4 – Segment reporting

Since January 1, 2015, BASF’s business has been conducted by 13 operating divisions aggregated into five segments for reporting purposes. The divisions are allocated to the segments based on their business models.

The Chemicals segment entails the classical chemicals business with basic chemicals and intermediates. It forms the core of BASF’s Production Verbund and is the starting point for a majority of the value chains. In addition to supplying the chemical industry and other sectors, the segment ensures that other BASF divisions are supplied with chemicals for producing downstream products. The Chemicals segment comprises the Petrochemicals, Monomers and Intermediates divisions.

Until the end of 2014, the Performance Products segment consisted of the Dispersions & Pigments, Care Chemicals, Nutrition & Health, Paper Chemicals and Performance Chemicals divisions. Customized products allow customers to make their production processes more efficient or to give their products improved application properties. The Paper Chemicals division was dissolved as of January 1, 2015. The paper chemicals business has been continued in the Performance Chemicals and Dispersions & Pigments divisions.

The Functional Materials & Solutions segment bundles system solutions, services and innovative products for specific sectors and customers, in particular for the automotive, electronic, chemical and construction industries. It is made up of the Catalysts, Construction Chemicals, Coatings, and Performance Materials divisions.

The Agricultural Solutions segment consists of the Crop Protection division, whose products secure yields and guard crops against fungal infections, insects and weeds, in addition to serving as biological and chemical seed treatments. Plant biotechnology research is not assigned to this segment; it is reported in Other.

The Oil & Gas segment is composed of the Oil & Gas division with its Exploration & Production and Natural Gas Trading business sectors.

Activities not assigned to a particular division are reported under Other. These include the sale of raw materials, engineering and other services, rental income and leases, the production of precursors not assigned to a particular segment, the steering of the BASF Group by corporate headquarters, and corporate research.

With cross-divisional corporate research, BASF is creating new businesses and ensuring its long-term competence with regard to technology and methods. This includes plant biotechnology research.

Earnings from currency conversion that are not allocated to the segments are also reported under Other, as are earnings from the hedging of raw material prices and foreign currency exchange risks. Furthermore, revenues and expenses from the long-term incentive (LTI) program are reported here.

Transfers between the segments are generally executed at adjusted market prices which take into account the higher cost efficiency and lower risk of Group-internal transactions. Assets, as well as their depreciation and amortization, are allocated to the segments based on economic control. Assets used by more than one segment are allocated based on the percentage of usage.

Sales in Other amounted to €757 million in the second quarter of 2015 (second quarter of 2014: €855 million) and €1,445 million in the first half of 2015 (first half of 2014: €1,932 million). In both periods, the sales decline was primarily due to the lower plant availability resulting from the outage at the Ellba C.V. joint operation in Moerdijk, Netherlands, as well as the disposal of our share in the Ellba Eastern Private Ltd. joint operation in Singapore at the end of 2014. Lower raw material trade further reduced sales in the first half of 2015.

Income from operations in Other improved by €257 million to minus €83 million in the second quarter of 2015 as compared with the same quarter of the previous year. This was mainly attributable to the reversal of provisions for the long-term incentive program. The second quarter of 2014 had included expenses for the recognition of corresponding provisions. By contrast, income from operations in the first half of 2015 fell by €227 million to minus €778 million year-on-year, due in part to expenses for the anniversary bonus in the first half of 2015, the sale of BASF’s 50% share in Styrolution Holding GmbH in the fourth quarter of 2014, and currency effects not allocated to the segments.

The reconciliation reporting for Oil & Gas reconciles the income from operations in the Oil & Gas segment with the contribution of the segment to the net income of the BASF Group.

Compared with the same periods of the previous year, income from operations declined by €69 million in the second quarter of 2015 and by €230 million in the first half. In the Exploration & Production business sector, income from operations in the first two quarters of 2015 fell considerably on account of the sharp drop in oil prices. Furthermore, earnings in the second quarter of 2014 had included a contribution from offshore lifting in Libya. The sale to the MOL Group of investments in non-BASF-operated oil and gas fields in the British North Sea had moreover led to special income of €132 million in the first quarter of 2014. These effects were only partly compensated by earnings improvements in the first two quarters of 2015 resulting from higher sales volumes in the Natural Gas Trading business sector.

The Oil & Gas segment’s other income relates to income and expenses not included in the segment’s income from operations, interest result and other financial result. As in the previous year, other income in the second quarter and first half of 2015 largely consisted of currency effects from Group loans.

Income taxes in the second quarter of 2015 were lower than in the previous year due to the decrease in earnings before taxes. The second quarter of 2014 had particularly included highly taxed earnings contributions from offshore lifting in Libya. In the first half of 2015, the increase in income taxes was primarily the result of higher deferred taxes. These pertained to a currency-driven rise in temporary differences to the values used for the calculation of taxable income in Norway. In addition, the first half of 2014 had included tax-free special income from the sale of shares in North Sea oil and gas fields to the MOL Group.