BASF Se

Stefanie Wettberg - Head, IR Kurt Bock - Chairman, Board of Executive Directors Hans-Ulrich Engel - CFO

James Knight - Exane Paul Walsh - Morgan Stanley Andreas Heine - MainFirst Andrew Benson - Citi Jeremy Redenius - Bernstein Laurence Alexander - Jefferies Martin Roediger - Kepler Cheuvreux Tony Jones - Redburn Peter Clark - Societe Generale Laurent Favre - Evercore Andrew Stott - UBS Patrick Lambert - Raymond James Jamie Wang - Nomura

Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the fourth quarter and full year 2016 results.

With me on the call today are Kurt Bock, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, Chief Financial Officer. Kurt will explain the financial performance of BASF Group in the fourth quarter and the full year 2016 while Hans-Ulrich will present the segment results and financial figures of the fourth quarter in more detail.

Kurt will conclude by providing BASF outlook for 2017. Please be aware that we already posted a longer version of the speech on our website at basf.com FY 2016.

With this, I would like to handover to Kurt Bock.

Yes. Thank you, Stefanie, and also welcome ladies and gentlemen from my side.

Welcome to our conference call and thank you for joining us. Today, we will provide you with the fourth quarter and full year 2016 results and the outlook for 2017.

Overall, the finish of 2016 was much better than the start. We gained considerable volume momentum in the course of 2016 and improved our earnings in the chemicals business year-on-year in every single quarter.

We knew that earnings in Oil & Gas would be significantly below 2015 due to the lower oil and gas prices as well as the asset swap. However, Oil & Gas achieved a positive free cash flow despite very difficult market circumstances.

Markets developed pretty much as expected. In Europe, the market showed moderate growth.

However, the development differed substantially from country to country. In Asia, the upward trend since the end of Q1 2016 continued in the fourth quarter.

Economic growth in China was lower than in 2015, but slightly higher than we had expected at the beginning of last year. Market demand in North America grew at a slightly lower rate than we had assumed, especially in the first half of 2016.

However, consumer confidence increased significantly in November and December. We saw continued positive momentum in the automotive and construction industries.

The economic development in South America was again weak and business confidence continued to be low. Brazil remained in recession.

Let me now address BASF’s business performance in Q4. Sales in Q4 increased by 7% to €14.8 billion.

This was mainly due to higher volumes. For BASF Group, as well as for our chemicals business, which comprises the Chemicals, Performance Products and Functional Materials & Solutions segments, volumes rose by 6%.

Sales prices increased slightly by 1%. Currency and portfolio effects were both flat.

EBITDA before special items increased by 10% to €2.3 billion. EBITDA rose by 31% to €2.5 billion.

Income from operations before special items came in at €1.2 billion, 15% higher than last year. Considerably higher earnings in Chemicals, Functional Materials & Solutions and Oil & Gas more than compensated for lower earnings in Ag and Other.

At €1.3 billion, earnings in our chemicals business increased by more than 50%. Special items in EBIT amounted to plus €47 million.

The disposal gain following completion of the sale of our industrial coatings business more than compensated for expenses related to restructuring and other measures. In the prior-year quarter, which was burdened by impairment charges in Oil & Gas, special items in EBIT amounted to minus €698 million.

EBIT increased from €325 million to €1.5 billion in Q4 2016. Income taxes amounted to €264 million, compared with a tax income of almost €250 million in the prior-year quarter, resulting from the impairment charges in Oil & Gas and the dissolution of tax provisions.

In Q4 2016, the tax rate was 26.5%. Net income doubled to €689 million.

Reported earnings per share increased by almost 40% to €0.75. Adjusted EPS amounted to €0.79; this compares with €1.01 in the prior-year quarter.

Operating cash flow increased by €925 million to €1.9 billion in Q4. Payments for property, plant, equipment and intangible assets were down by 14 % and amounted to €1.2 billion.

Thus, free cash flow came in at €647 million. Let me now briefly comment on the full year 2016.

The global economy grew moderately in 2016 with regional differences. While growth in emerging markets was almost stable, growth in developed markets suffered from the dampening effect of the U.S.

economy at the beginning of the year. Overall, growth of the global economy and chemical production matched our expectations for 2016.

Sales of BASF Group declined by 18% to €57.6 billion. The divestiture of our gas trading and storage business at the end of September of 2015, as well as lower oil and gas prices were the main reasons for this decline.

During the first nine months of 2015, the divested Oil & Gas activities generated sales of €10.1 billion. The average price for Brent crude in 2016 amounted to $44 compared to $52 in 2015.

As a result of lower raw material prices, sales prices declined by 4%. At minus 1%, currency effects had a slightly negative impact.

Volume dynamic increased over the course of 2016. For the full year, volumes were up by 2%.

In our chemicals business, volumes increased by 4%. Volumes in Asia were up by 5%, particularly driven by China, where volumes increased by 12% compared to the prior year.

At €10.3 billion, EBITDA before special items was 2% lower than prior year. EBITDA almost matched the level of the prior year and amounted to €10.5 billion.

EBIT before special items declined from €6.7 billion to €6.3 billion. Higher earnings in the chemicals business, driven by Performance Products and Functional Materials & Solutions, were offset by lower earnings from Oil & Gas.

Special items amounted to minus €34 million compared with minus €491 million a year ago. In 2016, special income from several divestitures could compensate for expenses related to restructuring measures.

As a result, EBIT was on the previous year’s level of €6.3 billion. At €1.1 billion, income taxes were around €100 million lower.

The tax rate decreased from 23% to 21%. Net income came in at €4.1 billion compared to €4 billion in 2015.

Reported earnings per share increased from €4.34 to €4.42. Adjusted EPS were €4.83, €0.17 below 2015.

Operating cash flow decreased from a record high of €9.4 billion to €7.7 billion in 2016. As a result of our measures to reduce net working capital, operating cash flow in 2015 had significantly benefited from onetime effects.

Thanks to our strict capital expenditure discipline, free cash flow amounted to €3.6 billion and was at the level of 2015. Ladies and gentlemen, we are committed to our policy to increase our dividend each year, or at least maintain it at the previous year’s level.

We will propose to the shareholders’ meeting to pay out a dividend of €3 per share, an increase of €0.10 or 3.4%. Based on the share price of €88 at the end of 2016, we are offering an attractive dividend yield of 3.4%.

We continue to invest in future growth. With the completion of several large projects, capital expenditures were reduced by €1.3 billion to €3.9 billion in 2016, compared to the €4.2 billion forecast we had given one year ago.

In our 2017 to 2021 CapEx plan, average annual capital expenditures will remain at the level of 2016. Let me highlight a few recent developments, On December 14th, we completed the acquisition of Albemarle’s global surface treatment business, Chemetall.

Through this acquisition, our Coatings division expands its portfolio and becomes a complete solutions provider. BASF combines its know-how in chemistry and coatings applications with Chemetall’s market-leading expertise in surface treatment.

The combined businesses benefit from each other’s global footprint, scale and market access. Also on the very same day, December 14th, we completed the sale of our industrial coatings businesses to AkzoNobel.

The transaction included technologies, patents, trademarks, as well as the transfer of dedicated production sites. In early November, we announced our plans to globally invest more than €200 million in our plastic additives business during the next five years.

Approximately half of the amount will be invested in Asia. With this investment, BASF will further strengthen its plastic additives business to meet the growing demand for antioxidants and light stabilizers.

In mid-November, we announced our intention to increase the capacity of our North American MDI production. The capacity at our Verbund site in Geismar, Louisiana, will be increased in a stepwise manner, from 300,000 metric tons per year to around 600,000 metric tons per year.

I will now hand over to Hans, who will give you some more details regarding the development of our segments.

Thank you, Kurt. Good afternoon, ladies and gentlemen.

Let me highlight the financial performance of each segment in comparison with the fourth quarter of 2015. In Chemicals, sales increased considerably.

This was driven by higher volumes and prices, reflecting the increase in raw material prices and partially tight markets. Margins went up especially in isocyanates and cracker products.

EBIT before special items more than doubled compared to a weak prior-year quarter and came in at €635 million. Special items of minus €86 million were mainly related to restructuring measures, especially in the caprolactam value chain in Europe.

Sales in Performance Products declined slightly. Volumes and prices were flat.

Slightly positive currency effects could not compensate for negative portfolio effects. EBIT before special items rose considerably in the Nutrition & Health and Care Chemicals divisions.

Overall, EBIT before special items increased slightly, supported by improved margins. Sales in Functional Materials & Solutions grew significantly, driven by higher volumes.

Demand from the automotive industry remained high, while we saw only a slight volume increase in our construction-related businesses. Slightly lower prices negatively impacted sales.

Volume growth, a favorable product mix and continued cost discipline contributed to the considerable increase in EBIT before special items The Agricultural Solutions segment continued to face challenging market conditions in the fourth quarter of 2016. Nevertheless, we were able to increase volumes and significantly grow sales.

Lower prices were more than offset by positive currency effects, mainly from the appreciation of the Brazilian real. However, EBIT before special items decreased considerably due to higher fixed costs, partly resulting from new or expanded production facilities, for example for the herbicide dicamba.

In Europe, sales fell due to lower volumes in the fungicide business as a result of slower demand, mainly in France. Sales increased considerably in North America driven by higher volumes in our herbicide business.

Despite the ongoing difficult macroeconomic environment in South America, we increased sales in the region. Higher volumes in fungicides, boosted by our recent launch of the new fungicide Ativum, were the main reason.

Higher herbicide volumes and positive currency effects also contributed to the sales increase. We raised our sales in Asia, thanks to sales growth in India, Japan and China.

Positive currency effects contributed. Despite the continuing low prices for crop commodity products and challenging market conditions, the Agricultural Solutions segment showed a solid performance in 2016.

Full-year sales slightly decreased to €5.6 billion due to lower volumes and currency headwinds. At €1.1 billion, EBIT before special items was on prior-year level.

The EBITDA margin reached 23.4%, compared with 22.7% in 2015. Sales in Oil & Gas increased significantly due to higher volumes and prices.

In Q4 2016, the average price of Brent crude was $49 per barrel, $5 higher than in the same period of 2015. Gas prices on the European spot markets were on the level of the prior-year quarter.

Volumes rose by 23%, in particular due to higher production in Libya, Norway, Russia and Argentina. In the fourth quarter, we had a full offshore lifting in Libya, while in the same period of last year, we only incurred a shared lifting.

The combined price and currency effect was plus 3%. Overall, EBIT before special items increased from €127 million to €163 million, supported by higher volumes and prices as well as strict cost management.

Net income in Oil & Gas increased from minus €184 million to plus €182 million. Last year’s net income was burdened by the asset impairments already mentioned.

As targeted, we were able to generate a positive free cash flow in Oil & Gas in 2016. Then we get to Other.

EBIT before special items in Other declined to minus €386 million, down from minus €114 million. This was mainly driven by a swing of around €200 million related to our long-term incentive program.

While earnings in Q4 2016 were negatively affected by an increase in provisions, the prior-year quarter benefited from the release of provisions for the LTI program. With that to our full-year cash flow.

In line with our expectations, cash provided by operating activities decreased from a record high of €9.4 billion to €7.7 billion. In 2015, the operating cash flow significantly benefited from the one-time effect caused by our measures to reduce net working capital.

In 2016, changes in net working capital led to a cash inflow of €104 million compared to €1.3 billion in 2015. Cash used in investing activities increased from €5.2 billion to €6.5 billion, mainly as a result of the Chemetall acquisition.

Payments made for property, plant, equipment and intangible assets decreased by €1.7 billion to €4.1 billion. At €3.6 billion, free cash flow matched the high level of 2015.

Cash used in financing activities amounted to €2.2 billion in 2016. We paid €2.7 billion in dividends to our shareholders.

Around €100 million were paid to minority shareholders in 2016, compared to about €230 million in 2015. Finally, let’s take a look at our balance sheet.

Total assets increased by €5.7 billion to €76.5 billion, mainly as a result of the acquisition of Chemetall. Long-term assets were up by €4.3 billion.

Intangible assets increased from €12.5 billion to €15.2 billion, especially due to the Chemetall transaction. The value of tangible fixed assets increased by €1.2 billion to €26.4 billion, driven by additions to property, plant and equipment related to our investment projects and due to currency effects.

Short-term assets amounted to €26 billion compared to €24.6 billion at year-end 2015. While inventories were almost stable, accounts receivable increased by €1.4 billion, mainly due to higher sales in Q4 2016 as well as currency effects.

On the liability side, long-term debt increased by €3.6 billion to €28.6 billion. This was particularly attributable to higher provisions for pensions and similar obligations.

As a result of the lower interest rates, they increased by €1.9 billion compared to December 31, 2015. Compared to September 30, 2016, however, provisions for pensions and similar obligations were down by €1.7 billion.

Financial debt increased by around €1.1 billion to €16.3 billion following the issuance of bonds to finance, among other things, the acquisition of Chemetall. Net debt amounted to €14.4 billion, an increase of €1.5 billion compared to year-end 2015.

The net-debt-to-EBITDA ratio is 1.4. Our equity ratio remained at a healthy level of 42.6% at the end of 2016.

And with that, I turn it back you Kurt.

Thank you, Hans. Let me now come to our expectations for 2017.

As always, I will explain our assumptions for the macroeconomic environment, BASF’s priorities and our outlook for sales and earnings. Let me start with the macroeconomic assumptions for 2017.

We expect a volatile macroeconomic environment to persist and regard political risks to be higher than last year. With 2.3%, we assume that the global economy will grow at the same rate as last year.

We expect that growth in Europe will slow down compared to last year. Growth in the U.S.

will likely increase slightly. Asia Pacific will continue to grow.

However, we expect growth rates to slightly decline due to lower economic momentum in China. In South America, recessions in Brazil and Argentina will likely come to an end.

We anticipate global chemical production to grow at 3.4% and thus at same rate as last year. We assume an average oil price of $55 per barrel and an average exchange rate of $1.05 per euro.

Given the uncertain macroeconomic and political environment, we will continue to focus our efforts on areas we can directly influence. Our priorities remain unchanged.

Our commitment to research and development is core to our strategy. Innovation will contribute to the achievement of our growth targets.

R&D expenditures will remain on the high level of prior years. We target to increase the efficiency and effectiveness of our R&D activities.

We are also evaluating and applying new technologies to accelerate the development process and realize new ideas for a sustainable future. Investments will further support our organic growth.

We target to maintain the 2016 CapEx level also this year. For the next five-year period, 2017 to 2021, we plan total investments of €19 billion.

We constantly evaluate M&A opportunities and prune measures to further optimize our portfolio. Our M&A criteria remain unchanged.

We will continue to strongly focus on cost discipline and operational excellence and thus on self-help measures. In 2015, we have initiated our operational excellence program DrivE.

With this program, we want to achieve additional earnings contributions of around €1 billion from the end of 2018 on. The earnings impact from the end of 2016 amounted to €350 million.

Our restructuring program in Performance Products is on track to achieve the targeted earnings contribution of €500 million by the end of this year. At the end of last year, we have reached roughly €400 million already.

Based on those assumptions for the economic environment and our priorities, we provide the following outlook. We expect BASF Group sales to grow considerably in 2017.

This will be supported by slightly higher sales in Performance Products segment and by considerable increases in the other segments. And to make it quite clear, growing considerably in sales means above 5%.

We want to slightly raise EBIT before special items compared with 2016. We anticipate considerably higher contributions from the Oil & Gas segment.

In the Performance Products, Functional Materials & Solutions and Agricultural Solutions segments, we assume EBIT before special items will be slightly higher, while the contribution from the Chemicals segment should match the prior year level. Slight increase means by the way up to 10% improvement.

BASF Group EBIT is also expected to grow slightly in 2017. A significantly higher contribution from the Oil & Gas segment and slight increases in the Chemicals, Performance Products and Agricultural Solutions segments are expected to more than offset the slight decline in the Functional Materials & Solutions segment.

In 2016, that segment contained special income from divestitures. We strive to once again earn a significant premium on our cost of capital.

However, BASF Group EBIT after cost of capital will probably decrease due to higher cost of capital, mostly from the acquisition of Chemetall at the end of last year. So far the momentum in Q4 and Q1 has been good and healthy.

We are quite confident that BASF will have a good first quarter 2017. The last slide summarizes our forecasts for the development of EBIT before special items for the segments.

As mentioned before, all segments are up; Chemicals reflects the certain uncertainty and volatility and also the base effect of very strong earnings in Q4 of last year. As always, additional information is available in the BASF Report 2016 that was published today.

And now, Hans and I are glad to take your questions.

I would like to open the call for your questions. [Operator Instruction] The first question comes from James Knight of Exane.

Please go ahead.

Yes. Thanks for taking my questions.

A couple around the Chemicals segment outlook for 2017. You just talked about the uncertainty and volatility, also -- we can see also the year ended very strongly and probably started very strongly.

With the guidance of flat EBIT, clearly you’re pointing to some normalization through the year, probably in the second half. How concentrated is that risk, or is it more of a general concern, perhaps what’s happening in China, perhaps with that U.S.

capacity coming on streaming? I guess the second part, looking more specifically, I noted in the annual report in the outlook statement, you talk about strong competitive pressures in products including isocyanates.

I mean, how much of a potential normalization of MDI, TDI in the second half from superheated levels at the momentum do you feel or it’s baked into that outlook? Thank you.

I think Chemicals is the most critical segment in terms of providing guidance here. What we said is we want to match last year’s level.

Quite clearly, that is almost impossible mathematically because it really means plus or minus 1%. And we all know that in Chemicals, given the volatility and supply demand dynamics, there is certain unpredictability.

So, our goal is certainly to have earnings higher and above last year’s level. However, as you said, we have a certain base effect from a very, very strong Q4, so good results in petrochemicals but also in what we call monomers, and monomers, in this case especially isocyanates.

Your question is how concentrated this is really. Clearly, isocyanates, we have enjoyed.

I think that’s right for us. We have enjoyed very, very good margins in Q4.

This continues going into Q1. But frankly, it’s very, very hard to predict whether this will continue in the second half of 2017.

And against I think that background, we chose to have this from your point of view, mostly likely little bit too cautious statement earnings at last year’s level. Nobody actually knows what’s going to happen in the second half of this year.

There is new capacity coming on-stream; so far demand is healthy, continues to be healthy; and petrochemicals and monomers run very nicely. In intermediate, the third division of that segment, we have a couple of issues.

One is the margins in BDO our weak. Maybe they’re bottoming out, but they are weak and not really satisfying.

And secondly, we have a couple of turnarounds coming up, especially in that segment in 2017, which might also play a role. So, this is by and large our explanation.

Just a quick follow-up. Do you have any view on the likely phasing of the new crackers that on stream in the U.S.; are you assuming there is any delay into 2018?

That is very hard to say, because in most cases, these announcements are made on very short notice. And we have no special insight or special view on that one.

As you know, we run one cracker Port Arthur, and that is essentially our exposure to the cracker business and that cracker again is predominantly for captive use.

The next question comes from Paul Walsh, Morgan Stanley.

Thanks for taking my two questions. The first one is on China.

Kurt, I don’t maths are correct. I think you said volumes grew in China by about 12% last year.

And if my memory serves me correct, it is about a €5.6 billion business for you. When I run the math, it’s really sense checking thing, it feels like China represents about half of the incremental volume growth that you saw last year, both over the year as a whole and obviously the acceleration in second half.

I wanted to know if that math resonates with you, number one; and where do you see the up or downside risk to repeating that in 2017? And my second question, just to come back to the polyurethanes channel.

I’m sorry for that. I know it’s only one of your many businesses.

But, would you concede the outage situation last year helped boost profit? And assuming everything runs, what are your views on MDI and TDI?

Are those markets in balance; are they oversupplied; are they undersupplied? Because we’re getting messages depending on whom we speak to on that?

Yes. Hi, Paul, thanks for the questions.

China, yes, we had very positive growth development. We have a strong and big exposure to the automotive industry, and automotive industry developed very nicely last year.

We’re a little bit more cautious with regard to automotive growth in China for 2017, but it will continue to grow, which is important, and we most likely will also be able to increase our share, which is more important. I’m just trying to do that math in my head.

Yes, it plays an important role, 12% on roughly 10% of sales, that really translates into half, half of our volume growth. I would say most likely, it is a lower share than what you had calculated here.

But it plays an important role. And certainly going forward, Asia is supposed to continue to be a growth engine for BASF.

Polyurethanes, yes, we had some outages last year including BASF and TDI, as you know. We have been able to use our global network, products network to deliver to our customers, and we continue to run our operations in side and in Schwarzheide, in the eastern part of Germany, that’s mitigating the effects.

It is very difficult to predict what’s going to happen in that industry because there is a certain likelihood that you will have trips and capacity is not available. We have seen this again and again across all competitors.

There are better years and worse years with regard to this type of asset, what we call asset availability. Our goal is certainly to improve in that respect.

We also know that new capacity will come on stream over the course of this year. We don’t know the timing, the exact timing; I have no insight on that one.

Overall, the markets are growing nicely. Growth is essentially above GDP, 1 to 2 percentage points, which is not too bad.

But clearly, this is a supply-demand driven business, and that is one reason why I was so -- why we have been so cautious with regard to guiding for chemical earnings in 2017.

Understood. And just quickly, is TDI Ludwigshafen and Chongqing MDI, are they both now back in line with expectations or are you still seeing some reduced outputs at those facilities?

MDI Chongqing is developing; as expected, we cannot run at full capacity because we have constraints on the raw material side. One of our partners has a bottleneck, and we are working on that one.

But it was a very positive good growth story in 2016. Our TDI plant in Ludwigshafen is still idle, as we speak.

We have to do some repair work. We want to bring it back within the next couple of weeks.

And for the time being, we are bridging risk volumes from our plant in Schwarzheide.

So, now, it will be first Andreas Heine, then Andrew Benson and then Jeremy Redenius. Now, Andreas Heine, MainFirst, please go ahead.

I’d like to ask also on the outlook. If I take your sensitivity for the U.S.

dollar and your outlook for the U.S. dollar and the same for the oil price and the sensitivity even at Chemetall, consolidation and taken the normalization of the gas production at [indiscernible] into consideration, I would end up already with these factors to almost 800 million, which is already more than double-digit increase.

And that does not take into consideration what the others line most likely will normalize and that the impact on the interruptions you had in Q4 from the Ludwigshafen that also most likely impact mainly in 2016. Could we ask a little bit why these factors are not enough to make you optimistic enough that the earnings increase double-digit?

Okay, Andreas. I know you want to hear from me 10 reasons why everything that is said is not correct, right?

I think what you have done here is fair and not unrealistic. You have to put probabilities behind some of those events.

And what we are doing here is essentially that we are saying we have very limited visibility with regard to the second half of 2017. I think actually nobody really knows what’s going to happen.

And I mentioned in my little speech, the geopolitical risk and external effects as all of this might happen. And for those reasons, we’ve just thought it’s prudent to guide the way we have done.

And once again, I said during my little speech, this means upto 10%. And then, if you take this 10%, you are not that far from the 800 million you had mentioned.

Then, there is a certain level of uncertainty as you all know.

But, if basically this is slight increase, you look more to the really upper end of this range, so the 10%. Is that fair?

That is a correct statement. Yes.

Okay. So, the next question comes from Andrew Benson, Citi.

Yes. Thanks very, very much for that, and perhaps just really a little bit more on -- taking on from Andreas’ questions, you’ve got another €150 million of costs, which occurred in 2016 with Gazprom, which won’t recur.

We talked about a couple of hundred million start-up cost last year, presumably that’s little bit down as well with the cost reductions, and who knows what, but the long-term incentive plans. If you assumed then that in a market conditions that continue, I know there is geopolitical risks, and there is always and risks and everything but if you think the current trends continue, what sort of upside could you be talking about into the second half, or are you just giving that forecast simply to be cautious, I mean that the things got more difficult?

That’s a first question. And the second, on the oil and gas, can you just remind us when the gas Achimgaz production starts to have an impact?

Thanks.

If I would just go by the Q1 and what we see right now and the momentum also in terms of volume, there might be a reason to be a little bit more optimistic for the entire year. But again, I’m coming back to what I said earlier on, we don’t know what’s going to happen in the second half of 2017 and for that reason, we simply think this is a prudent forecast from today’s point of view.

Yes, there is always possibility that all things move in a right direction and everything develops nicely, but experience also tells us, you will always get hit from one side or the other, and sometimes in an unexpected way, and I think this kind of uncertainty we try to incorporate in our forecast. Hans, do want to talk on Achimgaz?

Sure. Achimgaz 1A, Andrew, fully in line with what we said, currently producing out of 80 plus wells.

Field’s being developed, target to be reached in the first half of 2018, will be 110 wells. So, perfectly in line with what we had planned there.

I assume when you ask Achimov, you may also include in your question 4A and 5A. On that, current plans are start-up in the first half of 2020.

And that’s a change to which we said originally because originally we expected this to start up towards the end of 2018. So, there is a slight shift there, taking into consideration market developments.

So, the next question is from Jeremy Redenius, Bernstein. Please go ahead.

Firstly, I was looking at cash flow in the fourth quarter, specifically before changes in working capital. It looked relatively weak in Q4, down quite a bit year-over-year.

And I’m wondering if there is anything in particular that was holding back the cash flow before changes in working capital compared to the EBITDA development in the quarter. And then, secondly, you made a comment about Europe slowing in your outlook for 2017.

I’m curious to hear more detail behind it; are there particular geographies within Europe that concern you or any end markets that you see slowing down? Thank you.

Hi, Jeremy; maybe I’ll with the macro question and then Hans can also cash flow answer. Europe slowing down, to be little more precise, we expect something like 1.3% growth in Europe that compares pretty much with 1.5% consensus.

So, you might say we are little more conservative; this reflects certain uneasiness about what we see in some countries. Retail spending slowing down in the UK; there are certainly risks in the southern parts of Europe.

Maybe, we are here on the conservative side, maybe not. So far, the start of the year and the economic indicators we see going into 2017 would underline a slightly stronger development, but again, early development in 2017.

Jeremy, this is Hans. Not so sure that I am seeing the same developments that you are seeing.

So, our Q4 cash flow -- operating cash flow, if I look at this, that doubled compared to Q4 of the prior year. If I look at free cash flow, we were negative in Q4 of last year and we are positive to the tune of 650 million in the fourth quarter of this year.

So overall, I thought that looks from a cash flow perspective, pretty good.

Just to clarify, I was looking before changes in working capital specifically. So, it looks like, it went from 680 million free cash flow before working capital last year to about 150 this year.

There is a big working capital inflow -- outflow last year, cash flow at least last year that boosted last year’s figures?

Let me take a closer look there, and I’ll get back to you.

Okay. So, the next question comes from Laurence Alexander, Jefferies.

First of all, just a housekeeping question. How are you thinking about D&A and also the amortization that you will be excluding from adjusted EPS in 2017?

And secondly, on the oil and gas, can you give updated thoughts about reserve growth, both potential for partnerships in Iran, any thoughts there? But also just more broadly, how you are thinking about reserve growth for the oil and gas business?

I think both questions go to Hans. Depreciation and amortization adjustment for adjusted EPS in 2017, I don’t think we have an idea in 2017 what’s going to happen there specifically; and then oil and gas reserve growth and beyond.

Okay. On the oil and gas reserve growth, can you do me a favor; can you quickly repeat your questions?

Because I was still on Jeremy’s question with respect to the cash flow. So, would you help me there quickly again?

So, could you just give an update on how you are thinking about oil and gas growth on growing the reserves? Over the next several years, there has been I guess some headlines about discussions with Iran but also just the broader landscape?

Yes. Okay.

So, on the reserves, we currently at P/E ratio of 10 years; so that’s exactly where want to be. We want to be in this range of 8 to 10 years with respect to 1P reserves.

We have a nice position there, as I already alluded to with respect to Achimov 4A and 5A, which is currently in the development stage, which means that there should be nice additions coming there. Looking at our overall oil and gas prices, in 2015 and 2016, we’ve reduced exploration work to a certain extent, so not too much to be added there in the year 2017, but expect us to keep this range of 8 to 10 years, which we feel very comfortable with.

Your Iran question, there was also on oil and gas in Iran. So, what do we do there, in April of last year, we signed an MOU.

We are in very, very, very early stages of looking at data, mere desktop analysis that we’re doing at this point in time. And it remains to be seen what will happen there.

And, Laurence, with regard to adjusted EPS, we don’t foresee any changes with regard to depreciation, amortization compared to last year.

Okay. So, the next question comes from Martin Roediger, Kepler Cheuvreux.

Please go ahead.

First on the regional development, I saw that EBIT in Germany as well as North America decreased substantially in Q4. Is the reason the long-term incentive program or respective to Germany here, specific impact from the accident in Ludwigshafen, the reasons for this strong decrease?

And second question is on Care Chemicals. Can you provide us an update about the competitive situation in superabsorbents; do you see some light at the end of the tunnel?

And how would you make progress with your new technology in superabsorbents? Thanks.

Hans, do you want to start and then I do Care Chemicals.

Sure, I will start with Germany, you exactly hit the reasons. One is the long-term incentive program that sits almost exclusively at that point in time at year-end, on the books in Germany.

And the second is then obviously also the impact from the incident that we had in the North Harbor that impacted the results of Q4. So, these are the two explanations there.

You also asked with respect to the North America. North America, the decline in results there is driven by the decline in Cracker margin that we’ve experienced in 2016 and then also in particular in the fourth quarter of 2016 where actually the cracker margins, if you compare with the Europe and Asia, were the lowest in the U.S.

compared to the other two regions, while they were still quite strong in Q4 of the year 2015.

And Martin, with regard to Care Chemicals and more specifically superabsorbents, this has been a pretty nasty development over the last two years. Margins have come down.

There is obviously oversupply. Customers have been extremely price-sensitive, given supply-demand situation.

There is still good underlying growth in terms of 3% to 5%. However, there is simply too much capacity available, and we clearly see this also in our numbers and also see it in the volume development of the Performance Products segment in Q4, which was slight decline, which was essentially only due to superabsorbents.

And so, it had quite some impact. On our path forward, I think we have described, and you mentioned this is as a different technology; we call it [indiscernible] polymerization.

These palettes have higher capacity to absorb fluids much faster also; customers want it. We are building a plant in [indiscernible].

The plant is a swing plant, so we can do both, the old and the new quality. The new quality is as I said interesting.

But at this price, which is really interesting development, this price is now also based on relatively low problem prices. Again price sensitivity of customers is extremely high and it’s an easy technology, advantages, also in terms of branding and how do you position this.

But it will take some time to face these new products into the market.

Okay. So, the next question is from Tony Jones, Redburn.

After that, it will be Peter Clark, Societe Generale. So now, Tony Jones, please go ahead.

Good afternoon, thanks for taking my questions. I’ve got two.

The first one is on capital allocation. So, it looks like your CapEx guidance for the next four years is about 0.5 billion lower than guidance in 2016 and it also looks like the capital allocation to Chemicals is reducing whereas your allocating to more into the specialty divisions.

Can you talk a little bit about whether this is a sustained trend; and how you see the potential returns on organic growth versus acquisitions? And then secondly, just a short question on Chemetall and guidance.

Can you confirm if that’s all going to be absorbed in to Functional Solutions? And if that’s right, then my simple math suggests that your guidance for 2017 implies your base business doesn’t grow at all and potentially contracts.

Why is that? Thank you.

Yes. Thank you, Tony for your questions.

I think capital allocation first, yes, you’re correct. We have reduced the five-year plan by 0.5 billion to 19 billion, and there is a slight shift from chemicals to the downstream businesses.

This reflects current knowledge. Obviously, these plants are updated every year.

From today’s point of view, this looks sensible and sufficient to fuel organic growth for BASF. At the same time, it also brings capital spending closer to deprecation levels, which is one of our targets.

That would also then free up funds for, for instance M&A, which always has been one tool for us. We have done a little bit in 2016 with Chemetall, needs to be seen whether we find additional targets which are worthwhile to spend money for.

So, this is all speculation at this point in time, but we are certainly interested to add businesses, which fit strategically and create value for our shareholders. With regard to Chemetall, I am not aware that Functional Materials & Solutions would only grow due to consolidation effect.

I think our goal is to grow the underlying business as well. So, that should work out quite nicely.

That’s the way we see it. And certainly these businesses want to grow; that has been our budget discussion late last year.

Okay, thanks. I might come back on that because I see the guidance implying a different EBIT growth but maybe I am using some wrong assumptions.

I’ll come back later. Thank you.

Okay. So, now, it’s Peter Clark, Societe Generale.

Obviously more questions on overall guidance. I just want come down on the downstream divisions where obviously you have more control in daily.

[Ph] And I hear what you are saying about the second half entirely, no one knows where it is going. But just looking at Performance Products, obviously in the fourth quarter, there was no margin improvement year-on-year; first nine months you were running at 400 basis points.

The main mechanics you see working in there in 2017 because, I know you see an uplift in the fixed cost with the new plant starting up and you had a big year in 2015. So that’s an element; you’ve got raw materials but also lot of cost cutting still coming through next year from the program -- this year from the program you’ve done in pricing.

And then the second question is on Functional Solutions. Obviously Tony was touching on this, but the mix effect.

I presume the drag, because you are indicating a margin down, the main drag there is probably the effect of mix and automotive, so just want to check those two points on the two downstream segments. Thank you.

Yes. This is Hans.

I’ll address your Performance Products question first. Keep in mind, the seasonality that we have in that business, you look at the years 2013, 2014, 1205, you look at the fourth quarter that we have there, you always see the same patterns.

So, Q4 in Performance Products is the weakest quarter of the year; that is one thing. And the other thing that we have is Performance Products and Chemicals are the two segments that are affected by the incident in the North Harbor, and that is clearly to be seen in the results that we generate in Q4 with Performance Products.

Now Functional Materials & Solutions, we guide there for further profitable growth, as mentioned earlier by Kurt. Are there some uncertainties?

Yes, there are. Automotive grew strongly last year; for this year, we are a bit more cautious with respect to growth rates in automotive.

Reasons are the high volumes already reached in North America at rate of 17.5 million units, but we also have seen significant stimulus, in particular in China are coming out of the sales tax that was zero in the year -- reduced to zero from 10% in 2016. Now, they continue with partial stimulus; it’s now 5% on engines up to 1.6 liters.

And it remains to be seen, what kind of an impact that has overall. We think that we see slightly -- or slower growth in automotive in the transportation industry than what we have experienced in the prior year.

We also see that there is a slowdown in the construction business in the second half of 2016, in particular in the Middle East, which is strong part of our portfolio in construction chemicals. But taking all of these uncertainties, we still see further profitable growth in all Functional Materials & Solutions segment.

I was just saying, it was the guide -- it was more about the guidance of Performance Products, not Q4. I hear what you are saying but you’re obviously indicating no significant margin advance from Performance Products despite the cost cutting.

Obviously one of the drag is more fixed costs coming in with the start-ups, but just what the main mechanics were for that guidance of very little improvement on the margin if any in 2017 in Performance Products?

Keep in mind that we are in a situation where raw material prices have increased significantly. Currently, compared to Q1 of last year, if I look at the entire raw material portfolio, we have cost increase there of 41%.

Now, if you do margin calculation on a relative basis, that automatically will lead you on a percentage basis to a decline; but on an absolute basis and that’s what we really measure delta margins in euros and in U.S. dollars or whatever the currency is, we intend, fully intend to grow that business profitably also in 2017.

Thank you.

Maybe I’ll just add one comment with regards to Functional Materials & Solutions. Keep in mind that we also did some divestures last year.

So, you have take all the earnings from polyolefin catalyst and from industrial coatings and you do your math 2017 compared to 2016.

So, now, the next question comes from Laurent Favre, Evercore, and following him will be Andrew Stott, UBS.

Thank you for taking my one question on oil and gas. What I am trying to do is understand the outstanding leverage of that business on E&P, as we see increase in prices especially on the Brent side where I think you reduced exploration costs.

So, I think Hans, you just said that you were quite happy with exploration costs where they are -- where they were in 2016. So, does it mean that if we were to see oil and gas prices in a Brent about 55, your assumption for 2017, you would be quite happy to just take the incremental profits or would you likely be tempted to just reinvest into exploration to try and maintain your asset life through 10 years?

Thank you.

Laurent, good question. It remains to be seen.

When you look at our results that we generated with the oil and gas business in 2016, when you keep in mind that even in that year we were able to generate a positive free cash flow, you know that we pulled all levers that we could. We moved costs down wherever we could.

Depending on where the oil price is, I think I am willing to give my guys in the oil and gas, a little bit more leeway going forward.

So, now Andrew Stott, UBS, please.

I had a couple. The first is on China.

And just looking at your report and accounts, the JV that you consolidate, you show net income going from 64 last year to 332 on a fairly minimal sales increase. I am sure there are some one-offs.

So, I think very simply trying to get an idea of the -- I guess the context, the appetite in general. How clean are those numbers?

That’s the first question; it’s from the YPC JV? And then, the second one was just -- I am sorry, if I come back to it but guidance.

The circularity, I guess the circular reference that there may be in this guidance. If we assume that your too conservative on your chemical guidance, do you come back to the market and have to recalibrate on your down downstream guidance?

I mean, I am just getting back to your point, Hans, just now on the 41% increase in Performance Products for example in Q1. So just, if you can just educate us on the extent to which your guidance downstream is based upon a significant deflation in costs through the next 9 to 10 months.

Thank you.

Hi Andrew, this is Kurt. I start with circularity of -- assumed circularity of our guidance, and Hans will talk about China and the joint venture, whether numbers are clean or not.

I think I explained the assumptions which are the bases for our guidance. If we see over the course of the next couple of months that things move more positively, I think this would be a high-class problem and we will certainly be able to address, the guidance of the different segments are not completely independent from each other and so far as raw material costs play important role.

But again, I propose that we will revisit that question when we have a little bit more visibility with regard to the next couple of months.

And on your question on BYC, what do we have there? I mean we have a situation where, you’re absolutely right, sales increased small amount there; earnings increased significantly; margin expanded.

We’ve seen a nice margin boost there, in particular in the fourth quarter. And also please keep in mind that depreciation has come down quite significantly, because a lot of the plants that we still depreciate -- or some of the plants that we still depreciated into 2015 were more than 10 years old in 2016; as a result of that, depreciation dropped quite a bit.

And thus, I would say the numbers are clean.

The next question is from Patrick Lambert, Raymond James. Please go ahead.

A very quick question on oil and gas again, and trying to gauge 2017. If I look at the 2015 appendix in the annual report, some of the numbers of 2015 have unchanged versus what was reported last year.

I just want -- especially in [indiscernible] sales. I was just wondering if it’s the adjustment that you adjusted in the annual report or is there something else in there.

And what do we need to focus on in 2016, since I think it was a basically one-off over the past ten years? Thank you.

Yes. Patrick, this is Hans.

Right, we have some changes there in the numbers for 2015, due to changes in the standards. But, I think thinking about the audience for this call and how long it will take to walk you through that in detail, why don’t we schedule a separate call and I take you through that.

So, now, we have two more questions, one is from Jamie Wang, Nomura; and then, we will have a final follow-up question from Andrew Benson. So, now, please.

Jamie Wang, go ahead.

Good afternoon. Can you guys hear me?

Yes, we can hear you alright.

Okay. Thank you very much.

Yes. Since I’m chemical analyst based in Hong Kong, so my question is focused on the MDI and TD -- of MDI capacity expansion in China.

And what I understand is that in China, MDI’s demand growth actually stored in elsewhere in the world. So, I was just wondering why if you want to expand the capacity in Shanghai, to double your capacity this year.

And also would you consider expanding your capacity in Chongqing in the coming next few years? That’s my question.

Thank you.

Yes. Thank you for your questions, Jamie.

MDI, we have a joint venture in Shanghai and yes, there is a new plant being announced a couple of years ago and this has been under construction or there is new capacity coming on stream. In Chongqing, as I said before, we don’t plan additional capacity.

However, we still have a capacity available to be filled. What we have seen in 2016 is not a complete surprise that sometimes also asset availability is not where it’s supposed to be, so they are having some trips and some capacity not in our side but in the market was not available and that has certainly also led to a certain tightness in Asian isocyanates markets.

So, now, we have the follow-up question from Andrew Benson, Citi.

Thanks very much. I may have misheard or not heard at all, but can you just let me know, the total costs in the fourth quarter and the probable total for the first quarter the accident you’ve had and how you’ve allocated that?

And I presume a lot of that will be offset against insurance. I know you’ve accounted for that within the figures where you are going to take the insurance gain at some point in the future.

And then on the performance project, the raw material cost increase, because you’re talking about an increase in or slight increase in profits; you’re talking about having started very well and you’re also talking about a 41% increase in raw material costs. So, I know these aren’t necessarily intimately connected but can we imply from that you are having significant success in fairly aggressively and rapidly passing through those cost increases as we speak in the first quarter?

Thanks.

Yes. Andrew, this is Kurt, thanks for the question.

Hans will talk about raw materials. The accident, October 2017, the result or effect in terms of loss of contribution margin is something like a low double-digit number per month, and this continues going into 2017, since we have been not able to reestablish the entire supply chain operations.

There are still some bottlenecks, which essentially affect CPE, which is petrochemicals and some of the Performance Products businesses. So, we have had -- we have a deductable in our insurance and that deductable already was included in the 2016 numbers.

Apart from that, there is an ongoing discussion with the insurance company about how to account for this. And I think the final invoice will be done later this year.

Yes. Andrew, this is Hans.

On your raw materials question, keep in mind when we compare now, we find ourselves in a situation where in January of last year we saw the lowering oil price of $26 per barrel; we had a NAFTA price last year in January of 245, 248; oil price has doubled to, NAFTA price has doubled accordingly. We see this going through all value chains.

So, overall, what I said is when we look at January and February we find ourselves, overall with respect to raw material prices, in a range of roughly 40% increase over the prior year quarter, which apparently was very weak with respect to raw material prices. We have to pass raw material price increases on; there is no question about it.

And based on everything that I can see right now, we are quite successful in doing this. And the strong demand that we experienced in Q4, where we first experienced steeper raw material price increases, continues also, as Kurt mentioned, in Q1.

So, I hope that we can actually pass all the increase that we are seeing on.

Ladies and gentlemen, this brings us to the end of our conference call. BASF will report on its first quarter 2017 results on April 27.

Our Annual Shareholders Meeting is scheduled for May 12. Should you have any further questions, please do not hesitate to contact the members of the BASF IR team.

Thank you for joining us today. And goodbye for now.