Good morning, ladies and gentlemen. This is the Chorus Call conference operator. Welcome to the BASF Interim report Q3 results 2012. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Anyone who wishes to ask a question may press * and one on their telephones. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero. This presentation includes 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. This presentation contains a number of forward-looking statements, including, in particular, statements about future events, future financial performance, plans, strategies, expectations, prospects, competitive environment, regulation, and supply and demand.
BASF has based these forward-looking statements on its views with respect to future events and financial performance. Actual financial performance of the entities described herein could differ materially from that projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts, and projections, and financial performance may be better or worse than anticipated. Given these uncertainties, readers should not put undue reliance on any forward-looking statements. Forward-looking statements represent estimates and assumptions only as of the date that they were made. The information contained in this presentation is subject to change without notice, and BASF does not undertake any duty to update the forward-looking statements and the estimates and assumptions associated with them, except to the extent required by applicable laws and regulations. Ladies and gentlemen, at this time, I would now like to turn the conference over to Magdalena Moll, Head of Investor Relations. Please go ahead.
Yes, thank you, Jason, and good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our Q3 2012 conference call. We saw slowing global economic growth during the quarter, but BASF maintained good business performance. We increased sales by 8% to EUR 19 billion and at EUR 2.1 billion, EBIT before special items was up 5% on the level of the previous year. 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, highlight important milestones, and conclude with the outlook for the full year 2012. Hans will review the segment results of the Q3 in detail, and afterwards, both gentlemen will be happy to take your questions.
We have posted, as always, the charts and the speech as well as the press documents on our website, www.basf.com/share. With this, I would like to hand over to Kurt.
Yeah, thank you, Maggie, and ladies and gentlemen, good morning, and thank you for joining us as well. Times continue to be demanding. Uncertainty remains high, and we have not seen any improvement in global business sentiment. The European sovereign debt crisis and an economic weakening in China continue to dominate the headlines. Q3, China showed once more a lower growth, which did not come as a surprise given the sluggish demand for chemicals we have seen since the end of last year. Let me now show you how BASF has performed in this challenging environment. All in all, our business held up well in Q3, thanks to our diversified portfolio. We generated sales of EUR 19 billion, an increase of 8% compared to the same period of last year. Main driver were higher volumes, primarily resulting from the higher production of crude oil.
Positive currency effects more than offset lower prices. While Oil and Gas and Agricultural Solutions posted another strong quarter, we saw a continuously weak development in our chemical activities. As demand softened in some areas, volumes in our chemical activities declined by 1% and prices fell by 4% compared to Q3 2011. EBITDA amounted to EUR 2.8 billion, up by 4% versus the prior year quarter. EBIT before special items rose by roughly EUR 100 million to EUR 2.1 billion. The higher contribution from Oil and Gas as well as our successful crop protection business were able to more than offset lower earnings in our chemical activities. Special items in EBIT of EUR -68 million resulted primarily from planned restructuring measures.
The tax rate increased to 46% due to the resumption of the highly taxed oil production in Libya. As a result, net income dropped by EUR 246 million - EUR 946 million. Adjusted earnings per share decreased 22% to EUR 1.19. Over the past 6 weeks, we announced several important measures to further optimize our portfolio, especially to strengthen our good performing Ag and oil and gas businesses. In September, we signed an agreement with Norwest Equity Partners to acquire Becker Underwood for a price of roughly $1 billion. The company is a leading global provider of technologies for biological seed treatment.
With expected sales of $240 million for the fiscal year 2012 and a strong technology platform, the planned acquisition will further strengthen our global crop protection business, particularly in the rapidly growing seed treatment market. The purchase is subject to approval by the relevant authorities, and the closing of the transaction is expected by the end of this year. In addition, we will invest more than EUR 200 million in Germany and the United States to scale up production and formulation capacities for our successful fungicides, F 500 and Xemium. Beginning of October, we announced the restructuring of our construction chemicals division to strengthen its competitiveness in Europe. We will adjust the business to declining markets, especially in Southern Europe and Great Britain, by downsizing our marketing and sales organization, as well as by reducing production capacities.
In addition, we will enhance the overall efficiency and customer focus by improving business processes in Germany and Eastern Europe. The planned measures will affect about 400 positions, including portfolio optimizations. We will also put some smaller non-core activities up for sale. At the beginning of this week, Statoil and BASF announced an asset swap, which will increase our oil and gas production footprint in Norway considerably. Wintershall will acquire equity in 3 producing fields from Statoil, containing two key reserves of around 100 million barrels of oil equivalent. Through this transaction, we will raise our production in Norway from currently around 3,000 to almost 40,000 barrels per day. This will strongly contribute to Wintershall operating cash flow and EBIT. In return, Statoil will receive a 15% share in the development field Brage and a financial compensation of $1.35 billion.
A potential payment of up to $100 million will be made dependent on additional volumes from the development of the Vega field. The collaboration also includes important technology-oriented topics such as joint research and projects on enhanced oil recovery and the development of unconventional deposits in Germany and also internationally. I'm now coming to the outlook. For the Q4 of 2012, we do not anticipate an upturn in the global economy and also do not expect demand to pick up for our chemical activities. Prospects are clouded by continued uncertainty, especially in the Eurozone and by slower growth in Asia. We therefore have adjusted some of our expectations for the global economy. For 2012, we now anticipate chemical production to grow at 2.9%, a reduction of 0.6 percentage points.
Our assumptions for the Brent oil price per barrel and the dollar euro exchange rate remain unchanged at $110 and EUR 1.3, respectively. We confirm our outlook for 2012. We aim to exceed the 2011 record levels in sales and income from operations before special items. Our forecast is supported by the continuous crude oil production in Libya and by our successful crop protection business. In our chemical activities, earnings will not match the level of the previous year, even if earnings in Q4 might be above the relatively weak Q4 of last year. Ladies and gentlemen, as you know, we continuously strive to strengthen our competitiveness and enhance our profitability. Our operational excellence program STEP, which we announced at the end of last year, is making good progress.
By the end of 2015, it is expected to contribute around EUR 1 billion to earnings each year. STEP comprises a couple of hundred projects that aim to lower costs and raise profit margins. With this, I will hand over to Hans.
Thank you, Kurt. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment in more detail and focus on the respective business developments in comparison to the Q3 of 2011. Chemicals sales increased significantly, mainly as a result of recent portfolio measures. Feedstock sales to Styrolution Group companies and to the new owner of the divested fertilizer business contributed to the top line. In addition, higher volumes and currency tailwinds more than compensated for lower prices. EBIT before special items declined considerably compared to the strong prior year quarter, mainly due to lower margins as well as planned and unplanned shutdowns. Sales in petrochemicals increased. Slightly higher volumes, feedstock sales to Styrolution and positive currency effects more than offset a significant drop in selling prices. Demand for acrylics and cracker products further weakened in Europe and Asia.
Higher raw material costs could not fully be passed on, putting margins under severe pressure. EBIT before special items was considerably lower due to weaker results, mainly from cracker products and acrylics, as well as unplanned shutdowns of the Port Arthur cracker. In inorganics, sales went up sharply. Main driver were feedstock sales to the new owner of the divested fertilizer business, which are now reported as third-party sales. Higher prices and volumes also contributed to sales growth. EBIT before special items increased primarily due to improved margins for inorganic base chemicals. Continuous strong demand from important customer industries such as agrochemicals and plastics, as well as positive currency effects led to higher sales in intermediates. Prices, however, declined and raw material cost increases could not fully be passed on. Due to scheduled plant shutdowns, EBIT before special items came in lower.
Sales in plastics increased, driven by a positive business development in polyurethanes and by favorable currency effects. EBIT before special items declined, though, mostly due to a weaker performance of polyamide precursors. In performance polymers, sales decreased slightly as positive currency and portfolio effects did not fully compensate for lower prices and volumes. Polyamide precursors, which were at record price levels in Q3 of last year, continued to suffer from weak demand and declining prices, in particular in Asia.
In contrast, our engineering plastics business developed positively thanks to healthy demand from the automotive industry. Earnings, nevertheless, fell sharply, primarily as a result of weaker margins for polyamide precursors. Sales in polyurethanes grew significantly. Demand from the automotive industry remained overall strong, in particular in Asia and North America, while Europe developed slightly weaker. Sales to the construction industry were below the prior year quarter. Market for basic products was tight.
As a consequence, we were able to increase volumes and prices for both TDI and MDI. EBIT before special items rose substantially. In Performance Products, sales came in slightly above the prior-year quarter. Lower prices and volumes were offset by positive currency effects. EBIT before special items was down primarily as a result of higher cost for idle capacity and increased R&D expenses. In Dispersions & Pigments, sales rose slightly thanks to favorable currency effects. Volumes declined slightly. While the demand for resins and additives developed positively, we experienced softer demand for dispersions and pigments. Due to lower volumes for high-margin pigments and higher fixed cost, EBIT before special items was significantly below the prior-year quarter. In Care Chemicals, sales did not reach the prior-year level despite positive currency effects. A highly competitive market environment led to declining volumes and prices.
In particular, the businesses with ingredients for personal care and home care remained weak. EBIT before special items decreased significantly. Sales in nutrition and health grew due to positive currency effects and higher volumes. Demand improved in almost all businesses while vitamin prices were under pressure. Increased raw material costs could, however, only partially be passed on to customers, resulting in lower margins. With higher fixed costs, EBIT before special items was considerably below the good level of last year's Q3 . In paper chemicals, sales did not match the prior year quarter, mainly due to lower prices. Volumes declined slightly. As a result of operational and strategic measures, fixed costs were reduced and EBIT before special items went up. In Performance Chemicals, sales rose thanks to positive currency effects.
Volumes were lower as strong demand for oil field and mining chemicals could not fully compensate for weaker volumes in the other businesses. Due to our value before volume strategy, EBIT before special items improved considerably. Sales in functional solutions declined mainly due to a lower contribution from precious metal trading. Currency tailwinds and portfolio measures could not fully offset this effect. Due to high raw material costs, EBIT before special items came in lower. Catalyst sales declined primarily as a result of lower precious metal prices and trading volumes. At EUR 560 million, sales in precious metal trading were down by almost EUR 120 million versus the prior year quarter. We were able to further grow our business with mobile emission catalysts due to strong demand from the automotive industry.
Positive currency effects as well as the strengthened activities with battery materials also contributed to the top line. EBIT before special items did not reach the good level of Q3 2011, mostly as a result of high raw material cost. Sales in Construction Chemicals grew thanks to favorable currency effects. While the construction activity in Southern Europe stayed depressed, our business in North America developed positively. Margins improved and EBIT before special items went up. In Coatings, sales rose as a result of higher volumes and prices as well as currency tailwinds. Demand from the automotive industry remained strong in Asia and North America. We were able to increase our sales both in automotive OEM and refinish coatings. EBIT before special items was higher. Agricultural Solutions had another very good quarter. Continued strong demand led to a volume increase of 3%.
Sales grew by 11%, currency adjusted by 3%. Overall, prices were stable. The new season in South America started with significantly higher sales than last year. Demand was strong in insecticides as well as fungicides. In North America, sales grew considerably, primarily driven by an excellent herbicide business. The drought in the Midwest of the United States only had a moderate impact on our business in 2012. The autumn business in Europe developed positively. Strong demand for fungicides and oilseed rape herbicides in Western Europe more than offset the negative impact from the dry weather conditions in Southern and Eastern Europe. In Asia, sales declined due to the delayed onset of the monsoon season in South Asia. In China, though, our business benefited from higher fungicide sales. EBIT before special items rose sharply and was a new record for the Q3.
Year-to-date earnings also posted a new record and reached for the first time EUR 1 billion, thus topping the full year 2011 figure by almost EUR 200 million. Sales in Oil and Gas grew strongly, mainly driven by higher volumes in exploration and production due to the continuous production in Libya. As a result, EBIT before special items tripled compared to the prior year Q3. Sales in exploration and production more than doubled due to the higher volumes and prices. While in Q3 of last year, the oil production in Libya was suspended, we produced in our onshore concessions on average about 85,000 barrels of oil per day in this year's Q3 , significantly more than originally planned. The oil price increased in euro terms by roughly EUR 7 to EUR 88 per barrel compared to the respective prior year quarter. Earnings rose sharply.
In natural gas trading, sales grew considerably driven by higher volumes on European spot trading markets. Earnings, however, declined compared to last year's quarter, which had benefited from a one-time gain from contract adjustments with customers. Concessions income from the OPAL pipeline could only partially offset this effect. Non-compensable taxes on oil production were EUR 492 million. Net income amounted to EUR 322 million, an increase of almost EUR 100 million versus Q3 of last year. Other posted a decline in sales, largely as a result of the divestiture of our Styrenics business, which was contributed to the Styrolution joint venture as of October 1, 2011. EBIT even before special items declined significantly. In addition to the missing contribution from Styrenics, higher provisions for the long-term incentive program, which resulted from the significant share price increase, negatively impacted earnings.
For your reference, in the Q3 of 2011, we had reported a reversal of provisions for the long-term incentive program, which led to an earnings increase. Let me now conclude with our cash flow. We generated, again, a very strong operating cash flow in the first nine months of EUR 5.2 billion, thereof, EUR 1.7 billion coming from the Q3 . In Q3, net working capital remained unchanged compared to mid-year. In the first nine months, we used EUR 2.1 billion in investing activities. CapEx amounted to EUR 2.8 billion, almost EUR 700 million more than in the same period of 2011. Free cash flow reached EUR 2.4 billion in the first nine months of this year, compared to EUR 2.9 billion in the same period of last year.
At EUR 11 billion, net debt was at the level of the end of 2011, but decreased by EUR 600 million year-over-year. With that, we are now happy to take your questions.
Yeah, thank you, Hans. Now we, ladies and gentlemen, I would like to open the call for questions and ask you to please limit your questions in here, because Bock has made an exception to two this time, so two questions per person. Of course, you're always welcome then to rejoin the queue for a follow-up question, and Jason is going to quickly reiterate the process. Please go ahead, Jason.
Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press * followed by one on their telephone keypads. If you wish to remove yourself from the question queue, you may press * followed by two. To ensure the best sound quality, we kindly ask you to use your handset. The first question comes from Andreas Heine from Barclays. Please go ahead.
Yes. Good morning. Andreas Heine from Barclays. Two questions. The first on Performance Products. I'd like to understand more the sequential development in earnings. In the last three years, so this quarter, 2011 Q3 , and 2010, there was an earnings decline sequentially of 22%, 14%, and 21%, and it was even weaker in the Q4 . What I would like to understand is whether the decline we have seen from the second to the Q3 is some kind of seasonal pattern which goes on to an even weaker seasonal Q4, or whether this is an underlying trend which really has worsened. That's the first question. The other one, the strong increase in Agro, basically earnings have increased almost as much as sales have increased.
Could you shed some more light why the earnings were able to increase that strongly in this particular quarter? Thank you.
Yeah. Thank you, Andreas. I will take the first one on Performance Products, and then Hans will try to answer the second one. The Performance Products, I think it's what you're asking is the right perspective sequentially, because that gives you a better idea about the business dynamics. What happened between Q3 and Q2 is quite interesting. We have five divisions within that segment. Four of them were able to improve margins, which I think is quite amazing compared to Q2. One essentially stayed flat or slightly, very slightly negative. All of them had volumes declines. You're right, part of that is seasonal. Q3 used to be, let's say, a summer quarter. Activity in Southern Europe is kind of down.
This year it's a little bit different because actually we had to fight very hard to bring up prices. When you look again at sales sequentially, you see that the sales level is almost the same as the quarter before, which means we have brought up sales prices. We could not increase volumes. We gave up on volumes, and essentially we made some very conscious decisions to give up some share because the pricing from our point of view was not attractive and not reflecting the long-term value of those products. This is what we call our value before volume strategy. There was some conscious decision-making here as well. We were more concerned about improving the margin situation, which we essentially have achieved.
We have a little bit of bigger effect in surfactants, essentially, in one division, which explains the situation for EM. Apart from that, I think it's really
Volumes down a little bit more than seasonal, to be expected because again, a conscious decision to give up some volumes here in order to bring up pricing again. That, I think, pretty much explains what happened. In terms of cost development, maybe one sentence. We had slightly higher fixed costs simply because there is a lower utilization rate of our plant, and we had higher R&D costs in general because this is, as you know, a quite R&D-intensive business where we also have some growth areas where we want to spend more. With that, I would hand over to Hans.
Yeah, there's a question on the Ag earnings in Q3. Throughout the year, Agricultural Solutions has enjoyed a very positive environment. If you look at soft commodity price development, they are record highs. That explains, I'd say, the overall development. We see increases in our business in all regions. This is in the Q3 , obviously, in particular Southern Hemisphere and our business in Brazil. We see also increases across the portfolio, so insecticides, fungicides, and herbicides.
Your question specifically with respect to earnings, we have a special effect in that, in as far as we have license income that's related to our Clearfield technology, which we had in 2011 in the Q4 , which we now have in the Q3 of this year. That explains, in addition to the overall positive development throughout the year, the specific increase also then in Q3 if you compare it to Q3 of last year.
Thanks.
We're moving to the next question from Chris Counihan from Credit Suisse. Chris.
Good morning, and thank you for taking my questions. Firstly, on the plastics business, just wondering if you could give us some sort of idea of the decline in earnings across the performance polymers relative to the stronger polyurethanes business. Any further maybe color surrounding why that's happened and any expectations for a recovery? My second question, should we be expecting any plant shutdowns of note in Q4? Obviously some in chemicals this quarter, but anything more than a seasonal impact that has already occurred or you're expecting to happen into Q4?
Yeah. Hi, Chris. Thanks for the questions. First, shutdowns, plant shutdowns. No, there's nothing exceptional in Q4. It's pretty much in line with what we have seen in previous year's quarters, so doesn't really distort the overall picture. In plastics, it's a mixed picture actually. Polyurethanes did quite well, essentially because we initiated a pretty broad-based price increase for all of our activities earlier this year, which are holding up. Then there was a little bit of tightness in the TDI market, supported by maybe also lower supply because there were some unplanned shutdowns in that particular industry. Performance polymers is a mixed picture. The engineering plastics piece did very well actually.
Where we do see weakness, and that is not, I think, a surprise because you follow the pricing also, is Caprolactam. Caprolactam had record margins, absolute record margins in 2011. We were pretty much aware that is not going to repeat itself this year, and that's exactly what's happened. Margins have come down quite dramatically. I have to say they are still at levels which historically are not too bad. Actually, they are quite good but far below what we had seen last year. That explains by and large the effect in Performance Polymers.
Thank you.
Welcome.
The next question comes from Martin Roediger, and this is Cheuvreux.
Yes. I would like to ask a question on Care Chemicals. Earnings were considerably down in Q3 due to more competitive environment, you state. In Q2, you had also some problems, but this was for a different reason. You named customer caution as customer behavior. My three questions or my question on Care Chemicals is in three parts. Can you clarify if this is again the surfactants only for home care and personal care? Secondly, is there a structural concern? That means anything going wrong with Cognis. And thirdly, did you give up your value over volume strategy in Care Chemicals? Because now we see selling prices coming under pressure, while in Q2 you said you gave up volumes on purpose because you were not willing to lower the prices.
I give it a try. I think I talked about money. I talked about value before volume. No, we don't give up, but for surfactants precursors, there are basically market prices. The basic question is for us, do we want to follow those or do we have better opportunities to sell at higher prices somewhere else? There was a slight shift in share, as I said before, in that particular business. This is put in Care Chemicals, really talk about the care, the surfactants part of the business. That explains essentially what happened. Structural changes with regard to the former Cognis? No, not at all. It's a very sound business.
Here again, we had a record 2011, which actually went much better than we had expected when we acquired Cognis far beyond our expectations, and we knew that that probably would not be completely sustainable at that point in time. There's a slight correction now going on in this year. What we do see is a little bit of caution in the respective customer industries. I mean, they also have some pressure from their markets, apparently, which means they are probably a little bit more cautious in terms of ordering patterns, supply chain management, inventory levels. That is something we have seen in Q3. At the end of the quarter, there was a little bit of caution because maybe they were a little bit uncertain about what's going on in their markets as well.
That might have, let's say, an additional effect, but structurally, this is a very sound and good business for BASF.
Thank you.
The next question comes from Tony Jones from Redburn. Good morning, Tony.
Good morning. Thanks for taking the question. I wanted to ask about pricing in chemicals. I was trying to think about how to or what to do in terms of extrapolating the, -9% you reported. Is it just as simple as the olefins prices being very weak in July, and now they've since recovered to a much higher level, which are actually above last year, so they look better than Q4 last year? Or is that not how to think about it? And should we be thinking that negative price trend continues through Q4 and maybe into next year? Could you help, please? Thank you.
Yeah. Thank you. Tony, as you know, our chemical segment is a mixed bag of very different activities, petrochemicals and organics, so it's difficult to give you a general answer. We see pricing in general holding up. Where we have seen a little bit of a margin squeeze was in acrylics, frankly. Apart from that, we see that Q4, and I said this before, Q4 is basically running at the level of what we have seen in Q3, both in capacity utilization, keeping in mind that December is always a short month, obviously, but also in terms of margin.
Okay, thanks.
Welcome.
Next question comes from Norbert Barth from Baader Bank.
Yes, hello. Two questions also from my side. One is concerning still to the outlook statement, which you have not changed for the company, despite you have taken down also little bit significant also expectation for industrial production and even more for chemical production. Can you explain a little bit the background? Also for the first question on perhaps on the China development, because it looks that it even goes a little bit worse. The second question related also a little bit going forward, especially delivering to the automobile sector. I think when we have met last time situation has worsened, especially in Europe and in Germany, also now starting.
If you said that, especially the segments also in Q3 that deliver to the automobile industry did quite well, what do you expect going forward in those segments?
Yeah, okay. Thanks for the questions. I take the first two, and then Hans-Ulrich will talk about the auto industry. I think we kept our outlook. You asked late last year or earlier this year when we initiated the outlook and said we want to improve both in terms of sales and earnings, "What does it mean? Does it include oil and gas?" We said, "Yeah, obviously, it does include oil and gas." Apparently the structure of our earnings today is a different one than what we had about a year ago. We have talked about this now several times, and we made also clear that we do not expect that our chemicals business, which means excluding oil and gas and Ag, will outperform last year's numbers.
Overall, we kept the wording, but since you all follow us very, very closely, it has a slightly different quality than what we said earlier this year. Apparently you see this also when you look at earnings after taxes. We stick to our policy. We guide on earnings before special items, and we will not change that. With regard to China, we see low growth. Put it that way. Growth below the trend which we had experienced over the last couple of years. The big question is now when will growth resume to its historic level, and I think that's simply. As you say, there's leadership change now going on. Some people speculate on additional stimuli which might happen.
At the same time, I think there are some structural weaknesses in the Chinese economy. We all know about this. For the time being, we assume that for the next couple of quarters, we will see this level of growth. We have a hard time to find out right now what could initiate all of a sudden a return to the historic levels. The long-term pattern is certainly still valid, but it depends certainly on measures the Chinese leadership might take over the next couple of months when we will return to the past growth pattern. With that, I would hand over to Hans and automotive.
Yeah. On your automotive question, what do we see in the automotive market? Let's start with the global figures there. Last year, 77 million units light vehicles. Our expectation is to see that increase to somewhere in the range of 81 million-82 million units light vehicles in the year 2012.
If you look at it from a regional perspective, Europe overall being weaker, most probably with a decline in production, but then more than compensated by Asia and in particular North America, where during the course of the year, the numbers for units built have moved up almost consistently and are right now forecasted to be in the range, somewhere in the upper 14, so 14.7 million-14.8 million units. We can also clearly see that in our business, be it in the emission catalyst business or in the OEM coatings business, engineering plastics as well as polyurethanes, that automotive is growing globally.
The next question comes from Jaideep Pandya from Berenberg Bank.
Yeah. Thank you. A couple of questions. First on the acrylic acid. Could you just give us a bit more color? What do you see in this market currently? I mean, maybe asking in the context of the accident that happened in Japan, and there was some news flow also that you had some production problems in Malaysia. That's the first question. Then just secondly, on the performance products in general, I mean, could you give us a little bit more color, in terms of how do you see this business progressing in a couple of years time in terms of margins?
Because obviously this segment has had a couple of big acquisitions, which you have integrated, but just wanna understand what sort of margins can we expect in the next couple of years. Thanks.
Yeah. Let's start with Performance Products. We don't guide on margins for specific segments. Obviously, I think we all know this. We have an overall target for EBITDA in absolute terms. Is there room for improvement? That is your question for Performance Products. Well, yes, there is. Absolutely. I mean, the, we are still working on a couple of cost issues. We have a couple of operational issues as always. I think the expectation should be that margins will improve over time. This business, and I think I talked about this, is not completely independent from, let's say, business or economic cycles, which we have seen right now this year, where growth came in a little bit lower than we had expected. Overall, it is a good contributor to our earnings.
It has some areas where we have to focus a little bit more on restructuring. That is, for instance, the paper chemical business, which has improved quite nicely over the last 2-3 years, but we are still not done with our homework in that respective area. Acrylic acid. Yes, you're right. There have been a couple of production incident issues. One is competitor in Japan. Our acrylic acid capacity in Malaysia came down. We are looking into it. It's partially up. Again, this tightens the market a little bit.
What happens then normally in those situations, if there is a lack of supply in some areas, that you are approached by those customers, whether you can help out, and that is certainly something which we try to do very hard, because those customers are very important, very close to us, and we do our utmost to support them in a situation like this. This is self-understood. It's not easy to do because we are running our capacities at extremely high levels. Now with Malaysia at lower capacity, it's a challenge, but we are able to do that. Our customers seem to be quite content.
Very clear. Thanks.
Thank you.
The next question comes now from Laurence Alexander, from Jefferies.
Hello. Two questions. First, the seed treatment companies, like Becker Underwood, have been fairly aggressive in their claims for the yield gains they can deliver for fairly low R&D investments. Does your acquisition of Becker indicate a shift away from wanting to allocate capital to GMO trait research? The second question is just on the refinery catalyst market. We're starting to see large capacity additions by competitors. Do you need to follow suit in order to maintain your share?
Yeah. I answer the question on seed treatment and then on the refinery catalysts. First of all, let me say it's a very good addition to our existing portfolio. It's biological seed treatment. We have chemical seed treatment. We will form a new global business unit, which has very considerable size, where we can combine the strength of those particular businesses. We see it as a growth area. You have noticed that the purchase price compared to sales seems to be quite high. Actually, I can assure you that the multiple we are paying is absolutely in line with the market practices.
It's based certainly on the assumption, not just the assumption, but our expectation to grow this business considerably, and we will do so over the next couple of years. It does not mean, if that is your question, it does not mean that we will move away from GMO. These are different businesses. There might be a slight overlap, but what we call functional crop care is not really affecting our GMO activity.
Okay. On your question with respect to refinery catalyst, as you may know, we are in the area of FCC, fluid catalytic cracking catalysts. Do we have plans, specific plans to increase our capacities other than what I would call the usual, running your plants better, the bottleneck, we don't have any specific plans.
Could it be that we consider having smaller blending activities, blending facilities closer to where our customers are? Yep, that could be an option, but with respect to FCC capacities, we don't have any current plans to increase them.
Now we're moving on with, Neil Tyler from JP Morgan. Good morning, Neil.
Good morning. Thank you. Just a couple, please. Within the margin impact in the chemicals activities, you talk about, you know, two broader themes impacting year-on-year profit, plant shutdowns and weaker margins. I wondered if you could sort of take a step back and look at those two themes and give us an indication of the relative magnitude of each to each other and in the year-on-year development. Secondly, just on cash flow for the quarter, obviously a decline really sort of tracking the decline in profits.
In terms of CapEx, you know, and the step up that the CapEx investments have seen year-on-year, can you give us some indication as to whether that's a sort of, I suppose, a lumpiness in the timeline of CapEx projects, or whether that's something we should use as a better run rate looking forward to 2013? Then finally on Care Chemicals, just going back to that and the recent management changes in that business. Are they in any way in response to the past six months sort of developments, or is that purely independent of that? Thank you.
I take the last one and the first one, and Hans will start with the cash flow.
Neil, on the cash flow, you've seen that we generated operating cash flow of EUR 100.7 billion in Q3 out of the 5.2 total for the full year. We had investment in capital expenditure and in intangibles of roughly EUR 1.1 billion. That's fully in line with what we had planned and forecasted for this year. You will see that our overall CapEx expenditure will increase.
I think, Kurt, you're gonna say something there for the longer term on our overall plans, and that's reflected not only in Q3 with the EUR 1.1 billion, but also if you look full year or year to date, with our EUR 2.8 billion that we spent currently, major projects such as the projects in Nanjing, the MDI project in Chongqing, the TDI project in Ludwigshafen, the acrylic complexes, both in China and in South America. Plus then what I would like, what I would call, the end of the infrastructure investments, major infrastructure investments, in the gas distribution business resulting from the Nord Stream, our Nord Stream participation, i.e.
pipeline, OPAL, plus then the storage facility, Jemgum, all of that, major CapEx projects that lead to higher CapEx in 2012 compared to 2011.
Coming to your two other questions, Care Chemicals management changes, completely unrelated. I mean, we see improvement potential for Care Chemicals. By the way, the management of Care Chemicals sees this improvement potential as well. This is not just the experience of the last quarter, but understanding the underlying business dynamics and the markets. We have looked at this since we have acquired major parts of that business from Cognis, have initiated many measures to improve further on. This is done by the current management team. There is, within BASF always after four or five years, you move people around essentially into new positions. That has happened now, I would say almost accidentally in the area of Care Chemicals as well. Chemical margins, Q3, we saw pressure on cracker margins and acrylics.
I think I talked about this. There is an impact from the Port Arthur shutdown, and that impact is certainly considerable. I can tell you we are not completely happy about it because the startup of the facility took us a little bit longer than we had expected. I can't give you the precise numbers, but if the Port Arthur cracker had run more efficiently during Q3, the business, the results of chemicals would have been definitely better. Yeah, that is fair to say.
Okay. Certainly the minor of the two impacts, if you're comparing the two.
I mean, when you compare now with previous year, and there's a reduction in chemicals earnings of something like EUR 160 million, I'd say, it's one third, two third probably, maybe even a little bit higher than one third, which is affected by the cracker shutdown.
Thank you. Very helpful. Thank you.
Now we come to Christian Faitz from Macquarie. Good morning.
I have two questions, if I may. First of all, on Agro. Have you received any feedback from U.S. wholesalers regarding potential channel inventory resulting from the drought conditions in the past season, obviously for 2013? In functional solutions, it strikes me that your two automotive-driven businesses, catalysts and coatings, showed a relatively diametrical performance. While catalysts saw a 10% sales decline, probably for a good part due to the lower precious metals trading, coatings were 10% up. Can you talk about automotive catalyst volumes in contrast to paints catered to the automotive industry? Thanks.
Yeah, we can. I propose that Hans starts with the automotive impact. Automotive impact volume growth in both of the businesses that you are addressing. Both in automotive catalysts and as well as in OEM coatings, we have volume increases. As you rightly mentioned, the decrease that you see in the catalyst business that is primarily driven, almost fully driven by the fact that the precious metal prices came down significantly. If you look Q3 last year to Q3 this year, that's explaining the decline there. Automotive catalyst not only volume increased, but also a sales increase. Very similar there to what we see in our coatings business.
If I may add to that question, can you talk about current trading conditions with the car-
Christian, can you speak up a little? We can hardly hear you.
Okay. I'm trying to speak as loud as possible. If I may add to that question, can you talk about current business conditions with the industry cutting capacities left and right? Thank you.
Can you repeat that question, please?
Yeah. If I may add to that question, can you talk about current trading conditions in the automotive industry with the industry cutting capacities left and right?
I tried to address that already with my earlier response to the question on the automotive industry overall. I think when you're saying capacity being cut left and right, you look at it on a region-by-region basis. I can see that happening in North America, where the automotive industry also in the beginning or middle of October is still quite positive. Europe, certainly in a more difficult environment, and I said earlier that we see an overall decline with respect to volumes in Europe.
Again, in Asia, we see an increase, which in total from our point of view, will lead to an increase in units produced in the order of magnitude of 5%-6% on a full year basis before the year 2012.
Coming to Agro, about the U.S. situation, U.S. drought. Actually, we had a very solid volume growth of something like 7%, and even at constant exchange rates, our sales growth was even higher, so we had price increases as well. With regard to U.S. channel inventories, I have a very good answer, which comes from one of our competitors, who said during their Q&A, I quote, "U.S. channel inventories, nothing to worry about." End of quote, which we support.
Thanks. Very helpful.
The next question comes from Paul Walsh.
Yeah. Good morning, gentlemen and Maggie. Thanks for taking my two questions. My first question relates really to looking into next year. You've announced the Statoil deal, Becker Underwood, you've got the STEP savings coming through. What else is there apart from the macro that you can do to drive underlying growth next year? I.e., what CapEx projects are coming through and how are you thinking about M&A? My second question is just on the nutrition and health segment. You talk about the vitamins market seeing weaker pricing. Can you just talk a little bit more around that? You know, typically that's a more defensive part of your portfolio that's clearly coming under pressure. I wonder if you could give a bit more insights into that, please.
Paul, it was very difficult to hear your questions. The audio was very bad. I try to answer correctly here. I think you asked about next year, M&A and CapEx.
Yes. I think, you know, you've announced Statoil, Becker Underwood. You've got STEP savings underlying. Just thinking about what other things, excluding the macro, you can do to try and drive growth next year.
Okay. I mean, it's too early to talk about next year. What we see right now is relatively flat development, flat growth. We have done a couple of acquisitions. You know our policy. I mean, we are very disciplined with regard to that. We saw both Becker Underwood and Statoil as very good opportunities fitting with our strategic needs and financially attractive. I cannot rule out one or the other smaller acquisition, but that's essentially it. In terms of CapEx, you see this year a slight increase in CapEx. That might continue into 2013. Again, it's too early to say because we are still in the budgeting process. We have plenty of ideas.
Some are growth driven, some are cost driven, and our job right now is to prioritize the multitude of projects which are presented by our divisions and to really make sure that we do the most attractive ones. But it might mean that there's a slight increase in CapEx in 2013 compared to 2012. In nutrition and health, I think you asked something about the underlying attractiveness of that industry, is this correct?
It was your comments about weaker pricing and lower profitability year-over-year. Can you talk a little bit more about the degree of pricing pressure? Did it accelerate in Q3? What are you seeing in vitamins markets right now?
Okay. You're asking specifically about vitamins, yeah.
Yes, yes please.
That's only a minor part of our business. It's a major part of another company. We saw a little bit of weakness in vitamin D pricing actually, and that has an effect on the bottom line as well. Vitamin E, as we all know, is this kind of cyclical demand, supply-driven as well, and that explains some part of the earnings development over the last 2-3 quarters. Going into the future, it's hard to predict. We have seen also in the past quite some surprises, sudden price increases, reductions. Underlying picture for us I think is a good one. The nutrition and health industry is a growth industry for BASF, and we have increased our exposure with the acquisition of Cognis considerably and our breadth and depth of portfolio as well.
Thank you very much.
Now, we're moving on to Richard Logan. I would just like to ask you to please take off your headsets because we have differing levels of how well we can understand you. If you take off your headsets and speak directly in the phone, that would be really helpful. Thanks. Richard.
Good morning, thanks for taking my questions. I noticed a headline on Bloomberg saying that you were potentially going to do some sort of deep dive into looking at shale gas opportunities. I wondered is that, I mean, just purely in the oil and gas area, or would you consider transporting ethane from across the U.S., akin to, you know, what we're hearing out of INEOS? And then secondly, on inventory positions, are you expecting to see destocking towards the year-end? Or, you know, I mean, I think we've talked about this before, inventories being seemingly at relatively low levels. You shouldn't see that destocking. I mean, really interested to get your opinion on that front. Thanks.
Yeah. Thank you, Richard. Destocking, actually what we saw at the end of this quarter was in some areas that people all of a sudden became very, very cautious and refrained from taking product, and then they came back right after October 1. There seems to be a little bit of, let's say, quarter-end activity going on as well. We agree with your assessment. The level of inventory in general is quite low. We don't have a full picture as we have talked about before. There can be sudden surprises, but we don't see anybody who is right now sitting on very high inventories, quite contrary.
Everybody is very cautious, which means if there is a pickup of demand, you could probably see also a surge in chemical demand happening pretty fast, which we have experienced in the past as well. Shale gas, as I talked about this when we had this Bloomberg talk, they were asking what are we doing here, and I was referring essentially to the U.S. market. The question was about U.S. competitiveness, and I reminded them that BASF is a large chemical operator in the United States as well. We are right now building a formic acid plant, which also needs natural gas, obviously. So we are participating in the shale gas advantages in North America as well.
Certainly, I think you understand, Richard, that our job is also to look into potential other opportunities which we could envision, but I think it's far too early to talk about this. It's far too early in terms of investment. The other question, other part of that question was could we envision to ship ethane or LPG or LNG across the pond? I don't think that's going to happen, frankly. I mean, there's a little bit of a spot market here in Europe, but Europe still is predominantly supplied by pipelines. As you are aware, we are also part of that business, which is kind of attractive for BASF as well.
What we do need is a discussion in Europe, by the way, about shale gas in Europe because we do have shale gas reservoirs deposits, and I think it's simply irresponsible to declare that we don't need it and we don't want it here in Europe because it can be dealt with in a completely sustainable and responsible way also from an environmental point of view. I think that is a discussion we have to have here in Europe.
Great. Thank you very much.
You're welcome.
We're moving on with Andrew Benson, but I think what we have to do now is limit it to one question because we are getting a little bit far along in the call.
That's a little bit harsh, but there you go. Can you just, perhaps one quick thing. If you just talk about the balance of factors into the Q4. I mean, last year there was fairly pervasive destocking, and so the business had a relatively difficult year-end. I mean, this year, hopefully, stocks in the system will be lower. You've got better currencies, but you've got a weak underlying environment. If you can compare and contrast just how the Q4 is likely to perform with those slightly different dynamics, I'd appreciate it.
Actually, we only give guidance on the full year and not on single quarters. Since this is now the last quarter, it's kind of difficult. It seems to merge. What I said before I think is valid. I mean, we see a flat development going into Q4. We don't see an upturn in demand. It might happen, but right now we don't have any indication that it should happen, and that is what we are preparing for, essentially flat development across the business volume-wise. We're talking about oil and gas obviously, and ag.
Is that both sequential and year-over-year or?
Pardon me?
Well, when you're defining flat, are you saying sequentially flat or year-on-year flat?
Sequentially flat, yeah. In terms of volumes. I mean, that is what we see. Keeping still in mind that the month of December is always a very short one for the entire industry, not just the chemical industry. Compared to last year's quarter, we had a relatively weak Q4, 2011, which makes the baseline comparison a little bit easier. Again, sequentially, we are looking at volume-wise a flat development in chemicals.
We're coming to our last question now, and I apologize to all of those who weren't able to ask their questions. We will call you back after the call personally. The last question comes from Anette Weber of DZ Bank.
Yes, good afternoon. I've just got a quick question on oil and gas, specifically on the production rate in Libya. The 85,000 barrels a day, is that a run rate that we have to assume for the next for Q4, in fact? Or was this kind of artificially a bit inflated due to the capacity on the export pipelines?
No, it's something you can expect for Q4 as well.
Mm-hmm. Okay, thank you.
Okay, ladies and gentlemen, this brings us now to the end of our conference call. We will next report on our full year 2012 results on February 26, 2013. I would like to ask you to mark this date already because it will probably be a event that we will have together with you in Ludwigshafen. I would also like to use the occasion to invite you to our agricultural round table. You should have received the invitation by now, but this round table will take place on November 12 in London. Our board member, Andreas Kreimeyer, and our two presidents, Markus Heldt and Peter Eckes, will take the opportunity to discuss our crop protection and plant biotech activities with you, and we are very much looking forward to welcoming you to this event in London on November 12.
Thank you to all of you for joining us in this call this morning. Those who did not get the opportunity, we will call back in a minute. Should you anyway have further questions, then also please do not hesitate to contact us. Thanks very much. We wish you good day and goodbye.
Ladies and gentlemen, that does now conclude today's conference, and you may replace your handsets. Thank you for joining, and have a pleasant day. Goodbye, and have a great day.