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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining the third quarter 2019 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. 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 Opportunities and Risks on Pages 123 to 130 of the BASF Report 2018. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. And I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our Analyst and Investor Conference Call. Today, we will provide you with a comprehensive overview of our performance in the third quarter of 2019. On the call with me today are Martin Brudermuller, Chairman of the Board of Executive Directors; and Hans Engel, Chief Financial Officer of BASF. Please be aware that we already posted the speech on our website at basf.com/q32019. With this, I would like to hand things over to Martin.
Ladies and gentlemen, good morning, and thank you for joining us.In Q3 2019, we basically saw a continuation of the second quarter's business development. The trade conflicts between the U.S. and China had a continued negative impact. In addition, the uncertainties associated with Brexit reinforced the underlying trend towards an economic slowdown.Europe's export-oriented countries like Germany are particularly affected. However, the industrial growth in the U.S. is now also beginning to soften considerably. In China, industrial production continued to grow, albeit at a slower pace.Production in the global automotive industry again declined compared with the already low level at the end of the first half of the year. The decline compared to the prior year quarter, which was negatively impacted by the WLTP introduction in Europe, amounted to minus 1%.Let's begin with the volume development by segment. Compared to Q3 2018, sales volumes of BASF Group were overall stable. Despite the cracker turnarounds, we were able to stop the negative volume development we experienced since Q4 2018. Volumes still decreased considerably in the Chemicals segment and in Other. In Chemicals, the decline was mainly driven by lower volume available due to the scheduled cracker turnarounds. In Other, volumes declined -- decreased mainly on account of lower trading volumes. Excluding Other, BASF Group sales volumes increased by 1% compared to the prior year quarter. In Agricultural Solutions, we increased volumes by 21% due to the good start of the South American planting season. In Surface Technologies, Nutrition & Care and Industrial Solutions, we were also able to increase volumes.From a regional perspective, sales volumes by location of customer increased in the region South America, Africa and Middle East and in Asia Pacific. Volumes declined in North America and Europe.Let's now look on -- at our performance in Q3 2019 compared to the prior year quarter in more detail. We start with our sales development.Sales in Q3 2019 were slightly below the prior year level and amounted to EUR 15.2 billion. Due to the uncertainty in the market and the cautious ordering behavior of our customers, we did not experience a recovery in demand from key customer industries. Nonetheless, we were able to maintain BASF's sales volumes on the level of the prior year quarter. Prices decreased by 4% mainly driven by the Materials and the Chemicals segments. Higher prices in Surface Technologies partially offset the decline. Portfolio effects were overall flat. The positive effect related to the acquisition of Agricultural Solutions businesses compensated negative effects driven by the transfer of BASF's paper and water chemicals business to Solenis. Currency effects amounted to plus 2% and were mainly related to the appreciation of the U.S. dollar against the euro. All segments and divisions incurred positive currency effects.Let's move on to the earnings development. EBIT before special items came in at EUR 1.1 billion, 24% lower than Q3 2018. This was mainly driven by the considerably lower contributions of the Materials and the Chemicals segments. The sharp decline of isocyanate prices and the scheduled cracker turnarounds considerably weighed on earnings in these segments.In our downstream business, we saw a considerable improvement compared to the prior year quarter despite the challenging market environment. In Industrial Solutions, EBIT before special items increased considerably, primarily due to lower fixed costs in both divisions. In Surface Technologies, EBIT before special items rose considerably in all 3 divisions. In Catalysts, valuation effects in our precious metal trading business and higher volumes had a positive effect. In Coatings, we recorded higher margins and lower fixed costs. In Construction Chemicals, the increase in earnings was mainly due to price-related margin growth.In Nutrition & Care, EBIT before special items increased considerably due to the significantly higher earnings in Care Chemicals. This was supported by a contractual one-off payment in the personal care solutions business. Slightly lower earnings in Nutrition & Health due to higher raw material prices and fixed costs partially offset the increase.In Agricultural Solutions, EBIT before special items rose considerably, mainly as a result of increased sales. This was particularly due to the good start in the season in South America. Positive one-time effects also contributed to the earnings increase.In Other, EBIT before special items decreased considerably, largely due to valuation effects for our long-term incentive program. Wintershall Dea's earnings in Q3 2019 were reduced due to the decline in oil and gas prices. Additional depreciation and amortization from the fair value measurement of Wintershall Dea resulted in a slight negative earnings contribution.At the end of September, we announced plans to expand the integrated ethylene oxide and derivatives complex at our Verbund site in Antwerp. The total investment adds about 400,000 metric tons per year and will enable us to support the continuous growth of our customers in Europe. The investment is expected to amount to more than EUR 500 million. The sequential start-up is expected to begin in 2022.At the beginning of October, BASF announced a EUR 20 million investment in Quantafuel to jointly drive the chemical recycling of mixed plastic waste. Quantafuel is a specialist in production and purification of pyrolysis oil for mixed plastic waste. Together, we aim to further develop Quantafuel's technology to create an optimized recycle-based feedstock for chemical production. The investment underlines our commitment towards a sustainable use of resources and the development of a circular economy model for plastics.Last week, we announced that Abu Dhabi National Oil Company, Adani Group, Borealis and BASF signed an MOU to evaluate a collaboration for the establishment of a chemical complex in India. This is the next step of BASF's and Adani's investment plans announced in January 2019. With the inclusion of ADNOC and Borealis as potential partners, we intend to jointly invest in a world-scale PDH plant and thus leverage the technical, financial and operational strengths of each company. The total investment is estimated to be up to USD 4 billion. The partners aim to finalize the joint feasibility study by the end of Q1 2020. Production is intended to commence in 2024.With our active portfolio management, we are moving towards higher value and more focus. Let me briefly provide you with an update on recently agreed upon and ongoing portfolio measures.To further expand our position as a leading global supplier of engineering plastics, BASF signed an agreement with Solvay in September 2017. In January 2019, the EU Commission approved the acquisition subject to certain conditions, including the sale of Solvay's PA6.6 business in Europe to a third party. In August 2019, BASF, Solvay and Domo Chemicals agreed that Domo will acquire the European PA6.6 business from Solvay. BASF will acquire the global non-European PA6.6 business from Solvay, including its 50% stake at Butachimie ADN production. Subject to the approval of the relevant competition authorities, both transactions are targeted to close by the end of 2019. The purchasing price to be paid by BASF is EUR 1.3 billion.At the end of August, we announced that BASF and the fine chemical company DIC have reached an agreement on the acquisition of BASF's global pigments business. The purchasing price on a cash and debt-free basis is EUR 1.15 billion. The transaction is expected to close in the fourth quarter of 2020, subject to the approval of the relevant competition authorities.The structured process to divest our Construction Chemicals business is on track, so is the carve-out process. We received confirmatory bids and are now progressing with a smaller number of interested parties. We continue to expect signing of the transaction agreement before the end of this year.Let's now move to a brief strategy update. We are implementing our corporate strategy with full energy, passion and speed to deliver what we promised. We are in the midst of reshaping our organization and reducing complexity. We are streamlining our administration, sharpening the roles of services and regions and simplifying procedures and processes. Increasingly, we start to see cost-reduction effects in the P&L and we notice strong interest on the customer side in the changes and the new BASF.Here are some details. We have embedded significant parts of our functional services into our operating divisions. As of October 1, the embedding of around 20,000 employees was completed. We have defined a lean corporate center to support the Board in steering the BASF Group. As of January 1, 2020, around 1,000 employees will be working in these corporate units. This is less than 1% of BASF's workforce. The roles of the regions were sharpened to increase the customer focus and to support and enable businesses locally. At the same time, we are simplifying our process landscape and we foster an entrepreneurial performance culture across the whole organization.All these measures have one common goal: to put BASF, with its increased customer focus, back on profitable growth track.At this point, I would like to hand things over to Hans.
Yes. Thank you, Martin. Good morning, ladies and gentlemen. I'll start with our excellent -- sorry, excellence program. We accelerated our excellence program and are well on track to achieve the targeted EUR 2 billion annual EBITDA contribution at the end of 2021. In 2019, first positive EBITDA contributions will likely be compensated by costs due to the accelerated implementation. So far, we booked one-time costs related to the program of around EUR 400 million. In 2020, we expect an EBITDA contribution run rate in the range of EUR 1 billion to EUR 1.3 billion. The associated one-time costs in 2020 are estimated to be around EUR 200 million to EUR 300 million.In addition, I would like to provide you with a rough breakdown of the EBITDA contribution by category. By far, the largest contribution will come from operational excellence measures in the areas of production, logistics and planning. Furthermore, we are streamlining our organization. By the end of September 2019, we have reduced around 1,800 positions worldwide. In total, we plan a reduction of around 6,000 positions until the end of 2021. Finally, innovation budgets will be more consistently focused and simplification measures will be executed.Let me turn to BASF Group's financial figures for Q3 2019 compared to the prior year quarter in more detail. Sales decreased by 2% to EUR 15.2 billion. EBITDA rose to EUR 2.3 billion compared to EUR 2.2 billion in Q3 2018. EBITDA before special items decreased by 8% to EUR 2.1 billion. EBIT before special items came in at EUR 1.1 billion, 24% lower than Q3 2018. Martin already explained the main drivers for the earnings development. Special items in EBIT amounted to plus EUR 257 million, compared to minus EUR 75 million in Q3 2018. A considerable disposal gain from the sale of real estate in Basel overcompensated special charges from restructuring measures and integration costs. EBIT amounted to EUR 1.4 billion and also matched the prior year level -- almost matched the prior year level, sorry. The tax rate was 22.5% compared to 17.9% in the third quarter of 2018, due, among other factors, to lower deferred tax income. Net income amounted to EUR 911 million compared to EUR 1.2 billion in Q3 2018. Reported earnings per share decreased from EUR 1.31 to EUR 1.00 in Q3 2019. Adjusted EPS amounted to EUR 0.86. This compares to EUR 1.51 in the prior year quarter.The cash flows from operating activities came in at EUR 2 billion compared to EUR 2.9 billion in the third quarter of 2018. The decrease was mainly driven by the lower net income and the reclassification of the disposal gain from the sale of real estate in Basel to cash flow from investing activities. The free cash flow decreased accordingly to EUR 1.1 billion.Now to the cash flow for the first 9 months of 2019. Cash flows from operating activities amounted to EUR 4.3 billion compared to EUR 6.4 billion in the same period last year. This was primarily due to the lower net income after the reclassification of disposal gains to cash flows from investing activities, particularly the book gain from the deconsolidation of Wintershall. Cash flows from investing activities amounted to plus EUR 47 million in the first 9 months of 2019 compared with minus EUR 10 billion in the same period last year. This reflects the cash received in connection with the Wintershall Dea merger, whereas in the prior year period, the purchase price payment for the acquisition of Agricultural Solutions businesses from Bayer was included. Payments made for intangible assets and property, plant and equipment increased by EUR 220 million to EUR 2.6 billion. Financing activities led to a cash outflow of EUR 4.7 billion in the first 3 quarters of 2019, compared to a cash outflow of EUR 127 million in the prior year period. Free cash flow declined from EUR 4 billion in the first 9 months of 2018 to EUR 1.7 billion in 2019, mainly as a result of lower cash flows from operating activities.Turning to our balance sheet on September 30, 2019, compared to the year-end 2018. Total assets rose by EUR 3 billion to EUR 89.6 billion. More than 1/3, i.e., EUR 1.3 billion, of this increase resulted from the implementation of the IFRS 16 standard on leases. Higher deferred tax assets and higher other receivables and miscellaneous assets also contributed to the increase.Noncurrent assets increased by EUR 16.2 billion. The main driver for this increase was the recognition of our participating interests in Wintershall Dea and Solenis at fair value. We are reporting our shares in Wintershall Dea and in Solenis as investments accounted for using the equity method.Current assets declined, largely due to the derecognition of the disposal groups for the oil and gas business and the paper and water chemicals business. Net debt decreased by EUR 393 million to EUR 17.8 billion. Our equity ratio increased from 41.7% to 46.2% at the end of September 2019.And with that, back to you, Martin, for the outlook.
Thanks, Hans. Ladies and gentlemen, as mentioned before, the geopolitical conditions are and will remain challenging. It is not within our power to change these unfavorable conditions. However, we know what we have to address within BASF, and we are working on this with speed and determination.For 2019, we confirm our outlook for the BASF Group, as provided on July 8, 2019. We anticipate a slight decline in sales. For EBIT before special items, we expect a considerable decline of up to 30%. ROCE for the full year 2019 is anticipated to decline considerably compared to 2018.Let me also reiterate that we stand by our dividend policy of increasing our dividend per share every year.We slightly adapted the underlying planning assumptions. We now expect the average oil price at USD 65 per barrel Brent for 2019. Previously, we expected USD 70 per barrel Brent. And now Hans and I are glad to take your questions. Thanks.
[Operator Instructions] The first question is from Thomas Wrigglesworth, Citi. Please go ahead.
Two questions, if I may. Firstly, on your investment in India, could you just clarify what BASF's CapEx commitment is to that project and where you will participate? I think you will only own and operate downstream assets rather than upstream assets here. Some clarity around that would be helpful. And secondly, just on the -- for clarification on the statement of cash flows. Net working capital looks to be a positive in the quarter, but there's miscellaneous items of negative EUR 603 million. Could you just identify what of those are one-time in nature? That will be helpful.
So Thomas, on the India project, I mean, first of all, let me tell that we are very happy that we have 2 partners to join because this gives us the opportunity at the first step of this whole concept to build a broad-scale plant for PDH, the propane dehydrogenation, and I think this is giving us really the economies of scale and part of that raw material is then used, on one end, for polypropylene but also for us for acrylic acid. So we have about -- indicated about USD 2 billion investment in this. Please understand that this is still in the feasibility study and then will be detailed out later. So just to remind you that this is the first petrochemical plant that comes in as a CO2-neutral plant and this is significantly contributing to our plans of a CO2-neutral growth.
And on your question, Thomas, on the cash flow, what happens in the other line, if I got that correctly. What that is, is the reclassification of the income from disposals, primarily largest part in that is the Basel real estate transaction that I already addressed in my brief speech.
Could you -- sorry, Hans-Ulrich, can you quantify that?
Well, unfortunately, the way the contract is written, no, I can't. But here is -- I'm trying to give you a little bit of guidance here. It happens in Other, and Other shows a special item. And when you take a look at that, that gives you at least an indication.
Okay. And sorry, just one further follow-up, Martin. If it's prefeasibility, does -- is it in your CapEx forecast that you've given out to 2025? Or is it yet to be included?
Are indeed included.
The next question is from Charlie Webb, Morgan Stanley.
Just a couple from me as well. So first off, just in terms of some of the one-offs you identified, in essence, some kind of special income in ag, obviously a kind of special payment in Care Chems and the revaluation of metal prices within your kind of catalysis trading business. Perhaps you can help either in totality or individually give us some sort of quantum what that amounted to in the quarter, I think, would be very helpful. That's my first question. And then just second question, just in terms of crop protection in your ag business in total. Clearly, a decent quarter in terms of demand in Latin America. How is North America shaping up? I mean do you have any sense on how the inventory channels are looking today in North America as we start to think about into next year and how the season is going to pan out? So just how do you see those inventories in North America, particularly in crop protection?
Charlie, I'll try to take these 2. First on your one-off questions, I mean, we have these kinds of one-offs basically each and every quarter. And if I look at the order of magnitude of the one-offs that we report in EBIT before special items in Q3 of this year and compare that to Q3 of last year, that's pretty much the same order of magnitude. So if I look at ag as an example, yes, there's a double-digit million in there in Q3 of this year, but there was also a double-digit million one-off in there the last year. You take these out, the ag result, even without this one-off -- considering the one-offs, is significantly higher in Q3 of this year than it was in Q3 of last year. The same is true -- I think you also asked the question with respect to precious metal impact in Catalysts. The same is true there. There is as a result of the significant increase that we've seen during Q3 and, by the way, that continues in Q4 in particular for palladium and for rhodium. We've seen positive valuation impact, but the results of Catalysts without these positive effects from the precious metals are still quite a bit higher in Q3 of this year than they were in Q3 of that year. So if I look at the underlying business development without these type of one-offs, both in Catalysts but also in the rest of the group, is in the downstream segment's positive, speaks for what we are doing there and also little bit of benefit that we're getting from lower raw material prices.
Right. Just kind of thinking about the kind of order of magnitude, are we saying, all in all, if you add it all up, it's very similar year-on-year in terms of those one-off effects? And just to be -- and then just to be 100% sure, that includes also the negative effect of the Ludwigshafen cracker turnaround?
That negative effect of the Ludwigshafen turnaround is also fully reflected in the underlying, is not a special item. So -- and as I said in the beginning, if I compare to Q3 with these one-offs in our underlying EBIT, it's about the same order of magnitude.
Okay. And on the agriculture inventories and crop protection?
Sorry. That one what I missed, sorry for that, agro development inventories. We had a bit of discussion in the Q2 earnings call what was happening in our business compared to what you heard from competitors. We said all along we used the, anyhow, very weak year 2019 in North America to also clean up inventories. So as a result of that, when we look at our inventory situation in the channel, we are quite okay with it, could be a little lower. But it's not at a level where we are concerned. And as I said, we took quite a few measures to address the inventory situation. Although also quite good to see, we had that talk, both in the Q2 call as well as during the Capital Market Day in Ghent. In the meantime, the profit on ground figures are out and they are actually as favorable for us and should give you a clear indication on what happened there from a market share perspective.
The next question is from Christian Faitz, Kepler Cheuvreux.
Two questions, please. First of all, can you please give us an indication about current demand trends in China, potentially also by customer segment in your portfolio?Second, how do you explain the discrepancy in automotive demand between your upstream divisions, which is more aligned with what we hear from the car industry itself and downstream, particularly Coatings OEM? Did you win some new contracts in the latter one?
Christian, I'd start with your question on OEM. I think in general, we see obviously what is happening in automotive production. What we also experienced is continuation what we -- of what we had in prior year. You recall and you know that slide that shows how our automotive business has done overall compared to the development in the automotive industry and you know that we outperformed at a level of roughly 200% if you look over the last 6 to 8 years. So in other words, automotive industry growing at 2.5% to 3%. BASF automotive business growing at 6%. What we have at this point in time in Q3 is one development in Catalysts, which is primarily driven by the China fixed regulation that kicks in, in 2020. We've seen a nice uptick there in our business, and this is a market demand that we now can support out of the new capacities that we've built in China. Bit of the same experience we currently have in India. Also there, new emission regulation. Our capacities that we've built there over the last 3 years are there and we fill them and that helps us to generate, even in a situation where there's significant downturn, we're expecting somewhere between 4% and 5% in automotive production that helps to drive our results there in automotive emission catalysts. In OEM, we have a -- well, I want to say, diplomatically, we have a flat volume development, which is also better than market. Nothing to really write home about but better-than-market development from the point of view. We're quite satisfied with what we are seeing there. And yes, new platforms, new business that we won certainly plays a role. And we have to factor in that the end of Q3 was affected by the GM strike, which continues now in the beginning of Q4. So we'll have to see how that actually will work out.
So with respect, Christian, to the sentiment in China, I mean, you saw this, not all numbers there yet for Q3. But you saw also that overall, the most -- the gross order slowing down in Q3 in China, a little bit to 6.0 from 6.1 in the previous year. On the other hand, the Q4 is normally still a kind of peak production whereas some of the staff is finished for this year so this is, I think, why Q4 is not deteriorating further, might even be slightly better. No significant change, however, I would say. I think what we see in the trade conflicts, also the last considerations over there, I think this is not a major change. I think this was some appeasement in some of the areas. Also I mean, if you look on pork that comes together with the disease they have in pork population in China, so there's a desperate need to buy meat. So I think this is not giving a release now on the conflict. On the other hand, I think the companies have somehow to learn also a little bit to live with it. I think they know where their customers buy and what they cannot buy and where they sell. So I think, overall, to a certain extent, it stabilizes. On the other hand, we should also not forget that also China is pushing much for energy efficiency, labor efficiency and also environmental things. And overall, at least in the longer run, I think this gives business opportunities for BASF and a lot of the customers, despite the current situation, they actually come to us and talking about the future and talking about doing innovation together. So I would say this is not a desperate situation, but it's typical Chinese. I mean, if you learn how to live with something, then this is also providing a different view on the future.
The next question is from Andrew Stott, UBS.
So a couple of things. One, on Surface Tech, that seems to be easily the best answer in pro forma versus where consensus is at. There's a couple of questions on that. One, how do I think about the contributions from each of the key business units? So I wonder if you can just give a broad percentage split of the growth there, that would be helpful. And when I look at last year in Surface Tech, you had a huge Q4 on EBIT. And I just wonder if you could remind me of whether there were any one-offs in there or whether that's just a firm base to model from. I had a second question, if I'm allowed. Oil and gas, can you remind me of the dividend income timing? My understanding was it's an annual payment from L1 to BASF. I therefore assume that comes in Q4, but I just wanted to check that. And also, same point, all the various exceptional items that have happened with the JV, does that impact at all on the dividend? I would assume not, but just checking on that.
Andrew, this looks like Hans' question, so I'll give it a try. In Surface Tech, all 3 operating divisions contribute nicely to the increase that we have. In very rough terms, I think I could say that about 35% each in CC and it's actually a little higher than that. It's a little higher than that, 40% each in CC and in EC. So Catalysts and in Coatings. And then there's 20% roughly in our Construction Chemicals business. You alluded to Q4 and the effects that we had in Q4. You may recall that in Q4 of last year, the precious metal prices increased significantly. That certainly contributed quite a bit to the very strong Q4 that we had in Catalysts in Q4 2018. You then asked with respect to Wintershall Dea and the dividend payments there. So what happened so far is Wintershall Dea repaid the shareholders' loan. In addition to that, there was excess cash sitting in Wintershall Dea, which was also returned to the shareholders. And you see that when you look at our cash flow statement, order of magnitude of EUR 3 billion as expected were returned to the BASF Group. Dividend payments do not come from LetterOne. Dividend payments come to the 2 shareholders of Wintershall Dea -- from Wintershall Dea, so about more than 70% of that goes to BASF. The dividend payment for the year 2019, we expect then sometime in the first half of the year 2020. And what that will be will, in the end, be determined by the full year result.
Okay. And no impact from the various one-offs because they're noncash, is that fair?
No. On the results, rolled into our results by way of equity consolidation. And the equity result in 2019 is obviously heavily impacted by the significant integration and restructuring cost. I think I addressed that already in one of the earlier calls, so please don't use in your models what you had for Wintershall in 2018 as net income. That will be by far too high. Consider the fact that, among other things, we booked provisions for reducing the workforce from 4,000 to 3,000 people. And as I said, significant restructuring cost there and integration cost in the year 2019.
The next question is from Laurent Favre, Exane BNP.
And Hans, points taken on the ag performance for Q2. Two questions, please. The first one, following up on this oil and gas point, given all of the moving parts. Could you give us an order of magnitude of what an underlying, either net income or EBIT or EBITDA, would that be in using Q3 prices in a normal year without all those negatives? Is it low double digit, high double digit, low triple digit, that will be the real performance when we forecast 2020? And then the second question, most probably for Martin. You just alluded to a, I guess, a rethinking on innovation. From memory, you've got a EUR 2.3 billion ongoing R&D budget. I'm wondering, are you hinting that this budget might be reduced? Or are you saying that you would be doing things differently and try to get more output out of the innovation center?
Yes. On your question, Laurent, and I don't want to avoid the answer. But I think it's important to understand where we are currently. So this is now 5 months after forming the joint venture. We are in the midst of the budgeting process for the year 2020. So we've got to get through the year 2019, have a clear view then on 2020. And if you allow me, I would feel much more comfortable if you agree that we go through the budgeting process and I give you then some guidance once we are through with that.
Yes. Laurent, I think also when you look at the Page 8, when we talk about the excellence program, you see also R&D cost reduction via focusing budget. I mean the 2.3 is the highest we ever had, which certainly also came in because we bought the innovation-intensive Bayer business. They started already to bring this now together and certainly find synergies over there. Just to remind you also that as part of our organizational renewal, we have also put the development and the research part in the divisions under one leadership of a DTO and that also streamlines the whole chain. We have sharpening of the innovation strategies on the SBU level. And we have also other excellence measures, for example, from the supercomputing where we expect that the average project time goes down. This all is ingredients to bring also the R&D budget down a little bit and consolidate nicely. Also, earlier, there is not an automatism for increase also. So I think this gives us some leeway over definitely in 2020 and let's see beyond to streamline a little bit on the R&D costs.
Okay. We still have quite some analysts in the queue. Therefore, I would like to ask you to perhaps really limit your questions to only one. It's now Tony Jones, will be followed by Peter Clark and then Gunther Zechmann. Now Tony Jones, Redburn.
Martin, also on Slide 8. The EBITDA contribution, how much of 2020 is likely to drop through to EBIT if there are additional costs or other investments to sort of capture and squeeze out these savings?
It's to me and I look to Hans.
No, what we are giving you, Tony, on Slide 8, which is the excellence program slide, are the annual EBITDA contributions. And when you ask how much of that drops through, well, you have line 1. You subtract line 2 and there you are, which means in 2019 you have pretty much a wash between what the EBITDA impact -- the positive EBITDA impact is. Then with the one-time costs in 2020, we expect to see in the P&L roughly half of what the total program has to deliver as run rate by the end of 2021.
That's very clear. Maybe just one tiny follow-up. The one-time costs in 2019, are any of the EUR 400 million to EUR 500 million above the line in EBIT before special items?
Yes, roughly EUR 50 million out of that is in the underlying EBIT.
The next question is from Peter Clark, Societe Generale.
Martin, sort of addressing a point you've been on actually, the encouraging performance in Surface Tech, particularly on Coatings admittedly from a low base. You mentioned that the OEM business was flattish on volume, which is a bit better than the market. Partly, that might be platforms and geography. I'm just wondering on that. And then also on the refinish where you seem to have been doing a little better than some of your competitors. I mean collisions were slightly down and they actually saw some of their big distributors destocking. So I'm guessing you saw volumes up there, that you saw less of these effects. So just on the auto side with the Coatings.
Yes, Peter, I'll take that. OEM, I think I covered already. On the Automotive Refinish side, we also saw improvement in our P&L. That is predominantly driven by our Asian business. You're aware of the fact that we invested in this Asian business over the last 2 to 3 years, and that's simply paying back and looks in the current environment. Overall, I want to say quite encouraging.
Now Gunther Zechmann, Bernstein.
My side going back again to the Surface Technologies division on the Catalysts side. Can you just give some color on where you see the strong volume growth on the emission catalysts coming through? And what is driving that growth? You briefly mentioned China 6, but if you could explain a little bit further where that comes from.And then secondly, how much within the Catalysts business, how much of that growth comes from cathode active materials, please?
Yes, Gunther. Happy to answer that. As mentioned before, we have this increased demand, in particular, in Asia, for Catalysts. And that is driven, a, by the new standards in China, China 6. It is also driven by a new standard in India, also to be implemented from 2020 on. We have -- and this is for light vehicles. We have good strong development then also in heavy-duty diesel also and again in Asia. So a bit of a similar story like I just told it with respect to the automotive refinish business. We invested in new capacities and also did a -- had a bit of inorganic growth by way of acquisition. In the Catalyst area, it's predominantly the new capacities that we've put into China and into India, which we are now filling. Battery materials, on the volume side, also contributes. No question about that. We see double-digit volume growth figures there as we had in the prior years, and this is simply driven by a market that currently grows at a rate of somewhere between 20% to 25%, most probably also in the very difficult year 2019.
And just on the cathode material, Umicore had that announcement around a large take-or-pay contract. Can I just ask if that's the direction you're pushing for contractual agreements with your customers as well or if -- how the pricing works for BASF in that business?
Are we pushing for contractual agreements with customers? Absolutely.
How many in that take-or-pay context?
Well, since we are in the midst of negotiating agreements, at this point in time, I think we'll be careful.
The next question is from Chetan Udeshi, JPMorgan.
First question is, again, full year guidance up to 30%, 3 quarters done, last remaining. Like, how are you feeling about that range now? If you can give maybe some color, that will be useful.And the second question was on free cash flow. If my calculation is correct and I do sort of take out the IFRS 16 sort of impact, which comes on cash flow from operations but probably offsetting these amounts come from cash flow from financing. But it seems the cash flow in the first 3 quarters is running around EUR 1.5 billion or so run rate. How are you guys thinking about where it ends up by end of this year? That will be useful.
Chetan, first of all, I mean, we reconfirm the outlook. I think this is clear that makes us confident that we ought to reach this. Is this a walk in the park? No. Because I just mentioned that there's no signs of any, let's say, revitalization of market, so it stays tight. And also as we said, the visibility is relatively high. So customer is very cautious in all the industries, not only in automotive. However, what we also told you already at the beginning of the year is that our budget had 2 components. One more is really from the self-help measures and our procedures by bringing in also -- and reducing costs and bringing in then the benefits. Also in terms of reducing the people and all the measures we have basically started, I can only tell you we are very happy with this. You also had this indication on the, actually, on the Chart 8, that we bring home quite a bit already from that excellence program in the first year. I think that underlying is all working very well. We don't see now a deterioration, but also no positive signals. And with that, we feel confident that we can make this. With respect to the cash -- for the free cash flow, I mean, we have the dividend commitment. We reiterate that. That mathematically brings you to a point where you say, okay. Your free cash flow should be in the area of paying the dividends. That is definitely also what we are aiming for. Where we will be at the very end has also to do with the volumes, how we can push that. I think over now the last 1 or 2 months and also looking on the overall portfolio, particularly downstream, I think it turns with the volumes. This is now momentum we have to hold for the second -- for the fourth quarter. And I think it depends very much on that also in context of inventories and everything that we manage this. But this is definitely the way we want to go and what the command is inside of the company and we are confident that we'll reach that.
So now we have, first, Laurence Alexander, then Andreas Heine, then Sebastian Bray. We start with Laurence Alexander, Jefferies.
Just a quick one. Could you give us some color on what drove the volume gains of 4% for Monomers and then the 12% for Nutrition & Health? Was that a capacity coming on? Or if you can give some extra color on what's driving that.
Yes, Laurence. So the volume increase in Nutrition & Care actually happens primarily in Nutrition and has to do with the fact that you may recall that we last year had issues with our citral plant in Ludwigshafen with that -- with the entire citral value chain. Now this year, we are up and running, also have the capacities available now from the new citral complex in Kuantan in Malaysia and that drives the volume development there. So to a certain extent, a base effect and then the new capacities.The plus 4% in Monomers, that is higher sales of both TDI and MDI and in particular in Asia.
Next question is from Andreas Heine, MainFirst.
Yes. It's on agro. You have outpaced what at least I have expected by quite a margin. As it is quite tricky to talk about 1 quarter only, maybe you can highlight a little bit if what you see as strong start in Latin America. Is it an early start? So is it a phasing effect? Or can we take this as in Q4? Should we then also up on last year these strong trends in Latin America continuing?
Andreas, this is Hans. I didn't get the first -- the sentence because the mic wasn't there. But is it an ag question that you're asking on...
Yes.
Okay. Good. What we have is, indeed, a very strong start to the season in South America. Demand came in actually earlier than what we had expected. Inventory channels are at very low levels. This is completely different from what we experienced 2, 3 years ago. There's a lot of cleanup that has taken place in the meantime. So customers came early this year. Whether and how this will develop during Q4 obviously depends on how the season will go, what kind of weather impacts we will have. You know the story. But what I can say is that also, in October, demand is solid to strong. So it seems like we're -- we'll look at a good season in South America.
Now Sebastian Bray from Berenberg.
It's on the Chemicals segment. The volume declines over Q2 and Q3 have been fairly substantial. And if I try and knock out the impact of one-off effects in Q2 and Q3, it looks as if the EBIT was pretty close to flat, if not maybe slightly down in Q3. My question is as follows: is it right to assume that the entirety of this volume swings back next year, given that the once every 5-year maintenance is done? Or are you going to ramp the volumes that will last more slowly, given that the underlying end market seems to be weak?
So in general, I mean, yes, this is a substantial volume drop and which is simply connected with the big machines at the very beginning of the chain. I mean you know the volumes of, at worst, steam cracker being out for several weeks. You end up in double-digit territory where we are. I mean certainly, what normally is the case, if you run these machines, you try to run these machines as flat out as you can. On the other hand, you have also an environment which is -- if it provides overcapacity, it's difficult because in either you push the volume very hard and then really have a cost and margin problem or you somehow play between the 2. And definitely, what we suffered now, if you don't have the building blocks at the very beginning of the chain, you have also the problem with availability then downstream in the commodity area so this is connected. All this was due to -- with respect to availability. Clearly, the plan is certainly to run all the crackers then in the next year, as we always do, at a high utilization rate. How that finally then translates? We have to see how the markets development. But you should expect in that respect a certain compensation for the volumes in Chemicals like, for example, in Nutrition & Care with the outage of the citral plant is very clear.
Two more questions. The first one is from Matthew Yates, Bank of America Merrill Lynch, and then we have Georgina Iwamoto. So now first, Matthew Yates, please.
I was going to ask about Wintershall, but I think your comments, I guess we'll defer that to the next quarter. So if I can just ask one on the pension. It looks like the deficit there or the provision has gone past EUR 10 billion. Can you just talk about whether for next year that has any implications in terms of P&L, interest expense or cash flow top-ups?
So on the pension, I mean, we've seen interest rates coming down for the major geographies where we have pension plans, i.e., the U.S. and then Western Europe. Order of magnitude, 100 basis points. That has driven up our provision to this level of above EUR 10 billion. We're now sort of in the same territory that we were in sometime late 2015, early 2016. Impact of that and where that will require cash contributions in 2020 still remains to be seen. We've seen in 2019 year-to-date very strong returns from the pension assets. So all that needs to be then taken into consideration when we go into 2020.
Next question is from -- and final question from Georgina Iwamoto, Goldman Sachs.
I have a question on CapEx. I was wondering if you could remind us what your plans are for 2020 and beyond and how you're thinking about your capital expenditure in light of the macro developments and also what you're seeing in terms of focus on cash generation to cover the dividend for the end of the year.And because I'm last, I'm going to sneak in one last question on top of that, which is, I think I've seen a headline on TDI turnaround being used to adjust capacity. Can you just confirm that, that's downwards and which plant that you mean? And is that because of market conditions or because you're having trouble operating your vapor phase technology?
First of all, on CapEx, we will be this year most probably a little bit lower than indicated. We always said that we look on CapEx, but also told you that there's limits in terms of reacting very quickly because you have other obligations from the projects you started. But certainly, I mean, with each and every single project we basically launch, we always look on the market expectation development. You can expect if some of the markets slowed down, there's also a latent need for additional capacity. So if this environment is slowing for a longer time, then this has also an impact on CapEx, and this is -- I think it's most probably that we are lower in CapEx than indicated in the previous time. So in terms of TDI, Hans, I think, mentioned that this is a turnaround. We are in there. There's an obligation in certain periods to do that. This plant, I think, has improved really a lot its reliability over the recent months when we drove it, also in terms of utilization rates we achieved. And now there is, in this [ power ], there is basically a list of things we do to improve the plant and then we go in. But that is certainly also connected with the market demand, which is certainly also reduced. And on the other hand, and I think Hans mentioned that, particularly in Asia and somehow you feel it in also globally, there is also a push for additional volumes into that market. So I think it is also actually pretty good that in times where the volume demand is not so strong to do your maintenance work. So this is all in the normal plan.
Ladies and gentlemen, this brings us to the end of our quarterly conference call for analysts and investors. We will report on our full year results on February 28, 2020. During the coming weeks, Martin Brudermuller, Hans Engel and other Board members have committed to several IR activities. We are looking forward to meeting you in person on these occasions. Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team. Thank you very much for joining us today, and goodbye for now.
Ladies and gentlemen, the conference has now concluded, and you may now disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.