4 – Segment reporting

BASF’s business is conducted by thirteen 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.

The Performance Products segment consists of the Dispersions & Pigments, Care Chemicals, Nutrition & Health and Performance Chemicals divisions. Customized products allow customers to make their production processes more efficient or to give their products improved application properties.

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 comprises the division of the same name. As part of an asset swap at the end of the third quarter of 2015, BASF transferred to Gazprom the natural gas trading and storage business previously operated together with Gazprom, and since October 1, 2015, has concentrated on the exploration and production of oil and gas as well as on the transport of natural gas.

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-based 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 declined in the second quarter and first half of 2016 as compared with the corresponding periods of 2015. In the second quarter of 2016, the year-on-year decrease was from €757 million to €485 million, and in the first half of 2016, it was from €1,445 million to €962 million. Lower prices and volumes in the raw materials trading business were largely responsible, along with the expiration of supply contracts at the end of 2015 in connection with the disposal of our share in the Ellba Eastern Private Ltd. joint operation in Singapore at the end of 2014.

Income from operations amounted to minus €147 million in the second quarter of 2016, after minus €83 million in the previous second quarter. This was primarily influenced by additions to provisions for the LTI program in the second quarter of 2016; the same quarter of the previous year had, by contrast, contained income from the reversal of provisions.

In the first half of 2016, income from operations of Other improved year-on-year from minus €778 million to minus €392 million, largely through the lower level of provisions recognized for the LTI program, and a higher currency result, as compared with the same period of 2015. The previous year had also included expenses for the anniversary bonus.

The reconciliation reporting 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 fell in both the second quarter and in the first half of 2016. This was essentially a result of lower oil and gas prices as well as the asset swap with Gazprom on September 30, 2015, through which earnings contributions from the divested gas trading and storage business and the 50% share in Wintershall Noordzee B.V., Rijswijk, Netherlands, were discontinued as of the fourth quarter of 2015. Moreover, income from operations was reduced by lower earnings contributions from the share in the Yuzhno Russkoye natural gas field, as the excess amounts received over the last ten years will be compensated in 2016, as contractually agreed with our partner, Gazprom.

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 largely consisted of currency effects from Group loans.

The change in income taxes was predominantly attributable to a lower level of income before taxes and minority interests, as well as to currency-related declines in deferred taxes from heavily taxed oil and gas production in Norway.