying with Europe and going to maybe the next three years, I reckon one of the key markets for you is the luxury end of the automotive industry. Now, you're cautious on your first question there, sub-questions of course, as usual. But does that include that particular end market, the luxury automotive segment? Are you cautious there? And secondly, are you cautious there on production, or do you see the automotive industry changing their purchasing behavior towards the chemicals industry in that they're downtrading because they've embraced all the modern chemistry that replaces metal and saves energy? And is this a cyclical fear that you have, or is there a structural fear towards European automotive coming into your thinking? Thank you.
Morning, Thomas. In luxury cars, German luxury cars, obviously this is not just a German domestic or European market. These cars are very much exported as we speak to emerging markets like China, and this is awfully important. I think at this point in time, we don't have an indication that the market for us is slowing down in any way. We still believe that the global automotive industry will grow healthy by approximately 3 million units this year to something like 87-88 million cars, which is from our point of view good essentially because we are well connected with the growing part of the automotive industry.
Can I then ask, sorry for follow-up. If it's not automotive, which end markets are you worried about going into 2015 for Europe? If you could just give some two or three headline end markets that worry you.
You meaning end markets in 2015 being slow for BASF? I think at this point in time, it's frankly, it's a little bit early to make that kind of forecast. We have seen, as I said, a quite noticeable slowdown of demand in Q3. This was from our point of view, pretty much across the board, and certainly what Hans just said also plays a role here. There was certainly a bit of inventory trimming included as well. You know, it's awfully difficult for us to differentiate exactly what is inventory trimming and what is really underlying demand development. Overall, I think the GDP numbers point to the direction of a slowdown.
Okay. Thank you.
Brings us now to the next question from Jeremy Redenius from Sanford C. Bernstein. Hello, Jeremy.
Hi, good morning. It's Jeremy Redenius. Thanks for taking the question. I just wanted to ask a question, perhaps about the bright spot of the business in chemicals. It's been a strong result again this quarter. You've talked about the increase of startup costs or maintenance costs this year that would basically cause EBIT to come in at last year's level. It looks like you're set to do much better than that. I'm wondering if you could talk about the costs associated with this. Like, are they coming in as expected? Also, are we just really seeing a big step up in margins and EBIT from this business because of your activities in North America, the low-cost gas? Thanks very much.
Yeah, Jeremy, this is Hans. Your question on chemicals. Yes, we enjoyed a very positive margin development in Q3, as you mentioned, driven by petrochemicals margins and there again, in particular, cracker products. By the way, that is true for North America, it's true for Europe, and also for Asia Pacific, with Asia Pacific still generating the lowest margins. But overall, also there, a nice improvement that we've seen. With respect to the start-up cost, yes, when we gave our guidance for the full year, we said that start-up costs will have a dampening impact on our expected earnings for the year 2014 in the chemical segment. We mentioned in the meantime that there will be a delay with our Chongqing project. We said that in May.
We won't start that up in Q4. That will now come in the second quarter of 2015. That obviously helps also a little bit with respect to the performance in our Chemical segment in the year 2014.
Is it fair to characterize this year's good result so far as a little bit better than expected because of lower costs for maintenance or startups, a little bit lower costs from U.S. gas or more products sold with cheap gas, and then also a little bit of benefit from higher
Ethylene prices.
You can look at it from the cost side. You can also look at it simply from the margin side. Overall, what we've experienced is a slightly better margin environment. On top of that, we're obviously keeping our fixed costs under control, and it looks like the MDI cost for Chongqing will come in 2015 and not in 2014.
Great. Okay, thank you very much.
Welcome.
The next question comes from Laurent Favre from Bank of America Merrill Lynch.
Yes. Good morning, all. My question is on the STEP program and the acceleration, so that you get that EUR 1.3 billion of savings as an exit rate for 2015. Could you tell us what is the exit rate for 2014? In other words, the 2015 to 2014 incremental savings. Thank you.
Laurent, beginning of the year, we said what we've got under the belt are EUR 600 million by year-end 2013, and we said we then expect EUR 200 million in each year in 2014 and 2015 to get us to the EUR 1 billion target. At this point in time, we see that we deliver faster and a bit more. Kurt explained in his speech, it will be EUR 1.3 billion now, the total amount. What we see for year-end 2014 is a P&L impact in the order of magnitude of EUR 900 million- EUR 1 billion.
Okay.
The remainder coming in 2015.
Thank you.
Next question comes from Michael Rae from Goldman Sachs.
Hi there. Can you provide an update on the disposal of NatGas trading to Gazprom? I think the guidance is for completion in the autumn, so should we assume an announcement will be pretty imminent? Just if you could give a summary of where you are in the process, it'd be great. Thanks.
Yeah, sure, Mike, can do. We are still working on some technical issues, and the goal is to conclude it, as you said before, in the fall of this year, which I think officially lasts until
Oh, I see.
21st of December, if I see it correctly.
Okay. Basically, was that okay, Michael?
Yeah. Can you give us any details of just where you are in the process? I mean, is there anything that's taken a little bit longer or?
No, Michael, there are a lot of, let's say, technical nitty-gritty details we have to resolve. It took more time than we wanted actually, but we are eager to get it done. I don't wanna go into more detail here. It's really the technical stuff which holds us back here.
Okay, thank you.
You're welcome.
Now we move on to Andreas Heine from Barclays. Hello, Andreas.
Yes. Good morning, Andreas Heine from Barclays. I have one question on Performance Products. We have seen in the last two years a very weak Q4. Is that a seasonal pattern or can it be better this year for whatever reasons? How you see the trends in this business? You had a strong growth in the first half, but zero growth in the third quarter. Is that what you expect for this division going forward as well, or were there some other effects? Thank you.
We still try to find the exact data, so we tell you exactly what's going on. As you said, Q4 is always a little bit difficult to predict because it is uncertainty when the year-end break really, really starts. We do think, you know, we don't really give specific guidance on segments, but we do think it should be a relatively good quarter for the Performance Products. Can we leave it that way?
Yes, you can.
I have the data in front of me, but sorry, I'm not.
Well, I was just wondering, in the last two years, I was surprised about the strong seasonality towards Q4, and it was in both years quite a disappointment. According to what you're saying, that might not be every year the case.
Yes. Yes, you're right, Andreas. However, we only know by the end of December, and the fourth quarter is always kind of a very special quarter, unfortunately.
What you don't really know is inventory management of your customers. We have seen this now again and again. At the end of a quarter, our customers try to trim their inventories, holding back orders, and we don't know yet how they will operate during the end of the year. Do they have a complete break? Do they continue to operate? All these things are kind of uncertain at this point in time.
Thank you.
I gave you an indication.
Yeah.
Good. We move on to Tony Jones from Redburn.
Good morning, everybody. One question for me with two small different parts to it. On Asia, you highlighted that petrochemical margins have started to get better in Asia. Having a look at the regional EBIT margin in Asia, it continues to be at pretty low level, which suggests that something else is going worse. Could you help us think about what that is? Also with the change in guidance and the management changes you talked about yesterday, should we read that there's a slight shift or change to the internal view on the Asia investment program? Thank you.
I think Hans will clarify the first topic with regard to base products in Asia and China. Management changes in Asia, that's a very interesting question, Tony. Essentially, I'd say these topics are unrelated within our company. We have a long-term strategy. That's the way we how we see markets, industry dynamics, our development going forward. I would have a hard time to imagine that now with.
Martin Brudermüller coming back to Ludwigshafen after seven years and Sanjeev Gandhi going back to Asia, actually, will anything change. We have certainly a big advantage in having somebody with Sanjeev who has a deep experience of the Asian market. He has worked in India, obviously in Hong Kong and Singapore and Japan. So he should be up to speed very, very quickly. So his warm up phase should be relatively short, and that is good because we have many projects going on in Asia which need management attention.
Just following up on that then. To be clear, there's gonna be no change in the CAPEX guidance?
That is a different question now. That is a more general question. At this point in time, we are looking at our budget for 2015 going forward. I think we are keenly aware of the market situation in some of our product areas. You can rest assured that we stay as capital disciplined, financial disciplined as possible. I think we used the Investors' Day this summer to talk about some of the bigger, larger products where we invest in China, in Asia, where we do believe that we have good cost positions and defensible competitive positions. We have other topics like shale gas in North America. That is a specific issue which we can discuss, if you like.
We have oil and gas, which needs a certain attention as well in terms of CAPEX. Again, I think we are very much aware that we have to look carefully at our CAPEX budget.
Thank you. Appreciate that.
Tony, on the margin question that you raised, I should have been more specific there in the beginning. We saw positive development on the cracker margins in Asia. We see other areas which are definitely under margin pressure. Caprolactam, one example there, the Isocyanates, but also Acrylic Acid and BDO. My comment earlier was specifically with respect to the improvement that we've seen with respect to cracker margins.
Understood. Thank you.
Now this brings us to Laurence Alexander from Jefferies.
Good morning. Why don't you touch on your views on the current volatility in oil prices, and particularly if they did stay down for an extended period, are there parts of your business where you would see better positioning for share gains over the next, say, 2-4-year horizon?
Hans, you're going to run the oil and gas business, starting next year.
I mean, I'll start with, obviously, the easy piece. We've seen the oil price coming down in a relatively short period of time by a significant amount. Brent this morning trading at, I believe, 86.40 when I looked at it the last time. Average prices that we've experienced in the first nine months are still at, I think the average for Brent is at slightly above 106. $20 per barrel, Brent below what the average is for the first nine months, a significant amount there that has an immediate impact, obviously, on our oil and gas business.
You know, the guidance that we're giving there, which is $1 per barrel, equates to $15 million in EBIT on an annual basis. Now, that's for the oil and gas business. Whether a lower oil price overall will allow us to position ourselves better in other parts of our portfolio, I think the answer to that is it remains to be seen. Typically, what a lower oil price means, it's a reflection on overall lower demand, which then also would have an impact on our entire portfolio. Could it be that lower oil prices allow us, through lower feedstock costs, to position ourselves in a different way compared to, in particular, North American competitors?
That might be the case, but as I said, that's all in big speculation there. I would like to leave that at, "That remains to be seen.
Thank you.
Okay, we go on with Christian Faitz from Kepler Cheuvreux.
Yes, sir. Thanks for taking my question. In North America, is the lack of profit development largely due to your agricultural segment and Q3? As question 1B maybe, you talk about less favorable product mix in Agro to explain the lower margins in that segment. However, your prices are up 2% in the quarter. How does that fit together? Thanks.
Yeah. Hi, Christian. I take both questions, actually there are two. Yes, you are correct. Yeah, that is a fact. We got hit by a weaker ag business in the United States. The other factor is really mix. We have other products in the mix now which have lower contribution margin, and that essentially leads to a lower overall margin in ag despite the slight price increase that you mentioned.
Okay. Thanks. Very helpful.
Next question comes from Martin Evans, JP Morgan.
Yeah, thanks very much. Just going back to the 2015 guidance or your new guidance, and if we were to sort of take maybe the midpoint of EUR 11 billion of EBITDA for next year as a sort of starting point, even allowing for the STEP progress and possibly cost inflation, that sort of would imply around a 5% progress next year on this year's consensus EBITDA. Can you just remind us which bits of the business, given the sort of relatively gloomy macro environment, which bits of the business you're more confident about in terms of showing that sort of underlying growth trajectory irrespective of the current GDP situation? Thanks.
Yeah. Michael, thanks for the question. Actually, it's not going back, it's going forward as we talk about 2015. I don't want to speculate about no range, midpoint, et cetera. I mean, we will leave that to the meeting on February 27, when we brief you on what we see going forward. We do have, I think that is the core of your question. We do have businesses which obviously are based on innovation that can continue to grow quite nicely. They, because they have customer intimacies, and we have seen this now in Asia, very nicely in the entire automotive space, which is growing very, very nicely for BASF also in a profitable way.
Despite what you described, a more conservative macro outlook, we do have quite some areas where we can grow based on our own strengths and our own performance, and are not just subject to overall supply and demand factors, which we have seen now quite clearly in some of our upstream businesses.
Thanks very much.
From Jaideep Pandya.
Yeah, thanks. Just sticking to 2015, two basic questions on if you can quantify or give us some color about agrochemicals or agrosolutions, what are you doing here and, you know, what should be our expectations for 2015, given a sharp drop in profitability on a year-on-year basis? Just what is your working assumption for oil price for next year when you give this, you know, precise range of EUR 10 billion-EUR 12 billion, or you're sort of pointing out to consensus? Because obviously that is a key part to your, you know, year-on-year bridge. Thank you.
Yeah. Again, I don't want to speculate too much about 2015 right now. With regard to the oil price, I think it's pretty obvious and clear that most likely we will work with an oil price which is below $100 per barrel. I think that is a realistic assumption from today's point of view. In agro, we have to put things into perspective. We have had a great run for six, seven years, continuous improvement, excellent top line growth, excellent profitability, despite considerably higher investments both in R&D and marketing. We have an excellent pipeline. We have briefed you on that one. We have defined clear midterm targets for BASF. What we experience right now is a little bit of a setback against a definitely softer marketplace.
Now speculating about 2015, there you have to make a couple of assumptions about the market development in soft commodities, which I don't want to do at this point in time. I can only tell you that we do think that we have an excellent portfolio, pipeline. We have a couple of ideas, new products coming to the market as well. Fundamentally and structurally, we don't see that this business is now different from what we had six months ago. Let's put it that way.
My question was more related to if you look at your comments on Latin America, where you do flag more competition. Going into next year, do you feel that you have enough in your pipeline in new products that will, you know, sort of offset this or get you out of this? Or should we expect, you know, you are investing more in ag and there is a little bit more competition in Latin America. Should we expect this to sort of linger on? Because this started as a theme in Q2, and it's obviously continued into Q3.
I would still describe this as, let's say, normal volatility in our markets. Sometimes you gain share, sometimes you lose a little bit of share. We have gained for quite some time according to our data. Again, we don't see a fundamentally different path forward than what we had six or 12 months ago. There is this overarching topic of profitability in the entire ag space, meaning soft commodity prices, which is certainly important for some of our products, especially those which are used for what we call plant health, which is very much about additional yield, which farmers normally only apply these products if prices or when prices are at a certain level.
There's a certain part of our portfolio which is very price sensitive to soft commodity prices, and therefore it's a little bit difficult now to make a forecast for 2015. Actually, I don't want to make a forecast for 2015 because that's what we typically do in February.
Thank you. Sorry, if I can just quickly.
Yeah. Jaideep, now we have to stop. You had already three questions. Don't be upset. You can re-queue, and I take you later. Yeah?
Okay. Thank you.
Next one comes from Andrew Benson, please, from Citi.
Yeah, thanks very much, Mike, again, and hello everybody. The gas trading wing, I know you're imminently gonna sell the business, but can you just explain why that did quite as well as it did, please?
Andrew, this is Hans. What we saw in Q3 is actually a significant increase in the volumes, which has to do with the fact predominantly that it got to the end what's called of the gas year, which ends in Q3. A number of contracts which have minimum quantities due to very warm winter. Some of our customers didn't pull as much gas as they were expected to and had expected themselves. Now getting towards the end of the gas year, they pull the gas according to their minimum obligations, and that is the major explanation here. We had some price revisions, which is also typically for that business with suppliers.
Overall, that led to the good performance of our natural gas trading business in Q3.
That's fair. Just on the profit is sort of retrospectively adjusted. Is that right for this one? It's sort of reset to the beginning of last year or something of that order. Is that right?
Well, I'm not 100% sure that I understand your question correctly. We report the results, obviously till the point where we then swap that business out, which is expected to be prior to the end of this year. What's gonna happen is, from an economic perspective, that the results that are generated in that business from, if I recall that correctly, April first, 2013 on, are then the buyers or the swap partners, economically.
Thank you very much.
Welcome.
Now this brings us to Oliver Schwarz from Warburg. Hello, Oliver.
Hello, thanks for taking my question. Just a quick one on the margins in the chemicals business. Is that solely due to the change to flexible feed in the U.S. or does that number contain also some windfall product profits, so to speak, from declining raw material prices that don't have yet reached your customers because the contracts are fixed on a monthly or three monthly business? E.g., will we see, let's say, a moving up of that windfall product windfall profits along the value chain? And will that no longer stick, for example, in the chemicals business starting, let's say, Q4 this year? Thank you.
Oliver, this is Hans. I think what we've seen in Q3, I would not call that windfall profits. What I think we've seen is a good balance between supply and demand that had to do with a number of things, among them scheduled as well as unscheduled plant outages. Overall, you saw that clearly reflected. Raw material price decline, yes, that may have played a role, but I'd say a much smaller role than overall supply and demand. You already alluded to the steps that BASF has taken to change raw materials for the cracker in Port Arthur.
That also certainly has shown the results that we expected in Q3 in combination with the tenth furnace that we started in April of this year in the cracker. All these three components together led to the good and healthy performance that we've seen in the chemical segment in Q3.
Thank you.
Oliver, you have to keep in mind that everything was just perfect in, for us. We have our SMPO plant in Moerdijk, which is operated by Shell, which is not operational at this point in time. This also had quite a negative effect on overall profitability of the chemical business.
Understood. Thank you.
Now we come to Peter Clark from Société Générale. Hello, Peter.
Yes, good morning. Thank you. It's coming back to the Asia margin question, and almost obviously it's come back a long way. I mean, if you go back to the extraordinary peak in 2010, it was about 10%. It's been hovering around the 6% level, just a bit below that. I know it's very dangerous just to look at that regional margin as such, but effectively, I'm just wondering when you see this turning or starting the long slog back up, because obviously the outlook for supply-demand remains quite difficult in some of the major markets in Asia for some time. Just your feel on that, 'cause we've sort of stabilized around this 6% level for quite some time now, and just your thoughts on when it might start to claw its way back up. Thank you.
I don't think that at this point in time, Peter, we have a clear opinion on when China should really see a tightening of supply-demand again. Actually, it's very hard to say. As I said before, we focus also on our downstream business, which grow very nicely. In the upstream businesses, I think it would be realistic to expect for quite some time that we continue to see margins under pressure, at least that is our assumption going forward.
Okay. Thank you. Thank you.
Now we are moving on to Josh Harris from HSBC.
Good morning. Just wanted to ask, you hinted earlier in the Q&A that you may look at the CAPEX budget going out for the next few years. Would that entail you also maybe having a slightly bigger probability of returning cash to shareholders, either through special dividends or share buyback?
Yeah, I can take that question. Special dividend, you're not alluding to our anniversary next year, which is 150 years. There's very little inclination on our side to have a special dividend for our 150th anniversary. Buyback, we have something now for quite some time. I think we do have a solid balance sheet, which is certainly a huge task, but I don't see at this point in time meaningful potential for a buyback. When you start something like that, it should be meaningful and not just one event, but then we should do it as we have done it between 1999 and 2008, where essentially we continuously bought back stock in the order of magnitude of about EUR 1 billion a year.
that I don't see for 2015.
Okay, thank you.
Now, next question comes from Mutlu Gundogan, from ABN AMRO Bank.
Yes, thank you, Maggie, and hello to everyone. A question on trading conditions. You mentioned destocking basic chemicals. Just wondering how long you would expect that to continue. Would you expect this to affect some of the downstream products as well, in particular, as we approach the end of the year? Thanks.
Destocking in petrochemicals or in base chemicals is pretty difficult because normally inventory levels are not really that high. Very different from some of the downstream businesses where we have very long value chains and sometimes inventory levels at our customer, which are much longer and much higher. We don't think that this will have a major effect going forward. Again, customer behavior at the end of the year is very hard to predict, but our underlying assumption is that there is, again, a major effort to trim the inventory levels.
Okay, thank you.
Our next question is now Markus Mayer from Baader.
Yeah, good morning, ladies and gentlemen. A question on the target or on M&A. Is M&A included in your target? On the divestment, you have been successful with the leather chemicals divestment. Are there further divestment candidates in your portfolio, for example, is leather again on the block?
Actually, Marcus, we divested the textile business, not the leather business.
Yeah, but are textiles now on the block? They have been a divestment candidate, and then you pull this back. Now the question is, will you put on the block again.
We are looking at a couple of potential candidates for divestitures. I mean, that is an ongoing exercise. I mentioned in my little speech earlier on, we have done quite a few over the last couple of years, and this will continue. I ask you for your understanding that we normally talk about this after we have concluded the deal. We made one exception here, which is recently, which is really the kaolin business as part of the Paper Chemicals business, just to help you to understand the rationale why we decided to dissolve this Paper Chemicals division after our decision to divest a part of the kaolin business over the next couple of quarters.
Is the M&A part of the 2015 target or is included?
Going forward, we normally don't put M&A into our stated EBITDA targets because there is a high uncertainty whether you can really get what you want to buy. Historically, what you can say for BASF M&A, the net effect was a slight positive over the last 10 years. It always added about one percentage point to our growth. But that is also almost more often a side effect. We look at businesses case by case and try to understand whether they really add to our performance, competitiveness and profitability. Then it can happen that it also adds net to the growth of BASF. Precisely coming back to your question, it's not included. It's not included in our 2015 models, which we normally talk about then at the annual press conference.
Okay, perfect. Thanks so much.
Now, given the time, we are circling in on the last two questions. There's one coming from Ronald Köhler from MainFirst, and the last one then from Thomas Gilbert from UBS.
Yes, hello. Oil and gas, the question actually is volume. You said volumes are down in Q3. Is it a production issue or is it a demand issue? Looking a bit forward, we obviously have Libya at least coming back on screen with limited levels so far. How do you see the ramp up here? Also a bit on Q4. In general, we have Libya coming back. I'm not sure what your volumes will do if they should come back in the rest of the world as well, and with lower oil price. Can you a little bit elaborate what we should expect in Q4 on oil and gas, excluding natural gas?
Well, this is Hans. I'll start with Libya. We restarted production there on, I believe, exactly the 22nd of September. 35,000 barrels per day out of a production capacity that we have of 100,000. I can't tell you at this point in time whether we will see any type of ramp up. It's still fraught situation there. We do not have any experts on the ground due to the situation that we face in Libya. The export terminals, it's still unclear what the available capacity is there. We are working with the assumption that we'll produce in this order of magnitude.
This is 35,000 barrels per day in Libya in Q4. The connection wasn't too good, but I think the first question that you asked had to do with the earnings performance in the E&P segment. You asked why did volumes come down? It's not a production issue that we have there. It is the difference between having an offshore lifting in Q3 of the year 2013 and not having an offshore lifting in Libya in Q3 of the year 2014. At this point in time, not yet 100% clear on whether we will have one late in Q4 or early in Q1.
Okay. Thank you.
Welcome.
I will be coming now to Thomas Gilbert. Last question.
Very quickly. Thank you very much. North American base chemicals. Assuming the North American economy continues to grow, can we assume that you do have wiggle room and enough spare capacity to satisfy that demand? Or ask it from the other way around from Laurent's question, the STEP benefit that relates to Port Arthur, has that been partially reaped? Or i.e., is this fully loaded in Port Arthur, or is there still incremental capacity or benefits to come? In other words, how do you think your capacity utilization rate there, is there upside into 2015 in Port Arthur?
Thomas, I'll give you that answer. Actually, we are not sold out in North America, so there's still a little bit room to continue to grow. We have a couple of investments which are in this shale space, like Formic Acid. They also come on stream. Overall, however, you have to keep in mind the profitability of a cracker is yes determined by capacity utilization rate, but it's also the margin. What we do see then next year is that we have now to become very specific, then we will have the tenth furnace in Port Arthur fully available for the total year. There is still room.
Yeah. Thank you.
You're welcome.
Ladies and gentlemen, this brings us to the end of our conference call. There have been a couple people who are still on our list, whom we will be calling back as soon as we have finished here. I would also like to alert you that our full year reporting, as Kurt said before, will be on February 27th, 2015. For today, I would like to thank you for joining us on the call. Whoever should still have any further questions, please contact any member of the IR team, and we will be happy to help you. With this, we say goodbye. We wish you a very nice weekend and hope to speak to you soon. Thank you. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day.