Basf Se

XETRA:BAS

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Emma, your Chorus Call operator. Welcome, and thank you for joining the BASF Analyst Conference Call First Quarter 2018 Results.[Operator Instructions]This presentation call contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and the results outlined herein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in the Opportunities and Risks Report from Pages 111 to 118 of the BASF Report 2017. BASF does not assume any obligation to update the forward-looking statements contained in this conference call above and beyond the legal requirements.And I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Good morning, ladies and gentlemen, On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the first quarter of 2018.Today's conference call is limited to 1 hour since our Annual Shareholders' Meeting starts right after this call. On the call with me today are Hans Engel, BASF's Chief Financial Officer and Marc Ehrhardt, President of the Finance Division.Hans will explain the financial performance of BASF Group in first quarter, while Marc will present the segment results and the financial figures in more detail. Hans will conclude by providing BASF's outlook for 2018. Please be aware that we have already posted the speech on our website at basf.com/q12018.With this I would like to hand things over to Hans.

[Hans-Ulrich Engel]

Yes. Thank you, Steffi. Ladies and gentlemen, good morning, and thank you for joining us. BASF had a good start to the year and finished the first quarter 2018 with slightly higher earnings compared to a strong prior-year quarter. In most businesses, we implemented further price increases. However, strong currency headwinds, mainly due to the appreciation of the euro versus the U.S. dollar, more than offset these price increases. Sales volumes were up, driven by continued strong demand. Production plant outages negatively impacted available volumes. Please also keep in mind that Q1 2018 had less working days than the prior-year quarter.Turning to BASF Group's financial figures for Q1 2018 compared to the prior-year quarter in more detail. Sales in the first quarter of 2018 decreased by 1% to EUR 16.6 billion. Prices were up by 5% and volumes increased by 2%. Currency effects were minus 8%. Overall, portfolio measures had no impact on sales.EBITDA before special items came in at EUR 3.4 billion compared to EUR 3.5 billion in Q1 2017. EBITDA decreased by 2% and amounted to EUR 3.4 billion. EBIT before special items increased by 2% to EUR 2.5 billion in Q1 2018. Considerably higher earnings in Chemicals, Oil & Gas and Other more than compensated for lower earnings in Functional Materials & Solutions, Agricultural Solutions and Performance Products. Special items in EBIT amounted to an income of EUR 9 million compared to an expense of EUR 6 million in Q1 2017. EBIT increased by 3% to EUR 2.5 billion in Q1 2018.The tax rate was 24.7% compared to 22.9% in the same period last year. The increase was mainly driven by higher earnings contributions from high-tax countries such as Norway. Net income was slightly lower and came in at almost EUR 1.7 billion in Q1 2018. Reported earnings per share decreased by 2% to EUR 1.83 in Q1 2018. Adjusted EPS amounted to EUR 1.93; this compares with 1.97 euros in the prior-year quarter. In the first quarter of 2018, the operating cash flow increased by 48% and came in at EUR 1.2 billion. At EUR 604 million, free cash flow was up by EUR 538 million compared to Q1 2017.Let me briefly provide you with an update on our M&A activities. In September 2017, BASF and Solvay agreed on the purchase of Solvay's backward-integrated polyamide business by BASF. We aim for a closing of the transaction in Q3 2018. Preparations encompass the finalization of ancillary agreements and obtaining regulatory approvals such as merger clearances in several jurisdictions.In October 2017, BASF signed an agreement to acquire significant parts of Bayer's seed and non-selective herbicide businesses. In April 2018, BASF agreed to purchase additional businesses and assets, which Bayer offered to divest in the context of its planned acquisition of Monsanto. The expanded scope includes Bayer's entire vegetable seeds business, its well-established seed treatment business, the R&D platform for hybrid wheat and the complete digital farming platform. The transactions with Bayer complement BASF's crop protection business and biotechnology activities, adding new capabilities and opportunities for profitable growth and innovation. The all-cash purchase price for the combined acquisition is EUR 7.6 billion, subject to certain adjustments at closing.In 2016, the combined businesses generated sales of EUR 2 billion and EBITDA of EUR 550 million on a pro forma adjusted basis. All transactions remain subject to the closing of Bayer's acquisition of Monsanto, expected in the second quarter of 2018. BASF expects to close most of the acquisitions in Q2 2018, with the vegetable seeds business closing in the third quarter of 2018, of course, subject to the required regulatory approvals.In December 2017, BASF and LetterOne signed a Letter of Intent to merge their respective oil and gas businesses. Currently, we are conducting a confirmatory due diligence and are negotiating definitive transaction agreements. If an agreement is reached, closing could be expected in the second half of 2018, subject, as always, to regulatory approvals.This week, BASF and Solenis have signed an agreement to join forces by combining BASF's paper wet-end and water chemicals business with Solenis. Solenis is a global producer of specialty chemicals for water intensive industries. The combined business with pro forma sales of around EUR 2.4 billion and around 5,000 employees in 2017 aims to deliver additional value for paper and water treatment customers. The goal is to create a customer-focused global solutions provider for the industry.BASF will hold a 49% share of the combined entity that will operate under the Solenis name and be headquartered in Wilmington, Delaware, USA. 51% of the shares will be held by funds managed by CDR. Pending approval by the relevant authorities, closing is anticipated for the end of 2018 at the earliest.I will now hand things over to Marc to give you some more details regarding the business development of our segments.

[Marc Ehrhardt, President of Finance]

Thank you, Hans. Good morning ladies and gentlemen. Let me highlight the financial performance of each segment in the first quarter of 2018 compared with the first quarter of 2017.Sales in Chemicals increased slightly. Higher prices in all divisions, particularly in Monomers and Intermediates, compensated the significantly negative currency effects. Volume growth in the segment was slightly positive, driven by Petrochemicals as well as Intermediates. Volume development in the Monomers division was hampered by plant shutdowns due to inclement weather in the U.S., natural gas curtailment in China and the planned turnaround of the TDI plant in Ludwigshafen.EBIT before special items increased considerably from EUR 958 million to EUR 1.1 billion. This was driven by higher margins and volumes. In Petrochemicals, earnings were negatively impacted by weaker cracker margins in all regions.On April 11, Yara and BASF inaugurated the new world-scale ammonia plant in Freeport, Texas, which will strengthen the production Verbund at the site. The new plant allows us to take advantage of world-scale production economics and attractive raw material prices.Sales in Performance Products decreased by 6%, mainly due to negative currency effects. All divisions of the segment were able to increase prices. The unplanned shutdown of the citral plant in Ludwigshafen and the respective force majeure declarations for citral and isoprenol-based aroma ingredients as well as for vitamin A, E and several carotenoid products resulted in a slightly negative volume development for the segment. Citral imports from our new aroma ingredients complex in Kuantan, Malaysia, helped to partially reduce adverse impacts on our customers. Slightly negative portfolio effects were mainly related to the transfer of BASF's leather chemicals business to the Stahl Group.We raised prices and, adjusted for currency effects, increased the average margin compared with the prior year quarter. EBIT before special items nevertheless declined slightly, largely as a result of negative currency effects.Sales in Functional Materials & Solutions decreased slightly, as higher prices, especially in Catalysts division, and slightly higher volumes could not fully offset negative currency effects. Some of our businesses, primarily in Performance Materials, were negatively impacted by raw material shortages. Margins declined as price increases could not fully compensate for higher raw material prices. Overall, fixed costs increased, partly due to maintenance work and new production plants coming on stream. As a result, EBIT before special items decreased significantly.Sales in the Agricultural Solutions segment declined by 7% compared with Q1 2017. This was primarily attributable to negative currency effects in all regions. Sales were also reduced by slightly lower prices in North America in particular. By contrast, we increased sales volumes. Business development in the Northern Hemisphere was dampened by the long and cold winter.In Europe, sales were down slightly on the prior-year quarter, mainly as a result of negative currency effects. These could not be completely offset by slightly higher sales volumes, particularly in Eastern Europe.Sales in North America decreased considerably, largely due to strongly negative currency effects. Slightly lower prices for herbicides, in particular, also contributed to the sales decline.Sales rose considerably in Asia. Significantly higher sales volumes, especially in Japan and China, more than offset the negative currency effects.The region South America, Africa, Middle East saw slight sales growth, driven in particular by higher volumes of soy fungicides and sugarcane insecticides in Brazil. Sales were weighed down by negative currency effects.EBIT before special items was considerably lower than in the first quarter of 2017. This was mainly attributable to negative currency effects and higher fixed costs in areas such as production and research.Sales in Oil & Gas were up significantly, mainly due to higher oil and gas prices and increased volumes. In Q1 2018, the average price of Brent crude was U.S. $67 per barrel, $13 higher than in the same period of 2017. In euro terms, the increase was EUR 4 or 8%. Gas prices on the European spot markets were also significantly above the level of the prior-year quarter. The combined price and currency effect was plus 3%. The volume increase of 11% was driven by higher production in Norway and higher trading volumes.EBIT before special items increased considerably from EUR 170 million to EUR 365 million. This was largely attributable to a higher earnings contribution from Norway due to lower depreciation as a result of higher reserves, as well as volumes growth. Higher oil and gas prices also contributed to the earnings increase. Net income in Oil & Gas increased from EUR 140 million to EUR 165 million.EBIT before special items in Other improved from minus EUR 250 million to minus EUR 213 million. This was mainly driven by a swing related to our long-term incentive program. While earnings in Q1 2017 were negatively affected by an increase in provisions, Q1 2018 benefited from the release of provisions for the LTI program.Let's now turn to our cash flow in the first quarter 2018. Cash provided by operating activities increased from EUR 833 million euros to EUR 1.2 billion euros in Q1 2018. This was primarily attributable to the lower level of cash tied up in net working capital, largely from receivables. Cash used in investing activities decreased from EUR 1.2 billion euros to EUR 634 million in Q1 2018, mainly driven by the decline in additions to other financing-related receivables. In addition, payments made for property, plant, equipment and intangible assets were down by EUR 140 million to EUR 627 million.At EUR 604 million, free cash flow was up by EUR 538 million compared to Q1 2017. Both the higher cash provided by operating activities and the lower payments for property, plant and equipment and intangible assets contributed to the increase. Cash provided by financing activities amounted to EUR 201 million in Q1 2018 compared to EUR 831 million euros in the prior-year quarter. The decline was largely a result of lower net additions to financial and similar obligations.And with that, back to Hans for the outlook.

[Hans-Ulrich Engel]

Yes, thank you Marc. We confirm our outlook 2018 for BASF Group, as provided at the end of February. Based on our assumptions for the economic environment and taking into account the agreed transactions with Bayer and Solvay, we anticipate slightly higher sales in 2018, largely as a result of volume growth. EBIT before special items is expected to be up slightly on the 2017 level. EBIT for the BASF Group is forecast to decline slightly in 2018. We anticipate special charges in the form of integration costs in connection with the agreed acquisitions.We aim to once again earn a significant premium on our cost of capital in 2018. However, compared with the previous year, the BASF Group's EBIT after cost of capital will decrease considerably. This will mainly be due to lower EBIT, including M&A related special charges, as well as the additional cost of capital from the planned acquisitions.And now, Marc and I are glad to take your questions.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

[Operator Instructions] We will begin with Paul Walsh from Morgan Stanley. I will then ask Andrew Stott to ask his question and followed by Christian Faitz. So now first, Paul Walsh, Morgan Stanley.

[Paul Richard Walsh, Managing Director]

Could you just help me understand a little bit more the year-on-year dynamics in both Performance Products and the Functional business. It just seems you've had a very nice step-up in margin in TP. I'd just like to dig a bit deeper into that. Similarly, for a relatively similar sales number in the Functional business year-on-year there seems to be a sort of sizable decline in margin. Again, just to balance those 2 things, any insights you can give would be appreciated. And I'll leave it at that please.

[Hans-Ulrich Engel]

Yeah, Marc -- sorry, Paul this is Hans. Let me start with the question on Performance Products. Indeed, what you see is on a currency adjusted basis, an overall nice improvement. We had price increases across the board in Performance Products. The raw material price increase was actually lower than what we had expected going into the quarter, so that certainly helped. Overall, then if I add the impact of the foreign exchange, we come out with better results in Q1, 2018 in Performance Products and then we had in Q1, 2017. Just to give you an indication there -- currency, we took a real hit in Q1, not only the U.S. dollar, it's basically all the other major currencies that we have in our portfolio. You've seen the 8% on the top line which equates to about EUR 1.3 billion. On an EBIT level we took a hit order of magnitude EUR 300 million due to the appreciation of the euro. Functional Materials & Solutions, I think you and I talked last time when we saw each other about the fact that we have a Monomers business with isocyanates and we have a downstream business in Performance Materials, and if I look at the improved results in the Chemicals segment which are to a large extent driven by the improvement in isocyanates, but also in caprolactam that's where then our Performance Materials business takes a significant hit because they can't pass on the significant price increases that we're seeing in the isocyanate chain and that explains part of the earnings decrease that we have in Functional Materials & Solutions. But overall in the isocyanates value chain, we have significant improvement. We have in addition to that, the currency hit which is equally significant as we've seen it in Performance Products, we have to keep that in mind. And the third bigger topic that we have, we had a turnaround of our styrene plant, which also hits the result of Performance Materials and these are the 3 key elements that lead to lower results, lower margin in Functional Materials & Solutions.

[Paul Richard Walsh, Managing Director]

And just a quick second question. The D&A reduction in oil and gas, Hans, should we be saying that EUR 200 million as the ongoing run rate for D&A in oil and gas, please?

[Hans-Ulrich Engel]

We have a significant reduction in oil and gas and depreciation as a result of higher reserves, in particular in Norway. And you should continue to see that in the year 2018.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Andrew Stott, UBS.

[Andrew Gregory Stott, Managing Director and Research Analyst]

First of all is the guidance specifically for Ag for this year. If you think back to March, I guess it was changed, there's 2 important things. One, you've probably lost some pre-emergent business due to the weather, and now you've got to see the vegetable seeds assets on top. So when you think about those 2 influences, are you still thinking for this division that guidance is as we were, but with those 2 changes, so that's the first question. The second question was just understanding where we are now with your polyurethanes capacity as we look out for this year and into 2019. So is Chongqing back on? You're running at full production in China there? Do you expect that to -- the natural gas issues to have gone away? And also, I think, last time we met you were talking about the reactor just arrived on site for the TDI facility in Ludwigshafen, so best guess as to sort of startup of the TDI facility?

[Hans-Ulrich Engel]

Yes, sure, Andrew. Let me start with the Ag guidance. The Ag guidance is unchanged. If we look at the historic business, we still expect a slight improvement in results compared to prior year. Weather was quite interesting in Northern Hemisphere in the first quarter, so we have a significantly delayed start into the season depending on where you are, which geography you look at. We're talking about 2 to 4 weeks. Based on everything that I hear from the guys in the Ag business, they think that they can catch up. So as always we've got to look at the full seasonal Northern Hemisphere. In other words, the first half will give us then the answer to your question. But at this point in time, we don't see a need to change our guidance. Chongqing -- yes, natural gas supply started in the second half of March. So we're fully supplied again. We overcame the weather-related issues, winter-related issues that we had in the Gulf Coast. TDI, Ludwigshafen, yes, the reactor is in place, and we expect to start up in a few weeks.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Okay. So we will continue with it Christian Faitz. He will be followed then Christian -- from Patrick Lambert. So now Christian Faitz, Kepler Cheuvreux.

[Christian Faitz, Equity Analyst]

Just 2 quick questions, coming back to Ag, are you worried about any inventory levels in agro, given this 2 to 4 week delay in the crop season, i.e. are we talking about a shortened season maybe here -- shortened application season? And then second of all, can you please shed some more light on the weal EBIT performance in North America. There you state that all segments contributed negatively, I guess part of it is Ag/weather related. Can you please elucidate this?

[Hans-Ulrich Engel]

Yes. I'll start with the second question Christian, good morning. In North America, we have 3 impacts that we need to consider -- actually we have 4. We have the weather-related issues, as everyone else, who experienced freezing temperatures in the Gulf Coast. Plants there are prepared to take hurricanes up to Level 4 and 5. But they're made -- not made for freezing conditions and that's what we experienced. Not only us also our raw material suppliers had 2 extended outages that we experienced in particular in our Freeport and Geismar sites. As you know these are the 2 Verbund insights that we have. A second big impact that we have comes from currency. Look at what happened with the U.S. dollar. I think the U.S. dollar on average in Q1, 2017 was at $1.06 and we were at $1.23 in the first quarter of this year. The third impact that we have, our cracker margins which are significantly lower in Q1, 2018 than where they were in 2017, that are 3 -- what was the fourth one that I had on my mind? So, outages, whether, Ag, big one you mentioned that one already and foreign exchange the 4 explanations for the significant decline that we have in results in North America. On Ag, overall, I'd say no significant issues with the distribution channels. I think end of the season now, looking at products on ground, in particular in Brazil, shouldn't be an issue there with all the measures that were taken in 2017. North America, a compressed season may play a role and that could very well have an impact on the distribution channels and the level of product in the channels. I cannot exclude that. We will see what's going to happen there during the season. Europe, overall, looks okay, but for France, where we see relatively high levels in the distribution channel, Eastern Europe looks okay. Asia, based on everything that I heard, no issues. Thank you very much. Highly appreciated.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

So now the next question is from Patrick Lambert, Raymond James

[Patrick Gerard Jean Lambert, Research Analyst]

2 quick questions, the first one is on citral and actually the EBIT on Performance Products. Was there any impact of any insurance payments due already to the force majeure and how do you see that panning out in Q2, Q3 in terms both of ramp up and also insurance contributions? And the second will be round Ags again. When I look at the potential size of the platform post the acquisitions, would you help us qualitatively and quantitatively possible to think about the synergies you can extract from those acquisitions, both in terms of R&D and also in terms of production -- crop production?

[Hans-Ulrich Engel]

Okay. Patrick, your first question on citral. Yes, there is -- we received an insurance payment. As always, this is an initial payment based on what you currently -- what the insurers currently see. We expect a further payment, not yet clear whether that will come in Q2 or whether that will come in Q3, depends on when we will reach agreements with the insurers. Give you an order of magnitude of the insurance situation and I give that to you on BASF group level, since we are partially self-insured, and figure is something in the lower double-digit million range. A positive impact in the lower double-digit million range in Q1. And as I said, not yet clear whether there will be another positive impact coming from the insurance either in Q2 or in Q3.

[Patrick Gerard Jean Lambert, Research Analyst]

And in terms of volumes ramp up, how does it took.

[Hans-Ulrich Engel]

So significant hit, obviously, you see this -- I think volume declined order of magnitude 10 plus percent in the operating division in Q1. We were able to bridge supply to our customers with quantities that came in from Kuantan. But nevertheless it's 10 plus percent volume decline. We are ramping up as we speak, so let's keep our fingers crossed that we are able to supply our customers as quickly as possible again. On you Ag synergies question, actually that is -- what we do is not the typical acquisition where you look at harvesting significance synergies -- in particular, on the cost side. These are complementary businesses that we are acquiring and as a result of that, we look primarily -- not to say exclusively, at growth synergies and not necessarily for cost synergies.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next -- yes, sorry. Okay. I would now ask Peter Spengler, DZ Bank to ask his questions. And the following ones in queue are Tony Jones and then Markus Mayer. So now Peter Spengler, DZ Bank.

[Peter Spengler, Analyst]

I have a follow-on question on the Bayer crop science business you acquired. Are there also facilities and lands you've acquired from Bayer in Germany and especially in the U.S.? And do still own seeds business and sizable research experts and facilities which you can add to the BASF business or it's basically that you buy the BASF business and keep it and add some experts from your side. And the second question is on your joint venture with Solenis, you have minority position and you have, I think, 3 out of 7 board members there. Your business was smaller. Is there a timeline or -- to change this setting or is the current setting permanent in the future.

[Hans-Ulrich Engel]

Okay. I'll tackle your Ag question and Mark will then address your Solenis question. Ag, what we are acquiring are actually fully enabled businesses. They come with -- they come -- the first part of the transaction, 5 chemical production and formulations sites, 10 R&D sites. Second part of the transaction which is further 7 research and development sites. And then obviously a lot of regional seed production and breeding facilities. With respect to personnel out of the different parts of this deal, total number of employees, order of magnitude, 4,300 that come with the transaction. So you see fully enabled businesses, be it on the production side, be it R&D side, be it sales, marketing, breeding and feed production facilities. So what you need to run the business comes with these transactions. And with that to Solenis.

[Marc Ehrhardt, President of Finance]

Thank you. So Peter, first and foremost what we want to do is create a customer-focused global solutions provider for the paper and water treatment industry. So we've now gone the first step in creating this entity and we're fully focused in bringing those 2 businesses together, first. And you know that CD&R is a private equity firm. So at one point we will look what the next steps are, but for now we're just concentrating on making sure that we set up this entity in a right way.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Tony Jones, Redburn. Please go ahead.

[Neil Christopher Tyler, Research Analyst]

It's actually Neil Tyler, Redburn. 2 from me, please. Firstly, on the cash flow, working capital development. The tightening of the working capital balance in the quarter. Can you share your thoughts on how much of the drop in receivables particularly is down to timing effects in a later sales perhaps in Ag and the like? And then sticking with Ag for the second question, and I suppose further to Andrew's question earlier. The EBIT impact from acquiring those seasonal businesses mid-way through the year, presumably I would assume would be negative for the second half of the year, because of the lack of sales in those last 6 months. Is that the right assumption to make?

[Hans-Ulrich Engel]

I'll take your second one and then Marc will answer the question on cash flow receivables and what he and his team have done in this area. On the EBIT impact your assumption is correct. Overall, what we are expecting is a negative EBIT impact, A, due to the seasonality of the business and, B, as a result of the significant integration costs that we will have to book in 2018.

[Neil Christopher Tyler, Research Analyst]

And the pre integration costs, still negative?

[Hans-Ulrich Engel]

Again please?

[Neil Christopher Tyler, Research Analyst]

Excluding the integration costs, you would still expect EBIT contribution?

[Hans-Ulrich Engel]

We would still expect because the seed season is more or less for the crop protection product. And the seed treatment product's season in Northern Hemisphere, we will miss. That will be compensated for -- by way of an adjustment of the purchase price obviously. But that you will not see in the P&L, you'll see that in the balance sheet.

[Marc Ehrhardt, President of Finance]

Now to the cash flow question, yes indeed, let's say the delay in some -- Ag business played somewhat of a role. However, I think, what we've shown over the past year is a very, very concentrated management of our cash flow. We have instituted a series of measures to make sure that we accelerate our cash cycle and that then ends up also in the improvement of almost EUR 1 billion in receivables. Measures that we've taken, for instance, of cleanup in longstanding overdues. We've systematically gone through all the regions in trying to get back. We've addressed issues like bank acceptance drafts in China to make sure that we accelerate the cash cycle. They were reported under receivables for the longest time. So it's a combination of both. A little -- slight delay in the uptick that we see in the first quarter due to the Northern Hemisphere Ag season and the other is continued efforts to accelerate our cash cycle.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question comes from Markus Mayer, Baader-Helvea. We will then after him have Andreas Heine, MainFirst. But now first Markus Mayer, please.

[Markus Mayer, Lead Analyst of Chemicals]

2 questions on Ag as well. First one on this negative pricing in Ag -- maybe I've missed this answer, but can this mainly from product mix effect that is basically my first question? And then second question on this acquired digital farming xarvio of Bayer. Did I understand it rightly, that you -- that basically Bayer still has a license? And maybe you can shed some light how this works with this license? And maybe also as I understood it so far this is kind of open data business, so how it does, kind of, business and model works from this digital farming for you?

[Hans-Ulrich Engel]

Yes. Good morning, Markus I'll take your first question on Ag. And indeed that is predominantly the impact that comes from product mix. And overall, slightly lower prices in North America, these are the 2 contributors and with that to digital farming and to Marc?

[Marc Ehrhardt, President of Finance]

Yes. So I fully understand with the dynamic of the discussion with regulators. So at the beginning we were to purchase a license to the digital farming platform that they had. But that then turn on to a full out divestment. So now we own the digital farming platform that Bayer built up. So we're really happy that that really accelerates also our efforts in that space and is a great outcome for us in the overall deal.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

So now underway Andreas Heine, MainFirst.

[Andreas Heine, Managing Director]

Just on Chemicals please. If you look on that you most likely will have a much better availability of the high margin plants in MDI and TDI. And on the dynamics we see in prices. What do you see going into the same quarter for Chemicals, which was at least in 2017 and in the first quarter, the main driver of your earnings? And secondly, could you give a little bit -- shed a little bit more light in the discussions you have LetterOne on the oil and gas joint venture. I thought that the negotiation come to an end much earlier than they seem to do. What is issue? Why it takes that long to come to a final agreement, please?

[Hans-Ulrich Engel]

Okay. Good morning, Andreas. First on your question on Chemicals, what do we currently see. I'll start with petrochemicals. I alluded already to significantly lower cracker margins, continued strong isocyanates prices. Overall, a good price situation and margin situation in intermediates. Petrochemicals cracker margins in -- particular in North America, significantly below what we have experienced in Q1 2017. I think since Q1 2017 there is roughly 3.5 million tons of C2 capacity that was added in North America. That obviously has a significant impact on prices, but also on margins in what we call industrial petrochemicals, the acrylic acid, BT, the oxos, actually good solid margin environment, good solid demand across -- or around the globe. Isocyanates, we see what I would call a differentiated development by region. MDI prices have come down quite a bit in Asia and in particular in China. If you compare to end of Q3 -- early Q4 it looked like they picked there and have come down from that point. In Europe MDI price is slightly down compared to the highest that we have seen also there in end of Q3 early Q4. North America MDI relatively stable, but the question always with the new capacity -- MDI capacity that is coming on-stream in particular the Sadara quantities that hit the market, what this will mean and how long we can actually enjoy this still very strong margin environment. TDI is relatively stable at a very high level. Looks like April prices will roll over into May, but also there the question, what the additional volumes that come on stream will do and they include then also our TDI plans in Ludwigshafen. So that maybe the quick outlook on Chemicals. Overall, if I think Q1, Q2, we've seen -- not only seen, we are -- based on everything that I have seen in April, operating in an environment with respect to Chemicals that is very similar to what we've experienced in Q1 2018. On oil and gas, your question is, why does it take longer? Now if I think about the fact that we've signed a Letter of Intent in early December and we are now at the beginning of May, I don't see a significant delay. What you have to factor in is that you need a consent from one of your partners in each and every geography that you are operating in, because in oil and gas you're typically not alone, you're always in a consortium, in a joint venture. Can provide data only once your partners have provided you with the necessary consent. That actually took a bit longer than what we had expected in certain geographies, which then overall leads to what I would call a delay, but nothing where one needs to be concerned about. Both parties are well aware of what's happening in oil and gas and have done a number of transactions and the lesson from that is, it typically takes a little bit longer than what you tend to think in the world of -- in the ambitious way that we typically think. Does that help? Very welcome.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Okay. We have 5 more analysts in the queue and 15 minutes to go. So we will now have Laurence Alexander from Jefferies. Then followed by Thomas Wrigglesworth, Sebastian Bray, Chetan Udeshi and Peter Clark. So now Laurence Alexander from Jefferies.

[Laurence Alexander, VP & Equity Research Analyst]

Could you clarify little bit the margin pressure that you are seeing in Construction Chemicals and the degree to which you believe you either lost demand for the year or you saw demand get pushed into Q2? And then secondly, just more broadly across your downstream chemicals, so the Functional and Performance Products, have you seen any real slackening in underlying order trends or has everything been pretty consistent?

[Hans-Ulrich Engel]

Yes. On the EB margin pressure we have what I would call 2 businesses which are -- tend to be impacted by weather, one is the Ag business and the other is the Construction Chemicals business. So also there we've seen a late start to the season, both in commercial and in residential and the expectation is that -- and April has shown that to a certain extent the demand will pick up in Q2. On Functional Materials & Solutions your question was do you see a flattening somewhere. I would say no. I mean I just explained what's happening in Construction Chemicals. We've seen slight growth in automotive and we saw the 2 key industry, automotive and construction that we supply out of the Functional Materials & Solutions segment. So slight growth in automotive, a bit below what we are expecting for the full year, in particular in North America, a slow -- or slower start than what we had actually expected which may also be weather related. But, overall, demand patterns pretty much in line with what we thought we would see in 2018 and in line with what we explained earlier in the year, during our call in February. So in other words no change.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Thomas Wrigglesworth, Citi.

[Thomas P Wrigglesworth]

So, obviously, I know there are lot of puts and takes. But on Performance Products, it looks to me like we are seeing kind of pricing picking up over the last really kind of 2 to 3 quarters. Are you seeing -- how are you doing in terms of recouping the raw material impact that's coming through there? As we exit the first quarter and enter the second quarter, should we be anticipating further pricing acceleration and is that being accepted by customers? That's my first question. My second question is just a point of clarification. You kindly gave us the insurance numbers, but the insurance claims is that purely citral in the quarter or are there MDI claims as well? If you could just clarify what the group insurance covers?

[Hans-Ulrich Engel]

Yes, okay. I will start with your insurance question. What I gave is the purely the impact that we have from citral with this low double-digit million figure. On a group level there is nothing in there for MDI the auditors that we had there in China due to natural gas curtailment. There is no insurance available. The weather-related impact that we have does not fall under business interruption insurance, so there is nothing in for that. There is also nothing in for North Harbor incident where we are expecting also some time in Q2 and Q3 a final payment. So what I have given you is purely citral. On Performance Products, as mentioned already, we have a margin improvement. If I adjust that for the FX impacts, which in other words, means that we were able to increase the prices above the raw material impacts that we had in Q1. On the raw materials side, please always keep in mind we have, in U.S. dollar terms, significant increases compared to Q1 of last year. But again currency adjusted for a company that reports in euros there is not much of an increase and we were able to compensate or even gain a little bit back compared to the situation that we were in -- in particular in Q2 and Q3 of last year in Performance Products. And price increases, there is a whole range of price increases that was announced in Q1. We'll see now during Q2 what will stick and what will not stick.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Sebastian Bray, Berenberg.

[Sebastian Christian August Bray, Analyst]

I would have 2 please, the first is on the agreement with Solenis. I just want to confirm -- and apologies for being a bit simpler on this. Is the right approach to modeling this to simply to deduct the related revenues from the Performance Products segment for BASF for 2019 onwards. And the second one is on a question of distribution of integration costs. I appreciate, it's a bit early, but would you expect a significant proportion of these to fall into 2019, and will you try to book as many as possible upfront?

[Hans-Ulrich Engel]

The second question, again that was on?

[Sebastian Christian August Bray, Analyst]

Distribution cost -- sorry integration costs, pardon me.

[Hans-Ulrich Engel]

The integration cost for which transaction?

[Sebastian Christian August Bray, Analyst]

For most -- what I'm trying to get at is, that would you expect for the transactions that you have announced for Solvay for the Ag, for [ virtual ], for all of them to potentially move into 2019 relative of how much of this do you think will be in 2019 relative to 2018?

[Hans-Ulrich Engel]

Okay, on the latter one, it obviously depends on the point in time where we closed. So let's take them one at a time. For the Ag transactions we would expect to actually book a large chunk of integration cost already in 2018. There will be spillover into 2019, there's no question about that. It depends on time point in time at which we will sell inventories and then cycle the -- what I call, purchase price allocation cost through our P&L. On Solvay, we are expecting to close that transaction in Q3, which then would also mean that there would be a large chunk already in 2018. On -- what else do we have? On Solenis, we are expecting a closing at the earliest in Q4. And that depends then really whether we will still be in a position to book Something in Q4 of this year? Whatever we can, we will most probably book in the year where we acquired. What's important to keep in mind with respect to Solenis. In 2018, and in other words, in Q2, we will have to put that business in a disposal group. As a result of that -- and I have to tell you Sebastian that everyone around me is nodding. I think they are bit concerned that I got my reporting correct here. But apparently what I'm saying so far it's correct. So there will be disposal group as of Q2, which then means the revenue as well as the results will be -- in that case, stay where they are. Okay, in that case, I just hear stay where they are. And then from the point in time on where we close, we will then have an equity reporting which means then we will not show sales. Therefore that business we will show our share of the net profits and that will be shown as part of the EBIT line. Now everyone's nodding around me again, that seems to be correct.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Okay. Now we have Chetan Udeshi, JP Morgan

[Chetan Udeshi, Research Analyst]

2 questions. Firstly on Performance Products, can you quantify what is the net negative impact you might have seen from the loss of production in the citral chain in Q1, because you had some insurance payments you benefited as you mentioned in the release from higher prices. And maybe you sold some volumes from inventory or your Malaysian plants. So the question I have is, should we be expecting a sequential, substantial improvement in Performance Products once citral is up in running by end of this quarter or -- so just to know the exact -- or some sort of quantifying the impact in Q1 will be helpful for that.

[Hans-Ulrich Engel]

Yes.

[Chetan Udeshi, Research Analyst]

And the second question was, in your catalyst business, you mentioned the margin or earnings are down significantly, primarily because of FX. But even underlying it seems the margin was down. So can you explain what is happening in that business given that the metal prices were more favorable, so that should have been -- probably be a tailwind on margin as there.

[Hans-Ulrich Engel]

Okay, so I'll do Performance Products, Marc will do catalyst. On citral, as explained, we will seek a first insurance payment. Picture a picture for the results in Performance Products, overall, a low double-digit million negative impact after this net insurance payment.

[Marc Ehrhardt, President of Finance]

And onto your question on the catalyst division, well, we're seeing very good business in -- and remember we've got 3 or 4 areas as you saw in that division. We've got the chemical catalyst, refinery catalyst that's one, those are doing very well with volumes developing in the right direction. Battery materials is obviously going from a low level, also looking good. Trading, also with healthy numbers. Where we're seeing volumes coming down is in fact in the mobile emission catalyst business, there especially. And if you've been following the turmoil in the European sector, a lot of the OEMs are shuffling their platforms back and forth in their likely deal segment. And that one -- I mean also if you know a number of components that are on diesel, exhaust treatment is almost 4 fold of what you have in the light-duty gasoline, so obviously then if there is a shift in platforms that has an impact on our business.

[Chetan Udeshi, Research Analyst]

Is it just a diesel share mix as a overall percentage of the sales or is it also because of some share gains between yourself and your competitors which is impacting you more maybe at the moment?

[Marc Ehrhardt, President of Finance]

Well it's a little bit more complicated in terms of that. Because you usually win a platform 3 years before you implement, so here you've got a combination of both the actual sales of certain platforms is moving in a way different than what was maybe planned in the past, and what you did in the competition performance 4 years ago. So I think it's a little bit too complicated to sort that out. But I wouldn't say that we've lost market share in the short term.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

So now the final question from Peter Clark, Societe Generale

[Peter Anthony John Clark, Senior Analyst, Chemicals]

Just coming back only -- you are talking of functional solutions on the margin. You made it quite clear Performance Materials is particularly hard hit, and I think you had fixed costs rising again in the first quarter. So, first question really is, is that the case? Performance Materials really makes that segment margin look a lot worse potentially? And then in terms of the coatings business, which has also been under a lot of pressure, particularly from raw materials. One of your major competitors on the auto side is pointing at potentially getting over the raw materials as they see it, or making certain headway on it by the second half. Just wondering if the progression is similar to what we see in the markets. But going into the second half that you are more confident that these margins can start stabilizing and turning on the coating side, so that's excluding the deco in Brazil?

[Hans-Ulrich Engel]

Yeah, Peter on your first question, indeed Performance Materials for the reasons I mentioned earlier, they get the high raw material cost from the isocyanates, but also in the PA6 and PA66 value chains where we've seen significant increases not only quarter-over-quarter, but also Q4, compared with Q1. They can pass on part of that, but not all of it. That was one of the reasons, but if you look at the entire value chain, we are quite happy with the results that we are seeing there, in other words a nice improvement. Next thing that I already mentioned is we had a turnaround of our styrene plant in Ludwigshafen also hitting Performance Materials and then overall the FX impact as already mentioned several times. So that's the explanation for Performance Materials in particular, but also explains a large -- to a large extent what's happening in Functional Materials & Solutions overall. On the raw materials for coatings,I have to say, I am not yet sure what's going to happen there in the second half of the year. Yes, we've seen that raw material price increases are much lower than what we experienced during the year 2018 on an ongoing basis. The foreign exchange helping there, but whether or not that could lead to a margin expansion in the second half of the year, frankly that's too early to tell.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Ladies and gentlemen, this brings us to the end of our conference call. Martin Brudermüller, Hans Engel will report on our second quarter results on July 27, 2018. Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today and good bye for now.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thanks for joining, and have a pleasant day. Good bye.