Basf Se

XETRA:BAS

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Hailey, your Chorus Call operator. Welcome, and thank you for joining the BASF Analyst Conference Call Third Quarter 2018 Results. [Operator Instructions] This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. The forward-looking statements are not guarantees of the future developments and results outlined therein. 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 presentation above and beyond the legal requirements.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 third quarter of 2018. On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors; and Hans Engel, BASF's Chief Financial Officer. Martin will explain the financial performance of BASF Group in the third quarter and comment on recently announced transactions and agreements while Hans will present the segment results and financial figures in more detail. Then Martin will conclude by providing BASF Group's outlook for 2018.Please be aware that we have already posted the speech on our website at basf.com/q32018. With this, I would like to hand things over to Martin.

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Ladies and gentlemen, good morning, and thank you for joining us. Today, we will provide you with the third quarter 2018 figures compared with the prior year's quarter on a restated basis. The restatement was necessary due to the signing of the agreement between BASF and LetterOne to merge Wintershall and DEA on September 27, 2018. As a consequence, sales and EBIT of our Oil & Gas activities are no longer included in the respective figures of BASF Group, retroactively as of January 1, 2018, and with the prior year figures restated. Until closing, Wintershall Group's income after taxes will be presented in the income before minority interests of BASF Group as a separate item, income before minority interests from discontinued operations. We expect closing to take place in the first half of 2019. I would like to begin with making a few remarks on the current macroeconomic environment. In Q3 2018, customer markets of BASF developed below prior expectations. In particular, towards the end of the quarter, we experienced a slowdown in demand from automotive, a very important customer industry of BASF. The current forecast from LMC Automotive clearly reflects this development. At the beginning of 2018, their growth assumption for light vehicle production was 2%. In October 2018, this figure was revised to 1.1%. This development concurs with the increasing uncertainties regarding the world economy in the light of trade conflicts, in particularly between the U.S. and China. Turning to BASF Group financial figures for Q3 2018 compared to the prior year quarter in more detail. Sales in the third quarter of 2018 increased considerably to EUR 15.6 billion. We were able to increase prices by 6% supported by all segments and divisions. Sales volumes of BASF Group increased by 2%, driven by Functional Materials & Solutions. Volumes in the Performance Products segment were still negatively impacted by supply shortages in our Citral value chain. Currency effects amounted to minus 1%, mainly due to the appreciation of the euro versus currencies in emerging countries such as Brazil. Overall, portfolio measures had a positive effect of 1% on sales and were driven by the acquisition of agricultural solutions businesses from Bayer.EBITDA before special items decreased by 10% to EUR 2.3 billion in Q3 2018. EBITDA amounted to EUR 2.2 billion compared to EUR 2.7 billion in the prior year quarter. EBIT before special items decreased by 14% to EUR 1.5 billion in Q3 2018, mainly due to considerably lower earnings in Chemicals. Earnings also decreased considerably in the Functional Materials & Solutions and Agricultural Solutions segment and fell slightly in the Performance Products segment. In Performance Products and Functional Materials & Solutions, we were able to increase prices by 5%, respectively, 4%. However, our measures to increase prices were partially offset by higher raw material costs and higher fixed costs. Earnings in Agricultural Solutions were burdened by the seasonally negative contribution from the acquired businesses. In the legacy business, earnings of our Agricultural Solutions segment increased significantly.Earnings over several segments were negatively impacted by the low water levels of the Rhine River. Throughout the third quarter, this negatively affected our operations in Ludwigshafen. In fact, currently the Rhine is at its lowest water level ever. This required the reduction of capacity utilization of some of our plants due to the restricted raw material supply and insufficient availability of cooling water. In addition, we faced higher transportation costs since we had to switch volumes from barges to other modes of transportation.EBIT decreased by 24% to EUR 1.4 billion in Q3 2018. Special items in EBIT amounted to minus EUR 75 million and were primarily related to the integration of the acquired businesses. In the prior year quarter, special items were positive and amounted to EUR 122 million. And this was mainly attributable to the divestiture gains from the transfer of BASF's leather chemicals business to the Stahl Group. The tax rate decreased from 23% to 18%. This was particularly due to the decline in taxable income in Germany as well as reduced tax rate in Belgium.In Q3 2018, income before minority interests for discontinued operations increased by EUR 149 million to EUR 235 million because of higher oil and gas prices and increased production volumes. In the third quarter, the average price for Brent crude was USD 75 per barrel, USD 23 higher than in the same period of 2017. Gas prices on the European spot market were also significantly above the level of the prior year quarter. The increase in volumes was furthermore supported by an offshore lifting in Libya. In 2017, the lifting took place in the second quarter.Net income amounted to EUR 1.2 billion compared to EUR 1.3 billion in the prior year quarter. Reported earnings per share decreased by 10% to EUR 1.31 in Q3 2018. Adjusted EPS amounted to EUR 1.51. This compares with EUR 1.40 in the prior year quarter. Cash flows from operating activities amounted to 2.2 -- EUR 2.9 billion, excuse me, in the third quarter of 2018 compared to EUR 3.8 billion in the prior year quarter. The decline was largely driven by the lower cash inflow from changes in net working capital. Free cash flow decreased from EUR 2.8 billion to EUR 2 billion.In August, BASF was -- has closed the acquisition of significant businesses and assets from Bayer, which generated combined sales of EUR 2.2 billion in 2017. The acquisition comprises businesses and assets from Bayer in the area of seed for corn, canola, soybeans and vegetables. They also include nonselective herbicides, products for seed treatment with nematicides, biotechnology and digital farming. The integration is well on track. Since closing, we have had -- been supplying our new customers without interruption. The cultural fit and motivation of our substantially enhanced Agricultural Solutions team is excellent. And we are experiencing additional momentum that will make us even more successful in the future. To reflect the expanded scope of our agricultural business, the division has established a new global business unit for seeds and traits and was renamed from crop protection to Agricultural Solutions.In June, the EU Commission started to review the planned acquisition of Solvay's integrated polyamide business in an in-depth investigation. This merger control process is ongoing. To meet the concerns of the EU Commission, BASF has offered to refrain from acquiring certain parts of the Solvay's European polyamide business. The EU Commission is now examining this offer and has submitted it for market testing. By complementing the engineering plastics portfolio, enhancing the access to key markets -- key growth markets in Asia and South America as well as strengthening the value chain through the back integration into key raw materials, BASF would still achieve its key strategic objectives. The EU Commission will likely take a decision in early 2019. As of now, the transition has obtained merger clearance in 8 of 10 jurisdictions globally.At the end of September, BASF and LetterOne signed the agreement to merge their respective oil and gas businesses in a joint venture. Closing is expected to take place in the first half of 2019, subject to approvals of several authorities. This transaction will create significant value for both shareholders by forming the leading independent European E&P company, seizing additional growth opportunities, generating synergies of at least EUR 200 million per year and last but not least, listing Wintershall DEA. We expect that the IPO will take place in the second half of 2020 at the earliest. The exact timing will obviously depend on market conditions.In May, BASF and Solenis signed an agreement to join forces by combining BASF's paper wet-end and water chemicals business with Solenis, a global producer of specialty chemicals for water-intensive industries. Necessary merger control filings have been submitted. Pending approval by the relevant authorities, we continue to expect closing at the end of 2018 at the earliest. As part of our active portfolio management, we are continuously evaluating whether businesses could unfold their potential even more in a different setup, as for example, in a joint venture or outside of BASF. In this context, we have decided to evaluate strategic options for our Construction Chemicals business to ensure a successful future development. The market currently offers attractive consolidation opportunities.The Construction Chemicals division comprises admixture systems and construction systems. It generates sales of more than EUR 2.4 billion in 2017, operates in more than 60 countries and has around 7,000 employees worldwide. The outcome of assessing strategic options is open. This means we consider a merger with a stronger partner as well as a divestiture. We strive to reach an agreement on a transaction in the course of 2019.This week, BASF announced Harjavalta in Finland as the first location for battery materials production serving the European automotive market. The plant will be constructed adjacent to the nickel and cobalt refinery owned by Norilsk Nickel. With this investment, BASF will be present in all major regions with local production and increased customer proximity further supporting the rapidly growing electrical vehicle market. This investment is part of BASF's EUR 400 million multistep investment plan announced last year. Startup is planned for late 2020, enabling the supply of approximately 300,000 full electrical vehicles per year with BASF battery materials. Additionally, BASF and Nornickel have signed a long-term market-based supply agreement for nickel and cobalt feedstocks from Nornickel's metal refinery in Finland. The agreement will establish a locally sourced and secure supply of raw materials for battery products in Europe.With this, I hand things over to Hans.

[Hans-Ulrich Engel]

Yes, thank you, Martin. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment in the third quarter of 2018 compared with the third quarter of 2017.Starting with Chemicals. Sales in Chemicals increased considerably due to higher prices in all divisions. The price increase was particularly pronounced in the Petrochemicals division, given the significantly higher oil price. The favorable demand environment for petrochemicals and intermediates compensated for lower demand in isocyanates. Overall, sales volumes of the segment were stable. Lower margins for isocyanates and cracker products as well as increased fixed costs, among others, due to higher expenditures for maintenance measures, led to a considerable decrease in EBIT before special items. Higher earnings in the Intermediates division could only partially offset this decline.Sales in the Performance Products segment were stable. We increased sales prices in all divisions to pass on higher raw material costs and restore margins. Volumes declined mainly due to limited supply capabilities for nutritional products and aroma ingredients. By October 1, we were able to lift force majeure for all affected products in our animal and human nutrition businesses. For aroma ingredients, we expect to lift force majeure later in Q4 2018 partly thereafter. Currency and portfolio effects negatively impacted sales. EBIT before special items declined slightly, mainly driven by lower sales volumes, higher fixed costs and negative currency effects. Stronger margins had an offsetting effect. Excluding the negative currency effects, EBIT before special items was flat year-on-year.Sales in Functional Materials & Solutions grew slightly compared to the prior year quarter. This was mainly attributable to higher prices in all divisions, especially in Catalysts and Performance Materials. Also volumes grew in all divisions, except for Performance Materials, where primarily a lower demand for polyurethane systems led to a slight decline. Sales were slightly weighed down by currency effects. EBIT before special items was considerably below the level of Q3 2017, mainly due to higher fixed costs as well as lower margins in most divisions. However, we increased earnings from quarter-to-quarter over the course of 2018 and continuously reduced the gap to the prior year quarter.Sales in the Agricultural Solutions segment increased significantly compared to Q3 2017. This was due to portfolio effects from the acquisition of businesses from Bayer, higher prices and slightly higher volumes. Strongly negative currency effects partially offset the increase in sales. In Europe, sales declined slightly mainly as a result of lower sales volumes for herbicides and fungicides following the extreme weather conditions and long dry period in Central and Western Europe in particular. In North America, sales considerably exceeded the prior year figure. This was primarily due to portfolio effects from the acquired businesses as well as to a higher price level. Sales in Asia were up slightly year-on-year as a result of positive portfolio effects and higher prices. Sales growth was tempered by negative currency effects. The region South America, Africa, Middle East posted considerable sales gains. This was mainly driven by higher prices and sales volumes, particularly for fungicides and insecticides. The acquired businesses contributed to the increase in sales. Negative currency effects had an offsetting impact.Despite the seasonally strongly negative results of the businesses acquired from Bayer, EBIT before special items was down only EUR 26 million on the prior year quarter. Income generated by the legacy BASF business rose considerably compared to the third quarter of 2017. Excluding the negative currency effects, EBIT before special items for the entire business also increased slightly. EBIT before special items in Other improved from minus EUR 203 million to minus EUR 83 million in Q3 2018, mainly due to the release of provisions for our long-term incentive program.Now to cash flow. In the first 9 months of 2018, cash flows from operating activities decreased by EUR 1.2 billion to EUR 6.4 billion. This was largely due to a negative swing in changes in net working capital. At EUR 10 billion, cash outflows from investing activities were EUR 6.6 billion higher than in the first 9 months of 2017. The increase was driven by the businesses acquired from Bayer. Free cash flow came in at EUR 4 billion compared to EUR 5 billion in the same period last year. The decrease was caused by the lower cash flows from operating activities. Financing activities led to cash outflows of EUR 127 million compared to EUR 1.5 billion in the first 9 months of 2017. Now to the balance sheet as of September 30 compared to year-end 2017. Total assets increased by EUR 6.8 billion to EUR 85.6 billion. The acquisition of a range of businesses and assets from Bayer contributed EUR 8 billion to this increase. Noncurrent assets decreased by EUR 5.4 billion, mainly attributable to the reclassification of the fixed assets in our Oil & Gas business to current assets following the signing of the agreement to merge Wintershall and DEA. Current assets amounted to EUR 43.3 billion compared to EUR 31.1 billion at year-end 2017 due to the reporting of our Oil & Gas assets as a disposal group.Total liabilities increased by EUR 4.9 billion to EUR 48.9 billion. Current liabilities were up by EUR 7.2 billion to EUR 22.1 billion, primarily because of the reclassification of the noncurrent liabilities and provisions of our Oil & Gas activities to the liabilities of the disposal group. Financial debt was up by EUR 2.5 billion to EUR 20.5 billion. Net debt amounted to EUR 18 billion compared to EUR 11.5 billion at the end of 2017, this due to the purchase price payment to Bayer. Our equity ratio was 43% at the end of September 2018. And with that, back to you, Martin, for the outlook.

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Global economic risks increased over the course of 2018, driven by geopolitical developments and the trade conflict, in particular between the U.S. and China. They are causing a slowdown in economic growth in Asia, in particular in China. Our GDP forecast remains unchanged. Despite a slight softening in Europe and volatile developments in many emerging economies, we maintain our assumption of 3% of GDP growth in 2018. Stronger growth in the U.S. compensates for the slowdown in other regions. Overall, industrial production, and especially the global automotive production, developed below prior expectations. In Europe, particularly the introduction of the new vehicle emission standards weighed on the automotive production. While most of the impact is expected to be temporary, we have reduced our 2018 growth expectations for global industrial production from 3.2% to 3.1% and for chemical production from 3.4% to 3.1%. As a result of the changed reporting of Wintershall Group following the signing of the agreement to merge Wintershall and DEA, BASF Group's outlook for the full year 2018 was adjusted on September 27. We continue to expect a slight increase in sales compared to the adjusted 2017 numbers. We expect a slight decline in EBIT before special items compared to the adjusted 2017 figures while EBIT is expected to decline considerably.To conclude, the macroeconomic environment is becoming more challenging. The continued low water levels of the Rhine are also a challenge. Our third quarter results clearly reflect this. We are neither satisfied with our current business performance nor with our share price development. At our Capital Market Day on November 20, we will focus on how we will better position BASF and explain specific measures we are taking. Hans and I look forward to welcoming you on that occasion in Ludwigshafen. And now we are happy to take your questions.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

[Operator Instructions] The first question now comes from Thomas Wrigglesworth from Citi.

[Thomas P Wrigglesworth]

The first question, if I may. Just with regards to the developments that you're seeing into the beginning of the fourth quarter, could you describe a little bit specifically with regards to the automotive and your industrial chemicals exposure whether you're seeing a change in order patterns, whether you think there's something -- whether we're just seeing a destocking and that's accelerating or you think there's something more structural to demand? And a second question, if I may. You mentioned fixed costs a lot. Specifically with regards to FMS, surprised, given that there was volume growth, that you're also seeing fixed costs. Could you just elaborate by division what was driving the fixed costs? I think we can understand the component in Chemicals quite clearly. But in the other divisions, it's not quite clear to me what the fixed cost driver is there.

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Well, Thomas, a little bit more on the automotive. I mean, we have seen, particularly in September with basically 9% down, significant production reduction in automotive. I think there is no stocking or destocking effects in that very short period of time. I think it directly translates into consumption of major chemicals. And as you know, we are basically with a relatively broad portfolio in the car. So we paint the cars, but we have also a lot of plastic materials in the car. And we certainly have also fluids and we have also the catalysts in there. So it's impacting a quite a part of business. And you also know that automotive is our most important customer industry with more than 18% of sales. And with that, we see also basically an immediate impact here. But let me also mention, and this is why we have written it like this, it is very much the automotive industry that is affecting us here whereas the other markets are still in good shape.

[Hans-Ulrich Engel]

Yes, Thomas, this is Hans. Your question with respect to fixed cost development in the BASF Group and the drivers for fixed cost increases, our biggest driver for fixed cost increase that we have is the Bayer acquisition that we made. If you'll recall, we closed that in August. So that's driving up the fixed cost significantly at a point in time, where there were hardly any sales of the new Bayer products in our portfolio in Q3. In the other segments, you have a mix of new activities or new plants that came onstream, such as, for example, new catalyst plants or new catalyst lines in Functional Materials & Solutions. We also increased coating capacity. That brings a certain full year effect that's also in Functional Materials & Solutions. We had some smaller turnarounds in the Performance Products segment. And all of that in the combination leads to an increase in fixed cost. And what's also reflected in the fixed cost, at least to a certain extent, are the costs that come with the low water levels of the River Rhine. That's something that we are coping with since, I want to say, the mid of June. And that has increased cost also by way of underutilization cost because we had to throttle back some of our plants due to raw material supply situation.

[Thomas P Wrigglesworth]

Sorry, just as a follow-up, Hans. Could you help quantify or dimensionalize the size of those one-time items in the fixed costs for the third quarter?

[Hans-Ulrich Engel]

The one-times that we have, if I think about the cost resulting from the low water levels affecting activities and operations in Ludwigshafen plus then turnaround is in the area of a higher double-digit million figure.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Andrew Stott, UBS.

[Andrew Gregory Stott, Managing Director and Research Analyst]

A couple of questions. First of all, the strategic decision to look for a partner or indeed sell construction chems. I'm just wondering what it is you would look for in a partner or indeed why would you separate the asset when, I guess, it's not a question of scale. I mean, you're #1 globally in admixtures, #4 in construction systems, you've owned the asset, what, 12 years since the Degussa deal. You've got a long experience in the business before the Degussa deal. So what is it that you feel isn't right with BASF fully owning the asset? Second question is more straightforward on the numbers. I saw in the Bayer press release this week that EUR 300 million of sales have gone to you. So I've got the answer on the acquisition effect for Q3 in Ag. But on the losses, I was running with sort of EUR 60 million to EUR 70 million in my head for Q3. I just wondered if you could confirm if that's the ballpark number.

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Andrew, on the strategic decision of EB, I think you are right, this is 2 businesses. The one is -- the business is admixtures. This is also a business that is differently driven than the other part, which is the construction systems. So the first one is very much a project-based business. This is also something that is innovation-driven. I think we have the leading admixture technology here. I think with this, you are right, we are the #1. And I think this is totally fine, and you can run the business. On the other hand, the construction systems business is a relatively complex business. It has a very individual situation by countries. So we have, for example, a different regional or local setup than others of our competitors. I think we have mentioned also in the past that our business is relatively strong in the Middle East area, where there are currently, I would say, the situation over there, less construction activities. That's why we are burdened there. And I think in the current situation simply, where others also are offering their businesses and it offers consolidation opportunities, particularly in the construction systems business, I think it is a positive thought to bring businesses together. And this is also on a country and a local basis on one end but on also on a subsegment level in construction system, which is a very complex business with different segments. And there are opportunities to have a better market positioning as well as also cost reduction potential on the local level. You know that we have done some smaller acquisitions to strengthen ourselves on the country level, like the THERMOTEK acquisitions in Mexico, for example. But it's relatively tough work also to do that country-by-country. And I think the opportunity is here to be part of such a consolidation to really the position the business better. You also know that by the style or the kind of business, it is a rather unusual business for BASF. It is more on smaller orders. It has a relatively high complexity. And I think with this, it could really gain momentum if we use this opportunity of consolidation in the market. And that is why we have decided to really check the opportunities here. On the Bayer side, Hans?

[Hans-Ulrich Engel]

Yes. Your question with respect to sales and then you said losses with respect to the Bayer business. You were kind enough to give a figure. Ballpark-wise, that is okay. It is slightly higher than what you suggested.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Christian Faitz, Kepler Cheuvreux.

[Christian Faitz, Equity Analyst]

Two questions, if I may. First of all, coming back to the low water levels, in terms of costs pertaining to those water levels. Looking at Q4 and the even more severe situation at least at present versus Q3, can you comment on the cost increases and your ability to produce for Q4? My understanding is that you were correct, it was currently running at 60% or so. Is that correct? And then second question, pricing in ag chems was up by plus 18%. How much of that is underlying? And how much of that price pressure is related to compensation for weaker currencies?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Some more information on the water level. I mean, first of all, it's a very, very unusual long period we are bothered with this. We had this in the past happening 1 or 2 weeks. But this is now a situation that basically since summer is accompanying us. And very much on 2 issues, the one was in the summertime, very much on the cooling water, because you have kind of temperature restrictions to bring the water back to the river. And now which is becoming even more fierceful is really the transportation issue. So basically, shipping is almost not possible anymore, even if you take reduced load. That was the first measure you take. You go from 100%, 50%, 25% load. But now water levels is so low that basically it stopped. We have worked significantly to bring it more to road and rail. But it has its limit because, I mean, 2,500 ships over the year, you simply cannot bring all the volumes to rail and to road. So with this, we have now more a materials issue and a supply issue than the cooling water part. And with this, the impact will over the next months get slightly more severe, I would say. You can imagine that Hans and I, myself, prayed to the water gods to give us rain because that would ease the situation very quickly. And what we actually have done now is that we have indeed reduced the level of utilization in the cracker, we took it down to about 60%. And that is more or less what we can cope with, bringing the raw materials in by rail and road. So this is more, I think, now a stable situation going forward. But this certainly means also that the consuming plants down in the value chains, they suffer. And the other part there, which is really driving now is, of course, the one hand, underutilization. But the other part is also higher transportation costs by bringing to rail and road versus the ship. So it could ease easily from 1 week to the other if we get significant rain. But if not, we have to go on with about this utilization.

[Hans-Ulrich Engel]

Christian, this is Hans. Your question with respect to prices in ag, we have significant price increases. They are, to a large extent, driven by mix. Overall, season started earlier in -- a little bit earlier than we had last year in South America. Price is up significantly, as I said, driven by mix. Currency impact is, as you've seen, at minus 10%. You've seen the development of the Brazilian real and the Argentinian peso. Business is, to a large extent, dollarized, but there is unfortunately also a significant impact that we have there from FX. Actually, adjusted for FX, our earnings for the entire business, including the business acquired from Bayer, would have been higher in Q3 than in the prior year quarter.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Paul Walsh. We will then have Tony Jones and then Patrick Lambert. So now Paul Walsh from Morgan Stanley.

[Paul Richard Walsh, Managing Director]

Two questions. Firstly, on the Chemicals business, just thinking about the run rate of profitability. I'm curious to know if you think Q3 was a fair reflection of the reset in petrochemical margins and in polyurethanes. And maybe any other comments you've got on the other major product chains, whether it's acrylics or the nylon chain and so on, how they're panning out from here. And second question, just around the construction chems business. Am I to assume the margin of that business is lower than the divisional average? How should I think about the profitability of that business?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

So Paul, Chemicals business, I mean, let me start with really, I think, the major lever for change here, isocyanates. I mean, you know that we had the last year, a very special situation, a very nice one, I have to say. We expected that this cannot proceed forever like this. It somehow has to normalize. I think we have been somehow lucky that the first 2 quarters, that was more or less stronger. And this very special period took longer than we thought. But we clearly see now that in the third quarter that there is this normalization going on. So TDI and MDI prices have come down significantly in almost all regions in the world. It has also to do that basically additional capacity coming on. We have now also in these months, rather from a seasonal point of view, weaker months for the isocyanates. We also expect, however, that the next 2, 3 months are normally in the periodic or in the comparison with other years should be stronger months. But that is certainly the most important effect on Chemicals. The other part that is impacting us, I think, is the cracker margin situation, which is particularly in the U.S. stressed because, I mean, there is an ethylene oversupply, which is also not going away, I think, for quite some time. So these are the 2 major impacts which we see. On the other hand, we have rather nice stability, I think, on most of the other parts. And you mentioned acrylic acid, which is a strong leg of BASF, which is, I would say, a relatively sound demand. And also from the margin of our integrated production, you know that we are very strong in this. I think it is expected on a very healthy level. I think also most of the other products, I think there is nothing significant shifting. So we have these 2 effects now going forward. Overall, I think in the basic chemical products and raw material side, it's rather getting a little bit more constrained going up whereas, I think, in this situation, the pricing for our product is in a kind of a medium situation. So that is how I would describe Chemicals in the moment.

[Paul Richard Walsh, Managing Director]

Okay. And just on the construction chems margin?

[Hans-Ulrich Engel]

Your question -- actually the second part, I didn't get...

[Paul Richard Walsh, Managing Director]

It was just -- yes, sorry about that. Just the Construction Chemicals margin, the EUR 2.4 billion in sales that goes with that business, how should we think about the profitability of that business as you seek to look for alternatives for it?

[Hans-Ulrich Engel]

It's -- overall, as we said, it's a good growing, it's a well-positioned business. As you know, we don't disclose results below the segment level. And I think, Paul, we would like to stick to that.

[Paul Richard Walsh, Managing Director]

And above or below segment average or division average?

[Hans-Ulrich Engel]

For Functional Materials & Solutions, as you know, heavily affected by the pass-through costs that we have for precious metals. And I think, with that, I leave it.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

So the next question is from Tony Jones, Redburn.

[Tony Jones, Partner of Chemicals Research]

I had two. Firstly, on cracker margins, is there anything strategic you could do perhaps with a third party or tactically by adjusting the feedstock mix to improve the regional cracker margins? And then also on China, how are you seeing the opportunity for China in 2019 and maybe longer term, given some of the issues you call out. And what does that mean, if anything, for BASF's long-term investment plans?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

So Tony, cracker business, I think there's not so much, I think, we can do on a short-term basis here. I mean, first of all, let me mention that the Port Arthur cracker is totally or relatively strongly flexibilized in terms of feedstock. That was a project we have established quite some time ago, so we can actually flip from a kind of a pure naphtha base to a kind of a mixed feed. That is also the same thing we address on the Antwerp side, to flexibilize, these are the 2 major assets here. On the other hand, I think in Ludwigshafen, this is limited, I have to say. But that is also, with the supply situation, not so easy in tank farm situations. And by the way, here also in Ludwigshafen, we need the split we have because that is also a consumption pattern of the downstream. So I think there's not so much to do. You know then the overall, we have a strong Bayer position there on ethylene because we are usually using the other products more intensively like ethylene. So overall, I think we are tied into a grid. You know that also from Ludwigshafen, we have 2 pipes going north and south. So we can also manage there to stimulate this by the respective contracts and discussions with our partners or clients here. So and I think there's not much more we can do. But we definitely benefit already day-to-day from the feed flexibilization. Your question about China long term, I think what you clearly see, and this is what I also mentioned in the current situation and also a little bit in the outlook, that China is certainly suffering from the trade frictions with the U.S. I, on the other hand, lived long enough in China that I know, first of all, that the Chinese will not give up in that conflict. In the other part, I would say they are rather smart and creative in finding measures to somehow cope with this. And certainly, they are bothered now by exports to the U.S. in the moment. This is why you see a slowdown over there. But on the other hand, you might have heard also that the government has now recently announced tax reductions. And that is -- I have to say this, living there 10 years in the past, that's typical China. They take a measure and this is a state system, where there's one man at the top and he says now it's going to happen this, and they reduce the taxes. And with this, they will increase the consumption power. And in China, that will be very quick. So that doesn't take months to be established. Sometimes, that goes overnight. And I think this is one measure to stimulate now in the coming months consumption pattern. And for that reason, it could be very well that we see already an uptick with these measures also in Q4. And that's exactly, I think, the intention they have. So in that respect, yes, they are in a difficult situation. But I honestly spoke and I believe in pragmatic solutions. And somehow, I think the U.S. and China, they ultimately find a solution that no one loses their face. And I'm also pretty optimistic that the Chinese have a policy mix in taking measures to somehow stabilize the economy. So that's why long term, I'm not so much worried.

[Tony Jones, Partner of Chemicals Research]

And the investment plans are unchanged as well?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Yes. Because, Tony, you know, I mean, if you talk about, thinking now about the big cracker project in Guangdong, we really think long term because that is something you have to figure out where will you do the right step, you have to figure that out for decades actually. Because planning and building this, you have maybe asset lifetimes of 40 or 50 years. And I think if you have once a big site, you have it forever. So we believe in the pattern and the big consumption pattern in China. So that is why we are not worried in changing actually a little bit our strategy now because times are a little bit rubber. And you might know that this is in Guangdong, in Zhanjiang, which is a 7 million city in the South on the way to Hainan. And if you look on the figures of Guangdong, this is the largest province in terms of inhabitants, 110 million people. They passed the GDP of Russia this year, strong double-digit growth. This is the industrial center and heart. And by the way, they import 20 million tonnes of chemicals. So I think the strategic setup is -- it fits perfectly. And we will not change this only because now a few quarters are maybe a little bit more difficult.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Patrick Lambert, Raymond James.

[Patrick Gerard Jean Lambert, Research Analyst]

Two questions also on my side. The first one on ags, more looking at Q4 dynamics, are -- and yes, basic liquidity, are they pretty similar to what we've seen in Q3 in terms of contribution of Bayer's assets and also in terms of what you see on pricing dynamics there, the mix, as you commented. So first question, about ags. And the second, sorry to come back on the Rhine issue, if -- on my calculation, the impact would be in Q3 like mid-double digit at EBIT level. How do you see Q4 in terms of maybe some earlier estimates of impact of underutilization and logistic issue? Maybe your worst-case scenario there, if you could help us figure that out.

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

I mean, Patrick, as I mentioned earlier, and I think the utilization -- taking down the utilization just happened now, and I explained a little bit the different ingredients. We had the cooling water effect now, mode of transportation and the shortage of the raw materials. You can imagine if that continues or it theoretically would continue the whole fourth quarter, the impact would be significantly higher. However, it is also relatively normal that in November latest, it rains in Germany. So we still think if we look in normal weather patterns, which has been unusual the last month, but if we think in that direction, it basically can come down and normalize relatively quickly, within days even. So I would say, if you want to have an assumption, if you take worst case, your mid-sized double-digit million impact on EBIT is right for the Q3. If it continues for whole Q4 like this, it is significantly higher. But on the other hand, the probability that it will rain and it will normalize, I would say, is higher than the first scenario and then it would be definitely smaller.

[Patrick Gerard Jean Lambert, Research Analyst]

I just want to follow up -- sorry, maybe I'll just ask on -- I saw some force majeures already on a few plants. That could mitigate a part of the impact in case of it doesn't rain?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Well, I think if it doesn't rain, we stay on allocation. And the force majeure stays for some more time. And then yes, we have basically a lower business than we could have by the demand of our customers. And that's the normal consequence out of it. But as I said, I mean, 1 day of strong rain, 2 days of strong rain, it normalizes quickly.

[Patrick Gerard Jean Lambert, Research Analyst]

So we'll look at the weather then?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Yes. And that's what we all every day look.

[Hans-Ulrich Engel]

Your question on ag, we definitely expect a stronger Q4 season in South America will be in full swing. Actually, indication at the beginning of the season, I already alluded to what we've seen towards the end in Q3. You've seen our comment on the legacy BASF business. So we have a good start to the season in the Southern Hemisphere due to the nature, and I think you asked also with respect to the acquired assets, due to the nature of that business, expect a similar impact on the ag segment's result as we've experienced it in Q3.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Gunther Zechmann, Bernstein. [Operator Instructions]

[Gunther Zechmann, Research Analyst]

Gunther Zechmann from Bernstein. My one question then is on the macro outlook. The chemical production that you've updated, you don't expect any longer that this will outgrow the industrial production and GDP. Can you just take us through what the key drivers are for the reduced macro guidance? And you've also been quoted on Bloomberg this morning saying that you hope automotive will pick up in the coming months. So is that general optimism? Or have you seen some tangible signs that you've troughed in that end market?

[Hans-Ulrich Engel]

Gunther, this is Hans. Well, to be honest with you, September was a little bit of a surprise to us, the developments that we saw there. We had gone into the month of September after July and August, looking -- considering the seasonal effects looking very normal. And then we saw this dip in demand in the month of September. You're very familiar with the developments, in particular in the Western European automotive markets, new emission standards, the producer can't test their cars quickly enough. That has certainly led to a number of issues. But we've also seen a certain slowdown in Asia. And they are most pronounced in China. Now what's going to happen there in Q4 remains to be seen. Overall, we came to the conclusion to reduce our figures for industrial production and for chemical production, I want to say slightly. This is an adjustment that we made there, yes, but don't overinterpret that, please. And it remains to be seen how things will actually develop in Q4. Martin already alluded to the tax stimulus in China, which may very well play a role in the Western European auto markets. Let's see whether there's pent-up demand that will be satisfied then during Q4. So a number of things that can impact Q4 remains to be seen. But I think it's fair to say we don't see any type of structural issues. We see a dip in demand in September, and we take it from here.

[Gunther Zechmann, Research Analyst]

And just to follow up on the comment that the auto slowdown will pass in the coming months, is this something you've actually seen in your order books?

[Hans-Ulrich Engel]

That is -- I want to say that is too early to say. When I look at our order books, that looks solid, that looks okay. But volumes were then slightly slower. And that has also led to, you've seen in our cash flow, the dip that we had there. We simply, at the end of Q3 as a result of this dip in demand in particular in auto in September, we sat there with inventories which were too high, but the order books look okay.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Okay. So the next question is from Andreas Heine, MainFirst. We will then have Sebastian Bray and Laurent Favre. So now it's Andreas Heine, MainFirst.

[Andreas Heine, Managing Director]

The only one question then on the outlook. At least in my forecast, given the high base of Q4 2017 at the low end of the guidance range you've given, how comfortable are you with your guidance? And what should not happen that you stay within your guidance in Q4?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Yes, I mean, if you look on the mathematics then, basically we have now -- we are basically now 6.5% below the level of Q3 2017. If you look on the businesses, I think Hans alluded on the agriculture situation. We said this also last time, and I think if you see on the price development, everything we still expect that there will be a gradual improvement in the PP and in the Functional & Materials Solutions segment, that they could accelerate in the fourth quarter that will be certainly upset or offset by a decline in the Chemicals arena because we have also to compare here against a very, very strong Q4 driven by the isocyanates. So if we expect, and that's what we expect, that the Q4 will be certainly lower than last year's Q4 but still reasonable, then we are still in our budget guidance. And that is actually what we also confirm today. That is our expectation, that Q4 will be weaker in '17, but it is still for the whole year in the guidance. That's why we do not correct anything because that is what we currently can see. I think Hans alluded on the situation of the auto industry. We have in the outlook also only particularly taken reference to the auto industry. We did not talk about other industries because we cannot see in the moment significant downturn on the other industries. It is really very much on automotive in the moment. So with all these effects, which we -- which I just talked about, we still think from today's point of view that we are in the guidance.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Now it's Sebastian Bray from Berenberg.

[Sebastian Christian August Bray, Analyst]

I will just have one, please. There seems to be across the value chain in Chemicals a tendency towards higher raw material costs. And I'm thinking in particular of power and carbon pricing, particularly in Europe. Does BASF think of higher carbon prices, and they've more than doubled this year, in 2018 and 2019 as a particular headwind? And any idea of quantification as far as you can give it would be helpful.

[Hans-Ulrich Engel]

Yes, Sebastian, thank you for your question. This is Hans. We certainly experienced higher raw material prices, obviously not only driven by carbon prices. You referred to power, interesting situation there. Not only the river level of the Rhine is low, but also there was less power generated by renewable than what was expected. And that led to high power prices in Q3. We have overall raw material cost increase in Q3, which was predominantly driven by oil price. Keep in mind, roughly 2/3 of our raw materials are hydrocarbon-based. We've seen an increase in raw material prices in Q3 order of magnitude 13% to 14% that we had to cope with, power more expensive. But then at least in Germany, we produce a lot of the power ourselves. But the gas prices have also increased significantly. So that plays a role there. The CO2 certificates have moved up in price from EUR 8 to, I think, yesterday they were slightly below EUR 20. That's also a cost driver. But please understand, I will not give you a specific figure on CO2 certificates and what kind of cost that means for competitive reasons.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

The next question is from Laurent Favre, Exane.

[Laurent Guy Favre, Research Analyst]

The question is really regarding the strategic review. Should we take today's announcement on Construction Chemicals as the result of the overall strategic review in terms of portfolio, that is? Or should we expect more, especially regarding Performance Products? I was a bit surprised that you talked about the challenges of running Construction Chemicals in terms of small quantities and complexity of the portfolio, given that this is exactly what We Create Chemistry was about. And I guess, in performance, there have also been assets where you have had some challenges.

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Laurent, I think this announcement about Construction Chemicals, I think it fits totally in the line what we have done so far. And I think you know also our [ chart which ] in the equity story that we are pretty active in terms of acquiring and divesting. And it's just one more thing we want to do. And I think if you put it in line water chemicals on one hand and then you saw leather and textile in the past, now you see with windows high, now EB comes. I think it just shows that we continuously put all these portfolio parts on the block and review them continuously. And if there is an opportunity and if we come to the conclusion that the business could be maybe better outside of BASF and we do a value-enhancing step by following such an opportunity, then we will do. So I think it is a consistent [ rigor ] and you should expect also that going forward. On the other hand, I think all over the measures which we will take in place to reposition and position better BASF in the future, that is what Hans and I are going to tell you all on November 20. So I will not take anything on the measures now today. But yes, you expect that we have done, I think, a good portfolio job in the past. And we continue step-by-step in looking into this. So you should not see any policy change at the point of now and just maybe have a little bit of patience until November 20.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Okay. So now we have 3 more on the list. [Operator Instructions] It's, first, Peter Clark, then Chetan Udeshi, then Markus Mayer. So now Peter Clark, Societe Generale.

[Peter Anthony John Clark, Senior Analyst, Chemicals]

Very quickly on the functional solutions and the raw material trends. I mean, it looks like Performance Materials has gone over the hump with the isocyanate price coming back. I think see that Coatings is obviously under a lot of pressure a bit like, I guess, in the OEM, you're under pressure there on the auto side, in particular, also in Construction Chemicals. Just wondering when you see the inflection point now for the segment as a whole on the raw material side against pricing, will it be Q1 next year, do you think? Or let's see?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Well [ agree and so ], I mean, first of all, let me really repeat. I think on the pricing side, we have done a good job over there now in several quarters. Yes, I think you're right. You mentioned the 2 major points here, Coatings and also Performance Materials as the 2 ones who feel that pressure. I think that they will continue on that path in Q4. And with this I think we will come up also with the earnings, that is what is part of our expectation for Q4.

[Peter Anthony John Clark, Senior Analyst, Chemicals]

Okay. And you said the inflection point, you think, is early next year, hopefully early next year?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

Well, I mean, as I said, I think we continuously improved our position here over the recent quarters. We have also closed the gap basically and with this it just continues in that respect. And yes, it's the higher raw material costs, which comes in. And that should come also at a certain point to an end that we get more margin and a better pricing power.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Now it's Chetan Udeshi from JPMorgan.

[Chetan Udeshi, Research Analyst]

Just two quick ones. One, on Monomers, you've talked about lower sales volumes in the isocyanates business. Can you explain why were your volumes lower, given that I believe you are now ramping up your new TDI plant in Germany? That's number one. And number two, just looking for full year now and Q4, you still say slight, which is really now up to 10% decline? Do you have any specific number that we should be thinking in mind for full year now, given that first 3 quarters are already reported? And when you look at the historic seasonality in your business, Q4 is down quite significantly versus Q3. So is there a reason why this time Q4 is going to be different from the usual seasonality?

[Martin Brudermüller, Chairman of Management Board, CEO & CTO]

There's no more information on that one than I gave already on the question of Andreas. You know also the wording of slight and significantly. And you see the wording we have, we keep the guidance. And this is why we think the mathematics goes in this direction. On the sales volume of isocyanates, I mean, if you have a situation like this, where the prices for TDI and MDI in all regions go down relatively steeply, you play in your policy, the role between volume and margin. And that is something every customer, every producer does differently. And it depends also on your customer portfolio. And for us, it's the situation that this is the best maximum value optimization situation we do. And the second part, you already know that it's the TDI plant here in Ludwigshafen, we also have some restrictions with the Rhine in the moment. So that is the best way to guide that business for us in the moment.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Okay, now the final question from Markus Mayer, Baader-Helvea.

[Markus Mayer, Lead Analyst of Chemicals]

On construction chems again, given your strong position at admixtures but your preference to combine your business with a strong partner, are there any antitrust issues at admixtures? Is there any other players? Or do you think that should be -- will play out well to combine this business with anyone else?

[Hans-Ulrich Engel]

Yes, difficult to answer, Markus. We are at the very beginning of the process. You look at the competitive environment. And could there be issues in certain combinations? Yes, there could be. And in others, there are none. I'm sorry, there's not much more that I can say at this point in time.

[Stefanie Wettberg, Senior Vice President of Investor Relations]

Ladies and gentlemen, this brings us to the end of our conference call. We hope to welcome you at our Capital Markets Day in Ludwigshafen on November 20. If you have not sent the completed registration form back to us yet, please do so at your earliest convenience. The deadline is actually today. Should you have any further questions, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and goodbye for now.