Wacker Chemie AG

Thank you, Operator. Welcome to the Second Quarter 2013 conference call on Wacker Chemie AG.

My name is Joerg Hoffmann, Head of Investor Relations. As usual, we have Dr.

Rudolf Staudigl, our CEO and Dr. Joachim Rauhut, our CFO with us on the call today.

Please note that during this call we may make statements which contain predictions, estimates or other information which are forward-looking statements. These statements are based on current expectations and certain assumptions and are therefore subject to certain risks and uncertainties.

Some of these risks and uncertainties are beyond Wacker’s control and could cause the actual results to differ materially from results, performances or achievements that may be expressed or implied in such forward-looking statements. Wacker may not update those risk factors or the forward-looking statements made during this call, nor does it assume any obligation to do so.

We published today our quarterly report, a press release on our numbers, and an excel file detailing our data. Please note that the implementation of Standard IAS 19 Revised resulted in changes to the prior year numbers published previously.

The excel file has the corrected data for all quarters. Written version of today’s prepared speeches will be posted on our website about half an hour after this call.

You will find all of this on our website www.wacker.com under the caption Investor Relations. Dr.

Staudigl?

Ladies and gentlemen, welcome to our second quarter conference call. Today we reported a 7% sales increase over Q1 to €1.15 billion.

EBITDA in the quarter was 15% higher than last quarter at €188 million. Since prices for polysilicon and Siltronic’s wafers were still markedly higher a year ago, both sales and EBITDA in this year’s second quarter came out lower than in Q2 of 2012.

Net income for the quarter was €15 million. As you all know the trade dispute over PV modules between Europe and China has created many uncertainties in the market for quite some time from modules all the way back to polysilicon.

Consequently, the worldwide polysilicon shipments in Q2 decreased by about 10% compared to Q1. We have tried to contribute to the discussions very constructively in Berlin, Brussels and Beijing.

Yesterday the EU-trade commission has announced an amicable resolution to the solar panel dispute. We believe that this will provide all market participants with much needed certainty again and will contribute to growth of this important market segment.

The agreement however has to be approved by the EU-commission, before all details will be announced. On July 1, we have held our Capital Markets Day in London.

We have presented our strategy, focus and goals for the years to come. In our businesses, we are in leading market position, recognized by our customers.

Our portfolio of Advanced Materials is certainly an excellent foundation for future growth. Over the past more than a decade we have invested significantly to create this foundation through establishing sufficient base material capacity.

We have set up an international production footprint covering Europe, America and Asia. In addition we have globalized our sales network utilizing technical centers with R&D capabilities around the world.

A special focus was to increase capacity especially in polysilicon in order to provide our customers with enough high quality material and to defend our established market position. We have started to build a new site for polysilicon with low energy cost in Tennessee, which is also planned to serve us as an excellent base for our silicon chemistry in the US for the future.

This all has required investments significantly above depreciation. We are now moving into what we call our Leverage phase.

With most capital requirements for expansion of assets behind us, we can now focus on lower capital intensity growth, using the established global asset base. Chemicals are at the core of our growth strategy.

In Silicones, the key will be to use our innovation efforts to continuously upgrade our product portfolio and to increase the share of specialty materials sales over standard products. This will have a positive impact on our profitability as well.

In POLYMERS we will continue our efforts to replace other chemistries with our very versatile VAE systems. Our dispersible powders business grows strongly with new building materials and methods.

In Siltronic our focus on restructuring and cost reduction pays off. We target Siltronic to become cash generating.

We will not venture into 450 mm wafers. 450 mm would see us competing with a number of competitors for an even smaller number of customers, without the opportunity for decent return on investment.

The 300 mm is the diameter where growth and innovation happens. Siltronic should benefit from market growth and technology requirements in 300 mm.

This is why Siltronic will focus on 300 mm but will continue to harvest its very good position in 200 mm as well. In Polysilicon, we still have some CapEx requirements left to finalize Tennessee.

After that, the business will begin to generate cash because incremental growth from debottlenecking requires much lower capital expenditure. The growing PV market drives demand for polysilicon.

Growth has been moving away from Europe already. PV is becoming attractive in all parts of the world now.

Especially China and Japan have become major markets already. With balanced supply and demand the pricing environment should improve as well.

Putting everything together; significantly reduced capital expenditure below depreciation; increased share of chemical specialties; growth in emerging markets; cost reductions especially in Siltronic and Polysilicon; improved supply and demand balance in Polysilicon with higher pricing. All this has the lead to improve profitability, cash flow and ROCE.

Therefore we have set out our goals for 2017. We are targeting sales between €6.0 billion to €6.5 billion, with an EBITDA of €1.2 billion and a return on capital employed of higher than 11%.

These goals are certainly ambitious, but achievable. For more details on this please refer to our Capital Market slide presentation that you can find on our website.

The present business environment however is still challenging. Highlights certainly are growth of Chemicals in emerging markets, especially China and of course the hopefully now achieved resolution of the solar trade dispute.

Now I would like to hand over to Joachim, who will explain the results of the second quarter and update our guidance. Joachim?

Thank you everybody. I am going to discuss our quarterly results and will provide and update our guidance especially with respect to third quarter.

At Group level, WACKER reported Q2 sales of €1.15 billion. This is about 6% below last year, but 7% over the first quarter.

This increase came essentially from the Chemicals businesses, following a seasonal recovery and continued market growth after the Chinese New Year. Compared to last year, price declines of 10% or about €127 million reduced group sales in this quarter.

Second quarter EBITDA was €188 million, some 22% below last year, but 15% higher than in Q1. During the quarter we recorded retained prepayments and damages from contract cancellations of € 24 million in Polysilicon.

At €751 million, Chemicals reported 12% sequential sales growth over Q1. Q2 was at 2% slightly above last year.

Good demand for our products and seasonal recovery namely in Polymers were the cause. Earnings in the quarter in Chemicals were supported by volume and mix effects, despite some price declines.

EBITDA in Chemicals improved sequentially by 21% to €117 million. For Q3 we expect overall slight improvements in sales and EBITDA year-over-year.

We have just concluded the VAE expansion at Nanjing, adding 60,000 tons to reach 120,000 ton capacity in largest VAE dispersions units in China. New technical centers were opened at our sites in Mexico City and São Paulo.

Customer proximity is important in our Chemicals business, as many products are tailored to the specific need of customers or industry subgroups. Going forward we will invest more in labs and technical centers, driving our local presence in many regions.

Sales of €437 million in Silicones came in about 3% over last year and 9% over Q1. Volume improvements in Asia and across all major product groups drove results in the segment, resulting in high utilization rates.

Segment EBITDA at Silicones was €66 million, despite price pressures on standard products and supported by strong Asian volumes. In addition, the effects of the Q4 Chinese Siloxane JV refinancing supported EBITDA in the segment.

Supported by the seasonal recovery of the construction industry and demand from Asia, Polymers recorded sales of €273 million. This is slightly lower than last year, despite higher volumes and is 21% better than in Q1.

ASP declines dampened sales. EBITDA for the second quarter in POLYMERS was €44 million, 24% up from Q1 and at the level of last year.

Pricing of raw materials had a small positive effect on earnings. Biosolutions Q2 sales were €41 million with an EBITDA of €6 million, following growth contributions from pharma and agro products.

Polysilicon reported sales of €203 million. This is 29% below last year and 15% below Q1.

The first quarter saw high sales due to an improved market environment for our customers and a replenishment of customer inventories after Q4 adjustments. This quarter uncertainties triggered by the trade dispute between the EU and China had a negative impact on poly demand of the industry.

EBITDA for the segment was €64 million, supported by retained prepayments and damage of €24 million during the quarter. Excluding retained prepayments and damages, EBITDA in the segment was about twice the level of Q1 in an unchanged pricing environment.

The result shows some of the progress we have made on our cost roadmaps and positive inventory effects as production exceeded sales. In Q2, Siltronic recorded sales of €200 million, up sequentially by 17%, but 19% below prior year.

Increasing shipments among an overall weak pricing environment defined the quarter. With utilization rates around 80%, EBITDA in the segment was about €9 million significantly better than in Q1 and close to last year.

Benefits from aggressive cost management supported the results, as Siltronic saw substantial cost reductions in variable costs per wafer. Negative effects from currency translation with respect to the yen muted the results.

The performance in Q3 in Siltronic should be similar to Q2. During this quarter Siltronic received the Preferred Quality Supplier Award from Intel for its efforts in 2012.

Others reports sales of €46 million and EBITDA of €3 million. Period net cash flow came in at €65 million, as operating cash flow improved due to lower CapEx.

This is significantly better than in Q1 or prior year. Depreciation was higher than investments in the quarter.

At €820 million our net financial debt level increased only slightly. During the quarter we paid a dividend of €30 million to our shareholders.

We raised successfully funds in a private placement of $400 million in Q2, with the major intention of balancing our currency exposure. At the end of the quarter liquidity including securities was €648 million.

Net result was €15 million with a tax rate of around 50%. Some positive tax effects contributed to this lower tax rate.

For the full year we expect a tax rate significantly higher than 50%. Since we last spoke one major difficulty to giving full year guidance are still in place.

The key question that has a large impact on our results this year is how the solar markets will develop after the China-EU trade talks with regards to solar material appear settled. This may have an influence on our Polysilicon volume and pricing for the second half.

As explained in the Capital Markets Day, we so far forecast to lose about €350 million in pricing in the full year, mainly in Polysilicon and Siltronic. This assumes that polysilicon prices stay at the level of the first half.

Offsetting this to a degree are cost reductions of about €200 million in 2013. In this light, our guidance stays unchanged.

We see 2013 group sales at €4.5 billion and EBITDA below 2012, but expect a small positive net income for the full year. Full year CapEx is projected at €550 million.

Net financial debt will be less than 1 billion at year end. We will be switching now to the Q&A.

Before we start the Q&A, however perhaps I ask you all to please restrict yourself to two questions. If you have more questions, please write them down, we’ll welcome you back to the queue.

Thanks for your understanding of the procedures (inaudible) with everybody fair and equitable chance to ask questions. Operator?

Operator, the first question is from Robert Schramm with Macquarie.

Hello. Good afternoon and thank you for taking my questions.

First of all, congratulations on achieving 50% of full year consensus EPS in just one quarter. My two questions would be, a) are you seeing any impact in the polysilicon market from the recent introduction of import duties in U.S.

and Korean materials by China, and do you know how the Chinese customs handle potential duty loopholes with regards to those two countries? And my second question would be, could you split out the inventory effect for EBITDA margins in polysilicon in the past quarter and if that reverses what it would mean for the coming quarter's EBITDA margin?

Thank you.

What we are seeing right now is certainly, I would say quite healthy demand for polysilicon globally, also in China. And as far as the loopholes are concerned, this is not our task to follow on these things.

We don’t know all the details of the special arrangements and agreements. So this is what we can say about it, we really I mean we represent our customers on that demand, and just as what we are focusing on.

Robert, your question concerning the EBITDA performance in the quarter and I think the EBITDA performance in the quarter of polysilicon was influenced by higher production, like compared to Q1, and by lower sales compared to Q1 and by ongoing success on our cost roadmap. And all this three sectors contributed positively to the EBITDA performance, if you’d take out the retained prepayment.

But please understand that we cannot spread up more details due to competitive reason.

Could I just ask a follow-up question for understanding?

Robert, we understand that you have another question. Take – give us just a favor, write this down and we’ll have you back in the queue, okay?

Okay, thank you.

Operator, the next question is from Mr. Andrew Benson with Citi.

Hello, can you hear me?

Yes, we can hear you Andrew.

Great, thanks very much for taking. I think what I am going to ask is the same one again but because I didn't really understand the answer, Dr.

Staudigl, but if you could just – with the announcement of a tax on U.S. and Korean material, I mean, have you seen a change in more people, more Chinese trying to place orders with U.S.

as the price for deliveries over the coming months has that changed? So I just want to understand the (Inaudible) landscape is evolving and what actual changes?

And the second question just on the polymer side part of the shift to your resins away from SB resins was as very high butadiene price making, SB latex uncompetitive, given that the prices of your competitive raw materials have come down so sharply. It doesn’t make much hard enough to drive the growth of polymers or is there a technical factor beyond prices that is driving the polymers business now?

On your first question, I really would like to only comment that the demand for polysilicon is quite nice, right now could always be higher, of course and I do not make comments on material sense on other people speaking this. On the polymers, you are absolutely right that the butadiene price was fairly high and this made VAE even more interesting to some customers where we have replacement opportunities.

The price of butadiene has come down, due to the fact that not so much was needed for the tire business, et cetera et cetera and due to a very economic cooling and around the globe. But this doesn’t really, I mean the reduced butadiene price will certainly not accelerate the so called replacement business.

On the other hand, I think customers or potential customer are aware of the fact that’s because of the higher relative availability or let’s say the high usage or percentage of ethane crackers versus naphtha crackers certainly will give ethylene-based products in advantage in the long run and this is why many customers are very interested in working with us on VAE base solution. Yeah, I mean the reduced butadiene prices may slowdown such, but I think that the general direction is clear that it will be more interesting to work with VAE compared to competitive systems.

Okay, thanks.

Operator, the next question is from (inaudible) at UBS.

Hi, good afternoon thanks for taking my questions. So two, the first one to come back on the polysilicon that the market shares, when we look at the market shares the latest China imports data, it looks like you have taken shares.

Is that you see yourself with that mix i.e. (inaudible) for ordering more as a global picture, do you see some increased share or do you deliver more to others?

And the second one also on polymers, did you have a positive spread price versus raw material in the quarter?

Sorry, can you repeat your last question, please?

On Polymers, did you have a positive stress on your pricing versus raw material pricing in the quarter on us?

Yes, I said that. This was a small impact in the quarter, but it was a positive impact, but small.

And on your first question, yeah, of course we are following the same data as you are. We are seeing some growth of our share, but I would say this is mainly due to the fact that customers are in favor of our materials, because the requirements for higher quality modules is increasing, because Japan for example has high demand on high quality modules.

This is certainly something that is helping us.

And do you see your market just sustainable i.e. your market share should set at the current levels or what do you…?

We certainly will try to keep our market position.

Okay.

Operator, the next question is from Mr. Georg Remshagen, Commerzbank.

Hi, gentlemen and thanks for taking my questions. The first is on your cost saving program.

So I understand that the $200 million and half of it should be achieved in polysilicon. Could you provide us some more information on this amount which we made to the other divisions?

And also what has already been achieved and what we could expect for the second half. And maybe we are also able to give us a couple of examples for the most important measures.

That’s the first topic I would like to discuss with you. The second one relates to the pricing pressure and your indication.

I calculated correctly, you had [$115 million] revenues lost in the first quarter and $127 million in Q2, but this is to a $140 around in the first half and you expect $350 for the full-year, which would relate to around $110 million in the second half. Now, if that’s only the basic stats relating to polysilicon and also Siltronic, or do you also factor in highest selling prices in general in the second half?

Thank you.

Two good questions.

Thank you.

I would start with your question concerning cost saving. In our forecast, we have included $200 million of cost savings.

These cost savings relates around 50% of the polysilicon division and the other $100 million in shares nearly equal between the Siltronic and the chemical business.

Okay.

If you look how they evolve over the year and they come in quite steady, I mean, there are slightly accelerating but we already had in the first quarter, you can say nearly 25% of this cost savings come in quite steady. And to keep that some example, I think there are examples listed on our capital market presentation page number 101.

Okay.

To give just one example, for example on the chemical side, last year we closed our [strategic] production and this is a very favorable entry to our chemical business.

Got it.

In Siltronic, cost roadmaps particularly on 300 millimeter, we are very good on stream there and remember that last year growth is high, so we got our operating cost basis is much lower than in 2012.

Okay. Thank you.

Operator, the next question please.

Sorry, on the price question.

And if you look to the pricing, we expect to take for first half as a guideline we expect that the pricing with some price pressure in particularly in chemicals. I think we will (inaudible).

This is what we assume currently.

Okay. So this means that you would expect that your indication is more based on a base effect rather than increased prices in the second half?

Yes.

Okay, thank you very much.

Any price increase in the second half in case it happens in polysilicon will definitely help us significantly.

Well, sure. It would be appreciated by you and us, yes.

Thank you.

So operator, the next question is from [Christian Rath] with HSBC.

Good afternoon. Thank you.

Can you give us an update from the pricing pressure, if the pricing had change from the Japanese competitors in Siltronic compared to the previous quarter. And secondly in polysilicon, are there still any potential saving from under utilization charges which could be significant in the coming quarter, I mean how much can you still save from under utilization there?

Thank you.

In pricing in Siltronic, we reported that we have got negative price trends in Q2 compared to Q1 and it’s partly due to the effects of the exchange variation in the yen. This may slightly continue, but as a said in the previous question, we expect more alerts stable in pricing for Siltronic in the second half.

I think I had to ask you to repeat the question concerning under utilization and polysilicon.

Yeah, I mean I guess the first question not being after being less equivalent of just split between the cost savings and the inventory effect under utilization in Q1 competitive. Given that tool, didn’t want to answer this and presence probably how much is electrical on under utilization charges.

So how much can you fix on this?

Your question is how much has been positive through if we want 100% utilization.

Yeah, all the options, that’s the option.

Well, and that utilization on average in Q2 was around 90% and these underwent an technical possibility is that we run at 100%, but these and then that we don’t provide any detailed information on our cost structure.

Okay.

Operator, the next question is from Thomas Swoboda from MainFirst Bank.

Good afternoon gentlemen. I have two questions as well.

First is on the cost savings, between the $200 million, do you expect that you’ll be free from the renewable energy surcharge in Germany. Does it make path of the speculation that’s the first question?

The second question is again on this inventories or the utilization rate in polysilicon, do you mind give us a feel of what was the inventory build-up and is this inventory something you consider that you can carry that with you as the inventories you need going forward or will this inventory rather be brought down going forward? Thank you.

Yeah. With respect to your second question on inventory, as we said, production exceeded sales, but we had to operate in opposite case in Q1 but sales exceeded production and it has now reached a normalized inventory situation.

So, we’re not concerned about our inventory level. And with respect to renewable energy surcharge, I think so far we have communicated that we are partly relieved there.

So you don’t expect anything on top, is that the answer?

No, we can only provide you with our cost savings and we did only provide you with our cost savings on €200 million in 2013.

That’s fair enough, thank you.

Operator the next question will be from Robert Schramm with Macquarie.

Hello. Thanks for taking my follow-up.

I just wondered, you've obviously been asked quite a bit about potential for polysilicon prices in the second half. Just wondered how you rate the decision by OCI to delay 10,000 ton debottleneck into early next year in hope of better pricing.

Does that mean that there is potential for price improvement in the second half because of that move or would you think it's probably a bit defensive from OCI and there isn't really much hope for price improvement in the short-term? And my other question, if I may, is do you have any details on the timeline with regard to the EU process of approving that compromise with China?

We definitely don’t have any fulfillment of capacity increase, I mean it just makes the industry more healthy. And I think the industry fortunately is maturing to a degree, and this is a good process.

And we will see what price movements upwards will be possible in the second half. We have locked, certainly all of this want to be on the higher side of prices, of course on the other hand we need to be competitive in the market.

But it will be very interesting to see what happens over the next few months. On the EU issue, I think the days when the agreement is put forward for approval by the permanent EU Commission, as far as I know is August 2, but just following what’s happening there, and the positive comment of the EU as well as this industry associations in China and Moscow, and I don’t think that there is the threat of this not being approved by the EU Commission; this is my estimate.

Thanks for taking my follow-ups.

Our next question is from Jean-Francois Meymandi at UBS.

Yes. Just one quickie.

Obviously, BASF said, July is slow in China, but do you see any threat for slowing growth in your silicon business there in the H2 or do you have pretty good visibility there?

I think visibility of course is not very far in the chemical business. So far growth in China was very healthy in specific as well as for polymers.

Significantly, a slowdown of the Chinese economy, of course would not be welcome and we would feel that in the silicon segment as well. Presently, I think silicons demand 1is quite healthy and you also have to keep in mind that silicon’s especially chemicals.

Even if we call it a standard, sometimes a part of it standard, it’s normally even slower growing economies especially the can makes still have a high growth rate. So, we don’t see a reason at this point in time to be going negative from China.

Yeah. Thank you.

Operator, the next question is from Mr. (inaudible).

Yeah. Thank you.

Two follow ups, more an housekeeping items. You guided for a tax rate higher than 50% for the full-year that is fully understood, but you can probably also understand that it would be very helpful for us, if you could shut some library would see the potential tax rate from your best estimate today, closer to 50% or to 75%, that’s the first.

And the second is in the quarterly report on page 74, you have the related part to this and I just want to get a better grip on the joint venture with Dow Corning. My understanding is that this joint venture is included in year among other factors and other activities, and I would have expected a stronger positive impact here on the expense side from the renegotiated trends for prices or and so, I don’t understand it completely, so what is your view?

And yeah, housekeeping and tax rate for us is more than housekeeping. And so, if you take 50%, 75% and 100%, I forecast the tax rate more between 75% and 100%.

For the full year?

For the full year.

Okay, thank you.

And due to the structure of our results.

Yeah.

And with respect to your questions concerning the joint venture…

I’ll just look at the six months comparison on the joint ventures. So I would compare the expenses of the €27 million in the six month 2013 to the expenses of €28.5 million in the six months of 2012.

So I would have expected a formal positive impact, i.e., lower expenses from the renegotiated transfer prices. Or would this effect not show up here or this effect offset by other factors?

I think I have tell you that, I have to look in detail into it, and I think Joerg Hoffmann will give you a call. But assumption is, my assumption is, there are two impacts, one is lower prices, and the other is more volume, because this joint venture is still ramping up, so we are producing more.

Okay, got it. Thank you very much for this.

You follow that off?

Operator, the next question is from Mr. Thomas Swoboda, MainFirst Bank.

Thank you for taking my follow-ups, I have just two. The first is on your normalized CapEx.

You stated already on the Capital Markets Day and you repeated that today that your CapEx need will come down quite significantly, once Tennessee is done. Could you give us a bit of a hint what number you should be looking for kind of a maintenance CapEx plus some expansion CapEx you have on your mind at post 2015?

The second question is on the cost savings again. We saw several companies announcing kind of a perpetual cost savings program.

Is the €200 million that you have this year something we could expect as it contributed to you through your guidance over the next year? I don’t want to ask for too much, but I just want to understand a little bit better how you want to get to the €1.2 billion EBITDA in few years time?

Thank you.

Yes. On your question concerning CapEx, I think in the Capital Market Day, we said, we will invest between 2013 and 2017 around €400 million and the €400 million then included 40% maintenance of business.

It’s 40% of the €400 million?

Yes. If you look at slide 108 in the Capital Markets presentation, you will find the figure.

Thank you.

And your question concerning the cost savings, the cost savings which we have tabled for 2013, its €200 million and that means and I could see it from the examples which I gave that this cost saving continued and then in 2014, the additional cost savings will come into place and like we said, we have got our cost control methods for polysilicon which does not stop at the end of 2013. In our Capital Markets Day, I think we clearly said that, we have cost targets for 300 millimeter, which go beyond 2013.

So, there will be new effort and new effects from cost roadmaps and from lower costs, our better operating system let’s say in place, but we have not quantified this, but this is definitely including in our target of €1.2 billion EBITDA, which we had for 2017.

This is already heard, helpful. Thank you.

Operator, The next (inaudible).

Good afternoon, gentlemen. The question is on polysilicon and the import duties that China has imposed on, probably that is being produced in the United States, so I understand that’s a specific area of supply to specific producers, they’re suppliers from the U.S.

You are not yet producing over there, but still I wonder whether this decision there is somehow impacting the timeline of your ramp-up plan and would you be exempt from this regulation or is there any automatism that you would kind of fall into the group of people punished companies once you are being up in the U.S.

First of all, we can truly say that we have never dump material out of the United States and China.

Really.

Second of course, our legal procedures around that one due to – for our countries are established. On the other hand, if you assume for example 2017 maybe as they will have to maintain capacity once we have so far dependency something like 72,000 tons of polysilicon and only growth around robust 20,000 will come out of the United States and the Chinese of course that means far left than 50% of our material would come out of the United States, and of course the marker for polysilicon is not only China, it’s the world.

So at this point, I do not see a threat for our Europe’s production once we put severance from that perspective.

Okay, thank you.