Yeah. Thank you, Jason, and good morning, ladies and gentlemen, and welcome. On behalf of the entire BASF team, I'm delighted that you could join us for our third quarter 2011 conference call. BASF again delivered good results in Q3. In today's conference call, we would like to provide you with further details on our performance in the third quarter, share with you our updated economic forecast, and confirm our outlook for the full year 2011. With me on the call today are Kurt Bock, our Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, our Chief Financial Officer. After the presentation, the two gentlemen will be available to take your questions. We have posted the numbers and charts which will be discussed during this call, as well as the press documents on our website at basf.com/share.
I will now hand over to Kurt Bock.
Yeah. Thank you, Maggie, and good morning also from my side, ladies and gentlemen. As you certainly noticed, we changed the time of our call from the afternoon to the morning. I hope this doesn't make it too much of an early bird session for some of you, but there was an overwhelming demand for getting some guidance already in the morning and not having to be waiting until the afternoon. Where are we? BASF again posted good results in Q3 2011. Sales rose by 12% to EUR 17.6 billion compared to the same quarter last year. Successful price increases in all our segments contributed 14 percentage points to sales growth. Another five percentage points came from the acquired Cognis businesses.
Volumes, on the other hand, were slightly below the very strong third quarter of the previous year, due to 25% lower volumes in the oil and gas business as a result of the suspension of our oil production in Libya in the beginning of this year. Currencies, in particular, the weakening of the US dollar, had a negative sales effect of 4%. Volumes in our chemical activities were stable year-over-year, adjusted for a special effect resulting from the optimization of our supply chain of cracker products in North America. Volumes in our chemical activities increased by 1% compared to last year. Hans will explain this in more detail in a minute. EBIT before special items amounted to EUR 2 billion, and thus was 11% below the very strong result of Q3 2010.
Adjusted to Libya, which contributed EUR 255 million in last year's quarter, EBIT before special items increased by 6% compared with last year. At EUR 1.2 billion, net income came in slightly below the previous year figure. Adjusted earnings per share were EUR 1.52 and matched the level of last year. In the last month, we achieved further important milestones to optimize our portfolio. On October 1, Styrolution, the 50/50 joint venture between BASF and INEOS, began operating independently from its parents. With pro forma sales of EUR 6.4 billion in 2010, Styrolution is the global market leader in the styrenics industry. Given the higher value of our assets, we received a payment of EUR 600 million at the beginning of October.
The new joint venture will be consolidated at equity, and as of Q4, the equity income will be reported in the financial result. In addition, the disposal result will be booked as a special item in the EBIT of Other in the fourth quarter of this year. At the end of September, we also reached an agreement with EuroChem to sell our fertilizer activities in Antwerp. The total transaction value is in the range of EUR 700 million. The divestment is subject to approval by the appropriate antitrust authorities, and we expect closing by the end of the first quarter of 2012. In the past few weeks, we made significant progress with important projects to spur organic growth in emerging markets.
At our Verbund site in Nanjing, the first new production facilities, which are part of the $1.4 billion expansion, have started operations. Along with the successful completion of the steam cracker expansion, the newly constructed butadiene extraction plant and the non-ionic surfactants plant are now up and running. The majority of the remaining plants will come on stream around year-end of this year. In Brazil, we will soon begin construction on our new world-scale production site for acrylic acid, butyl acrylates, and superabsorbent polymers. Our plants will be the first acrylic acid and superabsorbent production facilities in South America. At more than EUR 500 million, it is the largest, by far, the largest investment in BASF's century-long history in South America. Production is scheduled to begin in the fourth quarter of 2014.
With our innovations, we are working on the solutions for tomorrow. smart forvision, a joint concept car of Daimler and BASF, was presented at the recent International Motor Show in Frankfurt in September. Thanks to the combination of smart automotive competence and BASF material and system expertise, a vehicle has been created which showcases technologies for sustainable and holistic electrical mobility of the future. The smart forvision's innovations are based on three main technology platforms. First, electrical energy efficiency. A number of solutions, such as our organic dye solar cells, as well as organic light-emitting diodes, OLEDs, help to increase the electrical efficiency. Second, multifunctional lightweight construction. Many of the parts usually made from metal are now composed of fiber-reinforced plastic, significantly reducing weight. The most exciting example is a plastic rear rim made of our engineering plastic, Ultramid. Third, integrated temperature management.
A novel transparent film applied in the windshield and side windows reflects most of the solar radiation and thus keeps the car interior cool. Ladies and gentlemen, we create chemistry. Our chemical solutions are playing a key role in bringing electrical mobility quicker to the roads and hence to our consumers. Now, let me comment on our current trading and the outlook for this year. In Q3, our businesses have developed positively. Demand from our main customer industries remained on a high level. The pace of growth, however, was, as expected, lower compared to the exceptionally strong first half of this year. We anticipate a continuation of this trend in the fourth quarter. Therefore, we now expect worldwide growth of GDP and industrial and chemical production in 2011 to be just under one percentage point lower than our previous forecast.
Given the current uncertainties about the future development of the economy, customers have become more cautious in their ordering behavior in the last weeks. Everyone is closely monitoring working capital. At BASF, we will continue to focus our attention on protecting our margins and controlling our fixed costs, as well as keeping working capital at a minimum level. As a consequence, we are managing our inventories accordingly. Furthermore, I would like to point out that we have successfully resumed our onshore oil production in Libya last week. We are currently producing about 20,000 bbl of oil per day, compared to roughly 100,000 bbl of oil a day before the stoppage in February. Now to our outlook. We confirm the outlook for a strong full year 2011.
For 2011, we expect to generate significantly higher sales than in the record year, 2010. As our oil production in Libya was suspended for most of this year, EBIT before special items, excluding non-compensable oil taxes, provides a much more meaningful guidance for 2011. We expect to significantly exceed the 2010 EBIT before special items, excluding non-compensable oil taxes, which amounted to EUR 7.2 billion last year. We will earn a high premium on our cost of capital once again in 2011. With this, I will hand over to Hans for more details on Q3.
Thank you, Kurt, and good morning, ladies and gentlemen, also from my side. I would like to highlight the financial performance of each segment in more detail and focus on the respective business developments in comparison to the third quarter of 2010. In Chemicals, the significant sales growth was driven by double-digit price increases across all three divisions, which by far offset the negative currency effects. Demand remained on a high level. EBIT before special items was slightly above the very high level of the previous year. In Petrochemicals, higher raw materials costs were passed on via price increases, leading to a strong rise in sales. Demand for cracker products remained high, but the modification of the swap transaction for a cracker product in North America led to a volume decrease. This adjustment was earnings neutral.
Excluding this effect, divisional volumes as well as segment volumes were stable. In Industrial Petrochemicals, demand softened primarily for plasticizers in North America. Earnings reached the very good level of the third quarter of last year. Sales in Inorganics were significantly up, driven by price increases and slightly higher volumes. Demand from automotive customers was high, while we saw signs of weakening in the electronics industry, primarily in Asia. Earnings grew. Sales in Intermediates rose mainly due to significant price increases. Last month, we lifted a force majeure for the butanediol value chain caused by a fire at our Ludwigshafen acetylene plant in May. Earnings matched the previous year's figure. Driven by significant price increases and further volume growth, sales in Plastics rose strongly despite negative currency effects. Demand from the automotive industry remained high. EBIT before special items was lower, mainly due to weaker TDI business.
Performance Polymers had another very good quarter. Caprolactam prices stayed at record levels and demand continued to be strong in most other product lines. Engineering Plastics and our specialties, particularly Basotect and Ecoflex, performed very well. Earnings went up substantially due to a combination of higher volumes and better margins. In Polyurethanes, sales were slightly higher. Demand in the automotive industry stayed high while it weakened in construction. Our specialty elastomers and systems performed again strongly. In TDI, volumes and prices declined, resulting from improved product availability after the start-up of new capacities in Asia and Europe by competitors. Due to the lower contribution from our TDI business, earnings came in below the high level of last year. Performance Products continued to perform strongly. Sales rose substantially, driven by strong price increases and the inclusion of the acquired Cognis businesses.
EBIT before special items went up significantly despite low double-digit million EUR integration costs for Cognis. Price increases in Dispersions and Pigments drove up sales and offset slightly lower volumes as well as adverse currency effects. In Pigments, customers started to draw down their inventories, especially for high-value products. Higher raw material costs could only partly be passed on. As a consequence, earnings decreased. In Care Chemicals, sales went up sharply, mainly due to the inclusion of Cognis. Price increases, especially for detergents and formulators, as well as for superabsorbents, nearly compensated for higher raw material costs. Earnings grew substantially. Sales in Nutrition and Health were up sharply, primarily as a result of the acquired Cognis businesses. We were able to significantly increase sales volumes, particularly in animal nutrition and pharma.
Prices were overall stable to slightly improving, with vitamin prices still below last year but showing an upward trend. Earnings increased. The business environment in paper chemicals continues to be challenging. Sales declined as a result of lower volumes, partly attributable to weaker demand and our measures to streamline the product portfolio. Despite reduced fixed costs, earnings were lower than a year ago. In performance chemicals, price increases and the inclusion of Cognis lifted sales. Declining volumes and currency effects had a negative impact on sales growth. In plastic additives, volumes decreased as customers increasingly focused on reducing their stock levels. Fuel and lubricant solutions developed positively. Earnings were significantly higher. The previous year's results included a one-time expense for valuation adjustments on receivables. Let me give you a short update on the Cognis integration at this time, which is in full swing.
The biggest part of the structural integration will be completed by the end of this year. The acquisition will be EPS accretive by 2012. One-time integration costs will total about EUR 300 million by 2013. Thereof, two-thirds already incurred by the end of the third quarter. We increased our synergy target from EUR 275 million to EUR 290 million. We now expect EUR 145 million, each from cost and growth synergies to be fully achieved in 2013 and 2015, respectively. For cost synergies, we anticipate a run rate of roughly EUR 60 million by the end of this year, representing 40% of total cost synergies. Sales in functional solutions increased, mainly driven by continued high demand from the automotive industry.
EBIT before special items improved primarily as a result of the strong performance of Catalysts. In Catalysts, sales rose substantially with higher prices. Volumes were up due to high demand, not only for mobile emission catalysts, but also for chemical and refinery catalysts. At EUR 674 million, the contribution from precious metals trading was at the level of the previous year. Earnings improved strongly. In Construction Chemicals, the business environment in North America and Southern Europe remains challenging. However, in the other parts of Europe, as well as in Asia, we saw a positive trend in demand. As we could not fully pass on higher raw material costs, earnings came in lower. In Coatings, continuing high worldwide demand for automotive coatings, as well as for decorative paints in Brazil, drove up volumes and sales.
We were able to almost pass on higher raw material costs to the market. Earnings were only slightly below the good level of last year. Agricultural Solutions, again, had a very successful quarter. Sales increased by 9%, currency-adjusted by 15%. We were able to raise prices by 3%. As a result of strong demand in all regions, we increased volumes by 12%. In South America, we had a very good start to the growing season. Demand was especially strong for our new AgCelence production system and for insecticides. Business with Clearfield herbicide tolerance technology expanded rapidly. In Europe, the fall season also began successfully. Demand for canola herbicides was strong in France and Eastern Europe. Weather-related factors in North America pushed the application period for fungicides into the third quarter, resulting in higher sales. In Asia, we again saw high growth.
In India, fungicides excelled. Please also note that we just received registrations for our fungicide blockbuster candidate, Xemium, in major European countries. We expect the first sales of Xemium in France as early as the fourth quarter of this year. EBIT before special items jumped to EUR 95 million. Due to our strong sales growth in the emerging markets of the Southern Hemisphere, we have turned the third quarter into a steady earnings contributor. In this seasonal industry, we have been reporting positive quarterly EBIT since 2008. As our year-to-date earnings are already above the full year 2010 result, we are on track for a new record year in Agricultural Solutions, both in terms of sales and earnings. Sales in oil and gas were nearly stable despite the suspension of our oil production in Libya.
Higher oil and gas prices offset most of the 25% volume decline. EBIT before special items was considerably below last year. However, adjusted for non-compensable oil taxes, EBIT before special items matched the previous year's figure. In exploration and production, volumes fell sharply, primarily due to the lack of oil production in Libya. As a consequence, sales and earnings declined despite substantially higher crude oil and natural gas prices. The average price for Brent was $113 per bbl, compared with $77 per bbl in the previous year. Sales in natural gas trading rose strongly, primarily as a result of increased gas prices. Margins, however, were negatively impacted by the time lag effect, the delayed adjustment of sales prices to purchase prices. This effect was compensated by a one-time gain from contract adjustments with customers. Earnings, therefore, were above last year's level.
As already mentioned by Kurt, we are again producing oil in Libya, on and offshore. As we are still in the startup phase of our onshore operations, our focus is currently on the stabilization of production at 20,000 bbl of oil per day and on lifting the first shipment. Crude oil production from the offshore platform Al Jurf in the Mediterranean Sea, in which Wintershall has a 6.75% stake, began a few weeks ago. We expect an EBIT contribution from Libya of less than EUR 100 million for the remainder of this year. In other, sales grew primarily as a result of higher prices in the styrenics business and raw material trading. A weaker U.S. dollar led to foreign currency losses in Q3.
At the same time, we reported a gain from the reversal of provisions for our long-term incentive program as a result of the lower share price. Special items in Other include a settlement payment in a class action lawsuit in the United States. Earnings were lower than last year. Let me now briefly conclude with our cash flow. At EUR 5 billion, we generated a very strong operating cash flow in the first nine months of this year. They have EUR 2 billion coming from the third quarter. Net working capital rose by EUR 554 million compared to the same period last year, mainly due to an increase in inventories, resulting from growing our business, higher raw material costs, and the buildup of natural gas volumes in our storage facilities. In the first nine months, we used EUR 957 million in investing activities.
CapEx amounted to EUR 2.1 billion, considerably above last year, but still below depreciation. Free cash flow reached EUR 2.9 billion in the first nine months of this year. They have EUR 1.2 billion generated in the third quarter. Since the end of 2010, we reduced net debt by EUR 1.9 billion- EUR 11.6 billion end of September. Thereof, roughly EUR 650 million reduction in Q3. With that, thank you for your attention, and we are now happy to take your questions.
Yeah. Thank you very much, gentlemen, and we are now happy to take your questions. Just the usual reminder, since our conference call is limited to one hour, I would like to ask you that you please limit your questions to only one at a time, and then you can re-queue, and I will certainly take a second question. With this, we start with Tony Jones from Redburn. Good morning, Tony.
Over the past few weeks, we've seen a bit more weakness in the C3 and C4 streams and derivatives than in C2. Could you first clarify whether that's a reasonable observation? Secondly, how do you expect to determine how to progress in the near term? Thank you.
Yeah. Hi, Tony. I saw your note on this recently. We cannot really confirm this. I mean, there is a little bit of fluctuation and volatility across the board, and you really have to go region by region. What I see here really is a very, very mixed picture, actually. Asia, for instance, is from our point of view improving right now in C3, while United States or Western Europe might see a slight decrease. We are really trying here to micro identify certain developments. We don't see yet a clear trend, and from our point of view, we are not overly concerned with regard to those margins. Which, by the way, looking forward, have a certain importance for us as well, certainly.
As we all know, we have a high share of captive use. If there is, let's say, in propylene, a slight margin decrease, our guys who produce acrylic acid, acids and superabsorbents will not complain about that development, that's for sure.
Thank you.
Welcome.
The next question is coming from Martin Roediger from Cheuvreux. Good morning, Martin.
Thank you. On Libya, you started operations. What are the real problems which hold you back to ramp up the production up to 100,000 bbl per day?
Yeah, Martin, this is Hans. What are the real problems? First of all, we started production roughly 10 days back. What you do with the field, you first of all go in, you test the pressure, and then you start to produce slowly. That's what we have done pretty much up to this time. We've fully tested our production plans. Now the next big question is actually how does the infrastructure look? We know about the infrastructure that we have directly at our production sites, but the key question is how does the pipeline look to transport the oil up north to the terminals and the harbors?
How do the terminals look, and what type of shipping capacity is available?
We are very confident in being able to produce what we are producing currently. That goes without saying. Whether we increase or can increase production fully depends on the infrastructure that we have in Libya. With respect to that, we do not yet have all the necessary information. We know that the 20,000 bbl that we can ship. Whether we can ship anything that's higher than that at this point in time is unclear. If you think about the entire situation that we have in Libya, that should actually not be a surprise.
Thank you.
Our next question comes from Mutlu Gundogan from Royal Bank of Scotland.
Yes. Good morning, everyone. A question on volumes. You saw volume declines and destocking in performance products. Would you expect this to intensify and spread to other businesses as customers focus on cash generation and clean up their balance sheets towards the end of the year?
Hi. Morning. That's certainly the $1 million question, so to say. First of all, let's state again, in Q3, in our chemical business, comparing apples with apples, we had volume growth. Pretty slow, but still volume growth. What is also important, we kept prices up in Q3, also compared with Q2, really something we have to keep in mind. Prices in our chemical business went slightly up, looking at this development consecutively. The question is now what happens in Q4, and there it's pretty hard to read because there is this cloud hanging over our heads of caution, general caution in the marketplace.
Everybody tries to optimize his or her inventories, including BASF, obviously, which might lead to a situation where we still see overall growth, but where one or the other customers simply will order a little bit less because they are always a little bit cautious also, coming to the end of the year and want to clean up, as you alluded to, want to clean up their balance sheet and generate some cash. I think this is overall a positive development. Might sound strange, but it's really a positive development because this general sense of caution has led to a situation where the, let's say, train breaks quite slowly and still drives ahead quite nicely at, I would say, pretty high speed, but it has slowed down a little bit in terms of growth.
That is much, much better than any other development we could imagine, just producing like crazy, and then all of a sudden, if people get really concerned, which we don't know yet, all of a sudden you see some deceleration, which could be then really harmful. From our point of view, we like what we see right now. Everybody is cautious. If the caution and the certain pessimism which we have been seeing should disappear over the next couple of months, then I would expect that people have to come back to the water hole and start drinking quite thirstily.
Okay. Thank you very much.
Welcome.
The next question is from Jaideep Pandya from Berenberg.
Good morning, and congrats on a good result. I mean, looking at your investment in Brazil, could you say that on a long-term basis, there is a possibility of a Verbund site in Latin America?
Oops. That's a long, long shot, I have to say. I mean, first of all, let me say it's a big step for us in South America, because for decades we have been looking at a major investment opportunity for what we see as a world-scale facility. The problem always has been that the market is too small, and then that very often the feedstock costs and the logistics, similar like in Northern Africa, are not what we need. Now finally, the market for superabsorbents, baby diapers, essentially, has grown into a size which is really interesting for us, and we have been able to secure a long-term contract for propylene, which is a major feedstock here. That makes it what I would see as a very promising and very attractive investment.
That is one big plant. Coming from that one big or two big plants, essentially, to a real Verbund site, that's a long, long way to go. Frankly, I don't see it for the time being in South America.
Okay. Thanks.
Welcome.
Our next question comes from Neil Tyler from JP Morgan. Good morning, Neil.
Yes, good morning. I wanted to ask about the other major investment announcement that you made with regards to the TDI plant in Europe. You know, relative to acrylic acid and superabsorbents, obviously the TDI market's considerably less healthy at the moment. Could you know, perhaps talk just briefly about the longer-term thoughts on the reason for the size and location of that investment? What has to happen to TDI margins for you to be able to achieve the target IRR from the current level? Thank you.
Hi, Neil. Let me start by saying that the reduction of TDI margins in 2011 does not come as a surprise to us. That is something we had expected because frankly, we knew that additional capacity would come on stream both in Europe and in Asia. We have seen this kind of fluctuation and cyclicality in the past as well. Overall, that's important, this TDI supply chain or value chain has been very, very attractive for us, and we see good underlying growth for those products. Obviously margins are driven more by supply pattern than by demand pattern in that particular industry. When we announced that we are contemplating to build a 300,000-ton plant in Western Europe, we knew what to expect.
We think, and you have to play the cycle here, obviously, in a timely manner. We think that when this plant comes on stream, and we are talking here end of 2014, early 2015, that by then the market will be in pretty good shape, and we'll be able to absorb those capacities. Please keep in mind, this is not the net capacity increase which you might see, because, yeah, we would expect that some capacity will be taken out of the market. We also have a small TDI plant, which we run at Schwarzheide, and we have to think very hard about the future of that particular plant as well.
Okay. Thank you. Just to follow up, in terms of the location, I mean, obviously the lion's share of demand for TDI in the last few years has been in Asia. Any thoughts on, you know, well, any sort of color on the thought process that went into building it in Europe versus Asia?
Yeah. I mean, we are very good positioned in Asia, actually. We have very competitive plants in Asia, a sizable market share. We see continuous demand growth in Europe as well. That's very important to keep in mind. For us, Europe is an attractive market, and, more importantly, we will be able to produce, competitively here within this marketplace. We haven't made up our mind whether this will be in Antwerp or in Ludwigshafen. Both sides are suitable. In both sides, we can achieve what is very important, the backward integration into our value chains, which really makes this investment a very nice fit, and very, very competitive.
Given the size of the plant, again, 300,000 K, that is sizable, and it will probably have one of the lowest cash costs one can imagine in that industry.
Okay. Thank you very much.
Welcome.
Go on. Next question comes from Thomas Gilbert. Good morning, Thomas.
Good morning, Maggie. Good morning, gentlemen. I've got one question in plastics and performance polymers. Could you give us an idea about the split between downstream nylon products and upstream intermediates, either by sort of quantifying how many tons long you are net in caprolactam or just giving a rough idea of the operating earnings split in that business between the engineering polymers business and the intermediates part? Thank you very much for taking my question.
Hi, Thomas. You know that we don't really comment on individual products or product lines, but what I can see here is that the caprolactam business in Q3 was a very gratifying business, put it that way.
You do have a sizable merchant position and net long position at this point. You do sell excess production into the merchant market.
We still certainly sell Capro in the market, yeah. The share of Capro production with growth external has come down quite significantly because we are growing what we call our engineering plastics business. What you describe as a downstream activity quite heavily, but still we are in the merchant position, and that position in Q3 continued to be very attractive. Absolutely, yes.
Okay. The same is true for things like adipic acid and hexamethylene diamine and these intermediates. Same thing really.
Pretty much so, I would say. Capro is kind of special right now.
Okay. Thank you very much.
The next question comes from Laurent Favre from Merrill Lynch.
Yes. Good morning, Maggie. Good morning, gentlemen. Quick question on your MDI facility in Antwerp, which, my understanding is, it's been out of the market for a bit more than a month. Could you please give us an update on that and whether you think that the MDI market might be a bit looser when it's back on stream?
You're talking about MDI? I didn't really-
Mm-hmm. Yep.
Yeah.
The EUR 500,000 in Antwerp.
No, I'm not aware that we have any special problems here. Maybe that's a confusion on our side. I have to clarify this. We would like to come back to you on that question if you.
Okay.
Agree.
Thank you.
We take the next question from Paul Walsh, Morgan Stanley. Paul, are you there? No, we take the next question from Peter Spengler, DZ Bank.
Good morning. Thank you for taking my question on Styrolution. You mentioned the EUR 600 million special payment. Could you elaborate a bit on this, like a cash component, capital gain, and maybe also on taxation?
Yeah. This is Hans Engel. I'm happy to do that. As you know, we concluded the transaction and established the joint venture on October first. We have received the compensation payment in the meantime. With respect to the capital gain, let me tell you at this point in time, that will be a sizable capital gain. But we do not yet have the final figures, since the external auditors are still working on the valuation report. Depending on the final amount, we will then also see what the respective tax amount will be. Hans, I would like to come back to the question which has been asked previously about MDI and Antwerp, which I was just a little bit confused.
Sorry to say that, but that is a planned turnaround in Antwerp, which happens on a regular interval for nothing special really. We shut down the facility for a couple of weeks and do our maintenance, and then up and running again. That doesn't have any special effect on the market or on our earnings. It's just a slight shift in earnings pattern, maybe. I hope that helps.
The next question now comes from Ronald Köhler from MainFirst.
Yes, hello. I have a question on your natural gas one-time income. I believe you renegotiate contracts with Gazprom for potentially backward looking also for some quarters. The question is just if you could qualify that income and if that is, let's say, the last payment you will see on that, or is there more to come?
Ronald, with respect to your question, that doesn't have anything to do with that special income with any type of renegotiation of our purchase contracts. It is just on the other side. It is on the sales side where we had an ongoing over a long time price discussion in particular with one of our bigger customers and we finally came to an agreement that covers overall a period of three years. As a result of that, there is a sizable one-time income that's reflected in our WINGAS business, so in the natural gas trading business.
Is it something mid-double digit, I could assume?
Mid double digits is a very good assumption, yes.
Okay. Just to add on, Gazprom, you have no renegotiation running here, which means that it's. I know from E.ON, they actually are waiting some payments over the next quarters, but this is nothing which you would look forward to.
No, the natural gas market over the last two years has seen quite some changes. You can assume that we are addressing that situation constantly, and as a result of that, also renegotiating where appropriate, but not only with Gazprom, but with all of our suppliers.
Okay, thank you.
The next question comes from Andrew Benson from Citi.
Yeah, thanks very much. You've reduced your GDP and/or industrial production numbers for 2011, so, you know, presumably that's all come in the second half. You haven't changed your outlook guidance, so you're expecting to do just as well, but in a materially slower environment, which seems, you know, odd. What message are you trying to convey with your reduction in your macro assumption? Should we take anything out of that in your thought processes for 2012?
Yeah. Hi, Andrew. Yeah, I understand it's a little bit difficult to digest maybe, but first of all, what is important to keep in mind, we still expect positive GDP and industry growth in Q4 from today's point of view. It certainly reflects a note of caution, which I have talked about just a few minutes ago. I think it's too early to talk about 2012. We are in the midst of our budgeting process. We look at our crystal ball, try to understand what's going to happen. We see continuous growth, underlying growth in emerging markets, et cetera.
It's the key question is really how long will it take the politicians to sort out the big issues which we are facing in Europe and in the States, so that this sense of caution or maybe even pessimism which dominates right now out of the economic environment could disappear. How do you align this GDP reduction by 1 percentage point with our outlook? I mean, we did not change our outlook. That's important to keep in mind. We just say significantly above last year's numbers in terms of sales and EBIT, and certainly it's up to you to come up with the appropriate numbers or to explain what is behind that general qualitative statement.
I know this might be a little bit frustrating, but we have had that type of guidance for quite some time now, and we will probably structure it the way I see it.
Yeah, no, I know that's sort of what we get paid for. Before you were looking for sort of 10%+. I mean, but basically you must still be looking for 10%+. You
We still use the same word significantly.
Yeah.
Yeah. I agree. Okay.
All right. No, that's great. Thanks very much.
Now we come to Lutz Grüten from Commerzbank.
Yeah. Thanks. Good morning. Thanks for taking my question. You've mentioned that the order pattern became a bit more cautious in the third quarter. How would you describe the current situation on inventory levels? I just remember that in the second quarter conference call, we had an issue or a discussion on Chinese inventories, where you stated that at the end of the second quarter, they came back to a normal level. How would you describe this in the current situation in regards to inventories, please?
Yeah. This is Hans. Let's look at inventories first. When we talk about inventories, we talk about inventories based on the information that we can gather, you know, from discussions with our customers, from our understanding of the market. I think we all have to appreciate that that gives us a pretty good idea, but never gives us really specifics about the inventories that our customers run.
What we see currently, I think we've described that. Kurt has described that in his speech, which is customers being cautious, running their inventories tight. As a result of that, we don't expect further significant destocking effects. What do we see on the order side? On the order side, we see that as a result of the described cautiousness of our customers, they tend to order in shorter intervals than they did in the past. Smaller quantities, often orders that come in more often. That's pretty much across the board and quite understandable in times of economic uncertainty.
Our order book, looking at that, in the beginning of the fourth quarter, is actually stronger than the order book that we had in the beginning of the fourth quarter of last year. I don't have the split there between volume and price. Price is certainly significantly higher, and driving our order book up, is probably what we are experiencing there and why our order book is stronger than where it's been in Q4 2010.
All right. Thank you.
Now we're coming to Jenny Parker from Nomura. Good morning, Jenny.
Oh, good morning. My question is on exploration and production. Given the volume growth that you give for the overall oil and gas segment and some indication that you've given for volume growth in gas distribution, I estimate you have an extremely large year-on-year volume decline in the third quarter. My estimates are 50% or above decline in volume in E&P. Now, your Libyan business has not been large enough, even at peak, to account for that sort of volume drop. Could you please give us an indication of where else in your E&P portfolio you've seen volume declines?
Jenny, as you rightly state, the key impact there is our Libyan activities. We were in full production in the third quarter of 2010 in Libya and didn't have any production there during the third quarter of 2011. The other factor that we have is scheduled maintenance work in the Yuzhno- Russkoye field, and that scheduled maintenance work leads to a drop in the volumes in the third quarter, since there was nothing like that in the third quarter of 2010. Here you have the two factors that lead to the reduction in volumes, A, Libya, and B, Yuzhno- Russkoye.
I can also tell you that after the scheduled maintenance, Yuzhno-Russkoye is back on stream and will deliver, as in the prior years, roughly 25 billion cubic meters of natural gas.
So-
Total.
Just come back. Yuzhno- Russkoye, for the full year, volume will be flat versus last year. Also, sorry to be a pain in the neck, but I mean, my annotation to my model says that Q3 last year in Libya was down because of OPEC restrictions. You weren't operating at full production. Conversations I had with IR earlier suggested that there was also some volume reduction in your mature European field. Perhaps I could just comment that the commentary on what's going on in E&P is a little bit inadequate and inconsistent in my view.
You are right. During Q3 2010, we were in the process of ramping up. I don't have the exact figures anymore, but I believe we were producing at a range of 70% in the beginning of the third quarter, 2010, and then ramping up to 90%, if I remember that correctly, by the end of Q3. During Q4, we went up to 100%. As I said, the other impact is coming from Yuzhno- Russkoye. What we also see is in the mature fields in Germany and also in the Netherlands, we have a slight decline there, and that in combination leads to the reduction in volumes that you're pointing out.
Thank you.
We are now coming to the next question from Andreas Heine from UniCredit. Good morning, Andreas.
Good morning. I have a question on Performance Products. This business seems should be more stable and more resilient than, for example, plastics and chemicals are. Looking on the quarterly trend from Q1 to Q3, that seems not to be the case. Is there something, some seasonality we have to be aware, or is it the trend going down from Q1 to Q3, what we have also to expect as an underlying trend visible in Q4? Thanks.
I think, Andreas, the major explanation here is really our
Paper chemicals business, which had been declining volumes and still is in the process, as you know, of restructuring and regaining its competitiveness to the full extent necessary. That is a major explanation. In principle, you are right, that business, by definition, should have less cyclicality. That business, by the way, gets lots of products, that segment gets lots of products from our upstream sector. They are in the constant need to improve prices and margins. We have seen this at other companies as well as you know. When you look at the overall earnings pattern of BASF, you see sometimes a certain delay in, say, passing through those higher feedstock costs, which come from our chemical segment, essentially.
It's not the seasonality. The picture describes the two effects.
It's a little bit of seasonality. There is always Q3, as we all know, in some parts of Europe, for instance, is quite slow. There's a little bit of seasonality included here as well, yeah.
Last year, we have seen a rather weak Q4. Is that then also a seasonality or was that something where the business conditions were? Again, just to find out what we have to expect from this division, which is very important as this includes the last two very big acquisitions for going forward.
What you will see in Q4 normally is the normal seasonal slowdown. Q4 is weaker than Q3 and Q2. What we expect, again, is some inventory management by our customers. Those customers are quite sensitive, as we all know, and they also carefully watch their markets and make up their mind how much stuff they really need in their warehouses. Those two factors might lead to a situation where Q4 is a relatively slow quarter for performance and products.
Thanks a lot.
Welcome.
The next question comes from Mr Jan Hein de Vroe from ING.
Yes, thanks for taking my question. I must say I'm going back to the inventory subject, if you will. If I look at the development of your inventories as a percentage of sales, at the end of Q3, with 57.8%, it seems at a record high. If I compare it to last quarter, if I compare it to Q2, 2008, we're not talking about a couple of bits, but many percentage points. Being a percentage of sales number, I'm not really convinced of the argument of higher input prices changing this a lot. Could you give me some more comfort that the actual levels themselves are far lower than before?
Yeah, on your inventory question, what do we have there? We certainly have a significant impact that's coming from higher raw materials, higher raw material prices. If you compare Q3 last year to Q3 this year, we're talking higher raw material prices in the order of magnitude of 25%. That's the one impact that you see. The other impact is actually one that's related to our natural gas business, where our storage capacities by the end of September were full. These storage capacities were filled with natural gas at a significantly higher price than the price that we saw in the summer and going into Q3 of last year. Why is the storage facility still full?
We actually had expected to start delivering out of these storage facilities that we have. It simply had to do with the weather conditions. The second half of September that we had was very, very nice. We had summer-like weather in Germany, and as a result of that, no natural gas deliveries. As we all know, that can change quickly, and we will see these inventories in our natural gas storage facilities being drawn down quickly.
Thank you.
Let me add just one sentence. I think your observation is not completely wrong. Do make that quite clear. When we measure our, let's say, inventory efficiency and how effective we are managing them, we are internally excluding the price effect. Excluding the price effect, inventories at the end of Q3 were a few days—we measure it in days of our outstanding sales—a few days, three, four days higher than Q3 of 2010. Again, that is something which I would still include in a kind of a normal fluctuation, which we have seen again and again in our business.
Okay, thank you.
Bye.
We have five more questions that we can take. The next one is coming from Annette Weber.
Yes, good morning. I've got a quick question on other. The reversal of the provisions for the stock options program, how much was that in Q3 2011? If I remember correctly, last year in Q3, the impact of that revaluation was negligible, when I remember back to the consensus call and the comments you made back then, right?
Yeah, let me answer that by giving you a qualitative answer. Yes, we had a sizable amount there that led to a positive impact in other. Please also understand that we don't comment on that any further than that.
Mm-hmm. Okay.
Our next question is coming from Richard Logan, from Goldman Sachs. Richard?
Yes, good morning, and thanks for taking my question. Given the macro concerns, have you had any change to your CapEx plans either for this year or going into next year?
No, Richard. Actually, no.
Okay, great. Thank you for that.
This brings us already to Jeremy Redenius from Sanford C. Bernstein.
Hi, thanks for taking the question. Just looking at a Bloomberg interview this morning with Mr. Bock, I saw that there was a line or a quote about growth in global GDP and in Europe, both for 2012. I'm wondering if you could perhaps provide a little bit of color on that commentary or if you know, confirm that quote, please. Thank you.
Actually, I don't remember what I said on Bloomberg this morning. Did I really talk about 2012?
Yes.
Good. I mean, I think what I tried to say is that we expect that the negative sentiment which we see in the marketplace right now will disappear very soon. That all depends, obviously, on the decisions with regard to the debt situation, both in Europe and the United States. I think I alluded to that earlier during this call today. If that disappears, if that negative sentiment disappears, I think it would be possible to improve volumes pretty quickly.
What I also said is that the underlying growth we still see in 2012, because I think that was a question which had been asked, "Do you see any growth at all in the chemical industry?" We said, "Yes, certainly." The underlying trends, which was about emerging markets, they need our products, and about the need for more innovative products are still in place. We are quite optimistic for the midterm future. We simply cannot tell you whether this will, this negativism will disappear within the next couple of weeks or whether it will be in the midst of 2012. That is a big uncertainty which we're facing right now.
Thank you very much.
Welcome.
We're now coming to Peter Clark from Société Générale.
Yes, good morning. Thank you. It's on China, actually. You alluded to obviously some potential risks with China looking ahead. Just wondering what happened to the volumes through Q3. I see the Asian underlying growth was still 17%, so it wasn't too different from Q2 at 22%. I'm just trying to get a feel for China and how it's progressing. Thank you.
Growth has slowed down a little bit. We alluded to the situation with regard to credit. Again, from our point of view, that is essentially a positive development because our biggest concern in China was the buildup of a bubble, and we have certainly seen signs of that in the real estate industry, in the construction industry. Again, slowing down a little bit I think is a healthy development. As Hans Engel said in his speech earlier on, what we do also see is that the government in China, when it's necessary, will take measures to ease credit, for instance, and provide more liquidity to the markets. So far there has been a little bit of slowdown simply as a response to the inflation, which is still above 6%, as we all know.
I'd be right in thinking China's still growing ahead of the Asian growth-
Oh, absolutely.
Regional growth.
Absolutely.
Yeah, yeah.
It is the growth engine in Asia. Absolutely, yes.
Yeah. Okay. Thank you.
Now we move to Norbert Barth from WestLB.
Yes. Good morning, gentlemen. To my knowledge, there was in the Ludwigshafen site a problem with the prussic acid value chain, Blausäure. There was a longer Stillstand. Can you elaborate a little bit? Will this have a material impact on Q4 result? Especially going, I think, also most parts in the TDI chain. What is the impact?
Norbert, we had a force majeure situation for acetylene, which has been lifted meanwhile. That affected our butanediol value chain, as Hans talked about. This has gone away. Is it a material effect on our numbers in Q4? No, that I can say clearly.
Okay.
Welcome.
Now, we are coming to our final question from Paul Walsh, Morgan Stanley. Is Paul here now?
Stefanie Wettberg, can you hear me?
Yeah.
Sorry about that before. I'm not sure what happened. Good morning, everyone. It was really just a simple question on the savings and synergy targets that you've had in place. I wondered if you could give us an update on where you are in terms of what's been delivered on next, the Ciba synergies and the Cognis synergies. You've updated on Cognis already, but perhaps on the other bits, what more is left to come?
Yeah, Paul, this is Hans. On Cognis, I already said that for the year 2011, we are expecting in the order of magnitude of EUR 60 million in cost synergies. On next, you're following BASF. You know BASF, we will deliver. What did we say on next? On next, we said EUR 1 billion by the year 2012. I can tell you that we are very well on track with respect to that. Our run rate currently stands at EUR 900 million, and this is at the end of the third quarter, which gives you a pretty clear indication that over the next quarter, we will be at least where we wanted to be.
Just, is there anything residual, Hans, on the Ciba- Perhaps more than you can do.
On the Ciba synergies, our target was EUR 450 million by the end of 2012. With respect to that, we are, as we've reported, with respect to the year-end figures, 2010, if I remember correctly, we were at EUR 350 million already then. A big chunk of the remaining 100, we've got under our belt during the year 2011, and there may be a small amount then still coming in the year 2012. What does it have to do with? Overall, we reap the benefits much faster than we had originally planned, and we will, as a result of that, also achieve the EUR 450 million sooner than what we had already planned.
Great. Thank you.
Let me just add one sentence here because you asked about what's going to happen next.
Sure.
What happens after next, so to say. We are not sitting on our hands. We have continuous improvement program underway. We are certainly. We have additional initiatives which already have started. We are looking at that, in a permanent way to make sure that we stay cost competitive. You can rest assured that we will come up with some ideas or talk about this also at an appropriate point in time. It's an ongoing effort, actually. I think that was the last question, right, Maggie? Nobody complained about the early timing. The way I see it, unless you sent us very nasty emails, we stick to this time now early in or earlier in the day to talk with you, and I hope it's helpful on your side as well.
Have a good day.
Yeah, ladies and gentlemen, there are still several of you that were in the queue, but we have noted you all down, and we will call you back from different members from the IR team to answer your questions. Now I would like to make a brief announcement regarding BASF future strategic direction. Our current strategy has made us the world's leading chemical company, and it is our objective to remain the number one in the industry. In the future, BASF will continue to focus on its strength, as the unique Verbund system. Also, with its strong technological basis and its access to a wide range of industries, BASF will further develop new and sustainable businesses. Finally, we will also offer our employees an environment in which they can fully develop their individual talents.
These are all topics that belong to the BASF strategy, and we plan to have an open dialogue with you on our future strategic direction shortly. We will send you invitations to this meeting that will take place in London shortly. With this, I would like to end today's conference call. I would like to thank our speakers and definitely should you have any further questions, please call us and we will call back all these ladies and gentlemen that haven't been able to post their follow-up questions. Thank you very much for joining in, and have a good day. Bye-bye.