Wacker Chemie AG

Thank you, operator. Welcome to the Q3 2014 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 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 maybe 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, press release on our numbers and also presentation on our results and an Excel file detailing our historical data. A 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 third quarter 2014 conference call. WACKER reports on a strong quarter.

On a group level, sales in Q3 were at €1.23 billion. Q3 EBITDA came in at €348 million.

Excluding special effects, EBITDA was higher than both last year and the previous quarter. This is the result of pricing efforts, high utilization rates across all businesses, very good operational performances including ongoing cost reduction programs.

This strong quarter allows us to provide you with a more precise EBITDA guidance of €1 billion for this year. There is good news to report as Siltronic has made substantial progress during this year.

With sales at €216 million (Technical Difficulty) 18% better than in Q2. This is quite an achievement in light of over 10% price declines for 300 millimeter wafers year-over-year.

After essentially three years without growth in semiconductor wafers, we are seeing the return of demand as PC sales finally bottom. This relates largely to 300 millimeter wafers.

While in 2013, the monthly average shipment of 300 millimeter was about 4 million pieces per month, we are looking now at 4.6 million wafers per month on average for 2014. Demand spiked in June and September with 5 million and 5.1 million wafers respectively.

Contrary to prior years, we are not seeing seasonal weakness in the fourth quarter. As a result, demand in Q4 should be better than last year.

For 2015, most market observes now expect overall wafer growth across all diameters at 3% to 5%. The major drivers for growth are mobile devices like smartphones and tablets, as well as applications like automotive, healthcare and general industry as electronic capabilities become even more pervasive in everyday goods.

Leading wafer users and equipment suppliers support this positive view on the market. As industry utilization is high, competitors are already projecting potential price increases next year should area growth continue as forecast.

We would certainly support this. Prices for 300 millimeter wafers are currently substantially below reinvestment levels, capping supply in light of a dynamic demand development.

Siltronic has seen great progress on its cost roadmap. For the full year 2014, we expect again a further reduction in variable cost for 300 millimeter of more than 10%.

Strong productivity growth allows us to transfer personnel to other WACKER Group operations. As productivity growth at Siltronic continues next year, we expect to fill a number of open positions in other WACKER functions with skilled people from Siltronic.

This should result in further reductions in direct labor cost in our wafer production. Without going into the details of the other divisions of the group let me make a few overall comments.

Polysilicon is well on track. Excellent operational performance and cost reductions strongly support the financial results.

In the Chemicals divisions we see a strong sales in dispersions and powders as well as good demand for silicone products. Growth in specialties applications support the results.

All this demonstrates that our strategy deployment works. For the future, certainly macroeconomic concerns, weak growth in the Eurozone, some excess capacity growth in China cannot be disregarded.

Yet looking at the positioning of our businesses, I am very confident about our capabilities and performance. On October 13th, we have celebrated a hundred years of Wacker Chemie.

In today’s environment such an anniversary is certainly a rare occasion. Long-term strategies in our businesses, a strong focus on customer needs based on innovative and high quality products have brought us this far.

We will continue on the path of creating tomorrow’s solutions today in order to prepare for successful decades to come. Joachim?

I will discuss our Q3 performance segment by segment and will provide some additional guidance. WACKER Q3 group sales were €1.23 billion, up 6% over last year and at the level of the last quarter.

Mainly growing shipments and product mix effects supported this performance. Group EBITDA reached €348 million.

Excluding special effects from the retention of prepayments and damage payments of €92 million, operational performance was about 11% better than in the previous quarter. This reflects an improvement based on volume increases, pricing effects and the good progress of our various cost reduction efforts.

Chemicals saw an increase in sales to €781 million, at the level of last quarter, but 7% better than last year. Both Silicones and Polymers reported new record levels of sales in September, after a weaker month of August.

EBITDA in Chemicals developed even better than sales at €123 million, 13% better than Q2 and 12% over last year. While especially inflation in VAM costs slowed profitability, good absorption of fixed costs was the main reason for this good performance.

WACKER SILICONES reported sales of €448 million, at the level of last quarter and 4% over last year. EBITDA in the segment reached €70 million, about 21% better than Q2.

This represents the best absolute results since Q1 2011 and reflects our strategy to move increasing amounts of products into higher value specialty applications. Silicones saw this quarter strong growth in automotive, coatings and textiles, while sales to construction and personal care lagged.

We expect full year 2014 sales in Silicones slightly over last year, with an EBITDA just below last year due to the release of a loss provision in 2013. Polymers saw sales of €288 million, maintaining the good level of Q2 at 9% over last year, driven by higher shipments mainly in Asia and the Americas.

EBITDA at €48 million was 11% better than Q2 and 7% over last year, following strong volumes and despite rising raw material costs. Pricing improved during the quarter, but did not fully compensate for the effects of the 30% VAM cost increases year-over-year.

As a result, the segment looks to implement a further price increase. In addition, our ethylene supplier to our own VAM operations in Europe has a turnaround in their plant.

Synchronized with this event we have a turnaround in our own VAM operations. Therefore, we have to buy VAM in the spot markets.

Overall, the gross effect of the turnaround and VAM inflation worldwide amount to about €35 million this year. About €20 million of this effect will hit the fourth quarter.

For the full year 2014, we now expect Polymers sales growth over group average, driven by construction, adhesives and coating applications. Despite the negative effects of the VAM shortage and the turnaround, Polymers expects a full year EBITDA close to the level of last year, helped by price increases.

Biosolutions reported higher volumes, especially in pharmaceutical proteins supported by the SCIL acquisition earlier this year. Sales in Q3 were €45 million, while EBITDA came in at €5 million.

Negative effects on EBITDA were plant revisions and higher VAM costs for gum base. For the full year, we now expect sales at 10% over last year and an EBITDA result at the level of last year.

At €252 million, sales in Polysilicon came in below last quarter as a scheduled plant maintenance reduced output. In addition, the sudden insolvency of a customer during the quarter resulted in reduced sales as we recalled material on route to the customer.

As a result, sales lagged Q2 by about €21 million. EBITDA in Polysilicon reached €180 million, supported by special effects of €92 million.

As previously guided, we retained prepayments and received damage payments relating to legacy contracts for solar polysilicon. In all of these cases, either original contract volumes were far higher than current demand or the respective customers stopped Photovoltaic operations.

Adjusting for these special items, performance in Polysilicon was good, raising the adjusted EBITDA margin to 35%, up from 32% last quarter. Positive pricing effects for solar material that began in early Q2 benefitted the full quarter.

In addition, high utilization rates and our cost roadmap contributed to results. Looking into Q4, our facilities in polysilicon continue to run at high utilization rates.

Pricing for the remainder of the year appears stable. A key issue in polysilicon apart from our ongoing focus on cost reductions is the construction of our Tennessee plant.

The project is on track and we now expect to start the ramp in late 2015. Additional volume from the new plant will be limited to less than 5,000 tons in 2015, amplifying our need for new material from debottlenecking activities.

For the full year 2014, polysilicon should see higher shipments and sales than last year. Siltronic sales of €216 million came in at the level of Q2, 10% over last year.

As Rudy already said, the industry observes strong demand, resulting in significant shipment increases. EBITDA at €33 million was about 18% better than in Q2, despite a similar soft pricing environment.

We are seeing a reduction in year-over-year price declines, as the industry operates at very high utilization rates. For Q4 we currently do not see a significant seasonal quarter-over-quarter decrease, thus indicating a strong demand environment.

Pricing overall should remain on about the level of Q3. Demand for 300 millimeter should grow, while 200 millimeter faces stable demand.

All-in-all, Siltronic full year sales will exceed last year’s reported number significantly following the full consolidation of the Singapore 300 millimeter activities. Full year EBITDA in the segment should increase significantly, coming in over €100 million.

This is close to the level of last year under full consolidation and despite about 10% price decrease in 300 millimeter year-over-year and scheduled maintenance in Q4. Our cost roadmap in Siltronic will yield another 10% decrease in variable costs of 300 millimeter and we prepare to continue the program into 2015.

CapEx focus in Siltronic at about €40 million in 2014 is on capability and not capacity as prices especially for 300 millimeters are too low to justify investments in volume. In 2015, we plan to double our investments in Siltronic for capability, installing advanced crystal growing capabilities.

Nevertheless, investment in Siltronic is below depreciation, which amounts to €150 million in 2014 and to €100 million in 2015. Net financial debt at the end of the quarter was €906 million, just below the level of last quarter’s end.

Inventories increased during the quarter as we prepared for the turnaround of our VAM facility and planned maintenance in Siltronic, yet overall working capital stayed flat at €1.1 billion quarter-over-quarter. We target full year net financial debt now below €1.1 billion as CapEx in Q4 amounts to more than €200 million.

Full year 2014 CapEx should reach about €550 million, below depreciation of about €600 million. Prepayments at the end of the quarter were at €731 million.

Net cash flow, which excludes the changes in prepayment levels, reached €178 million, significantly higher than in Q2 despite higher CapEx as other liabilities and tax provisions increased. The tax rate for the quarter was 34% as domestic earnings grew substantially.

For the full year, we now expect a tax rate of about 40%. EBIT more than doubled during the quarter to €196 million, up from €82 million in Q2.

As a result, quarterly earnings per share nearly tripled quarter-over-quarter to €2.43 per share. We are looking into Q4 with confidence.

Our businesses are strong and performing well. While Chemicals may have to deal with macroeconomic disturbances, Polysilicon remains strong at the level of Q3 as demand for high quality chunk material grows.

Working capital financing for Chinese solar customers, however, remains challenging. Siltronic has positioned itself successfully to benefit from potential price improvements in the industry.

Led by Siltronic and Polysilicon, the group continues to work on productivity improvements and cost reductions. On a group level and supported by special effects, we expect to meet our stated guidance of one-third higher EBITDA than reported last year.

At about €1 billion, group EBITDA margin should come in higher than 20%. Operator?

Operator, the first question is from Mr. Jean-Francois Meymandi at UBS.

Hello, good afternoon. Just well starting with two, I’ll reach you after.

The first one is on the chemicals in general. We see the sales up quite a bit, in your divisions.

At this point let’s say the demand trends in the industry are not that great, especially was surprised about Silicones. Do you see anything positive on the demand trend that we haven’t seen with the general chemical industry, and how do you expect that to continue?

Do you see positive mix of things like this? And the second one is on Polysilicon focusing on Q4, on the demand we saw a reduction, you said 20ish million lower sales.

Do we recoup that in Q4, or would you expect this demand in Q4 at the level of Q2 or more of Q3 in terms of volume? Thank you.

Okay. Let me briefly talk about the chemicals.

Our performance of the chemical segment was certainly very positive. I think what really seems to work is our focus on specialties.

We think that really helps us and we have stopped the price decreases and it’s looking more up now. That’s positive.

And in Polymers, demand is very high. I think we have because of our market shares; we have very good pricing power.

And certainly in some areas of the world, the construction business is not booming, but on the other hand, we are also supplying into the renovation business for example, not only what we see when the industrial construction business is slowing renovation of private homes for example is quite positive. But the most important effect certainly is the high market share we have and the pricing power we enjoyed in the Polymers business.

In addition to that maybe one thing that needs to be kept in mind, in the meantime also very strong in developing markets certainly China, which is almost the developed market, but Southeast Asia and India and we are performing very well in these segments.

Just coming back to the second on your Silicones, a year ago, a bit more than a year ago, you communicated that you were two-third commodity, one-third specialty, wanting to move to half-half. Can you quantify the progress that you’ve done within this year, year and a half?

We will certainly quantify that for the full year once we have harvested the full year.

Okay.

But it’s certainly going in the right direction.

Fair enough.

On Polysilicon whether we would make up for the loss sales in the third quarter, we will see. I mean the demand is good and let’s wait and see what happens in Q4 so far we’re pretty optimistic.

Okay, thank you.

Operator, the next question for Mr. Paul Walsh at Morgan Stanley.

Good afternoon guys. Thanks for taking my question.

There is really only one question. On the Polysilicon business, I guess to subset; pricing and energy.

It sounds like things are going very well in that business at the moment, you’re clearly sold out. What extent therefore is your guidance conservative?

You talked about stable pricing in Q4 versus Q3, but why not up given the situation you find yourself in being sold out? And why are you sort of early projecting a stable EBITDA in Q4 versus Q3, is that just you being conservative or are there other factors that play here?

I think if you look at the published pricing of the market, it’s fairly stable too. And this is why we are projecting that.

Okay. And in terms of the volume capabilities in Q4, can you produce more in Q4 or really looking at sequentially flat EBITDA in that business?

Yes, we are producing basically at the same rate as in Q3.

Okay.

Except for a few upside opportunities.

And in terms of sort of normal seasonality in the business ex-poly, can you just talk about the sort of normal seasonal trends that you’d expect to see in the chemical segments in the fourth quarter. And how that’s been impacted by the subsequent weakening at the macro environment please?

Yes, we certainly will a seasonal effect in the coming businesses especially in December, this is not unusual. As I said, of course we cannot completely decouple us from the macroeconomic trends.

However, in our specialty business and polymer, there is certainly a lot of specialties we see favorable development. And what we certainly can report on is really unusually strong September that give us confidence as we move into a fairly good Q4, knowing that December normally is a weak month or a weaker month.

But we are very confident about our chemicals business, because of these, especially these effects that I tried to explain when answering the question of Jean-Francois Meymandi.

That’s very helpful. If I may, just a quick one to come back on the first question I had on poly.

You talk about market pricing being stable sequentially. But you are sort of fully sold out and you produce premium product.

Are your prices entirely linked into what the spot markets are dong, and are there other players out there adding capacity that limit the extent to which prices can go up given just how strong demand is for you guys at the moment. Given the strength in the rhetoric around polysilicon demand, I’m just curious why we’re not seeing prices move higher more aggressively, I guess is the discount I’m trying to understand?

Well, I mean as you know, we never have commented specifically on our pricing. You can be sure that we used every opportunity to use the pricing power we have.

Okay. Thanks very much guys.

Thank you. Operator the next question is from Christian Rath at HSBC.

Yes. Thank you, good afternoon.

Also two questions on polysilicon, the first one I mean you provided a bit of guidance for the Tennessee plant for next for volumes. But could you give any indications for additional ramp up cost compared to the current year?

The second one, you also mentioned the bottlenecking activities in poly. Which quarter onwards can we expect any additional volumes?

Thank you.

As we said we are forecasting to start up to ramp up, let’s put it that way, in the second half more towards the end of the year as it appears right now. We will certainly try to do as early as possible.

Such a ramp up as you can imagine of as such a plant is not an easy task and ramp up cost certainly will be incurred. And it’s probably fair at this point in time, although we are really in the budgeting process and looking into all the details, so we might project clearer numbers along next year.

But looking at ramp up cost of something like a significant double-digit million dollar numbers is certainly reasonable. But you can be very sure that we try to do everything to ramp up as efficiently as possible.

And this is one of the clear focus areas for next year. Overall, I think it’s -- we cannot predict precisely what we can ship out of Tennessee for next year, but we can roughly assume a capacity for next year of our total polysilicon production of roughly 60,000 tons.

Okay. And one follow-up maybe on the ramp up cost.

Will this go fully through the P&L or is it also capitalized?

We are a German conservative company, and we will run this through the P&L.

Okay. Thanks.

Operator, the next question is from Mr. James Curran at Nomura.

Hi there, good morning. And just three questions from myself.

I was wondering if you could firstly give a comment on what you see in terms of the Polysilicon inventory situation for your downstream customers. And second question was just on the supply demand outlook for Polysilicon.

I know it’s just you’d incrementally increased your thoughts on Polysilicon capacity globally since your Q2 presentation. I was wondering if you could give some color around why that is the case.

And then third question, which is just more of a housekeeping question. On the net cash flow guidance, I think you’re guiding for a net cash flow it’s around the prior level, but if we look where we are after nine month it’s way ahead of that.

So, I was just wanting to understand delta between the two? Thank you very much.

James, I would like to start with the last question where we said we expect a further increase in financial debt of roughly €200 million. Now let me say it (inaudible).

It’s our target to stay below €1.1 billion in financial debt. If you take our fourth quarter in regards and take -- maybe a little bit conservative guidance of $1 billion for the fourth quarter.

You have to calculate and the EBITDA of €140 million. We have said in this call, you have to deduct €200 million investments, you have to expect that the amortized prepayments of around €50 million.

We have to do special payments for tax, because we have to catch up with our tax prepayments, because of the better results, that will cost another €50 million. And then we of course high approach in expenses in the quarter they are already accrued, but this is because before Christmas, there’s always an additional month salary.

And there is a bonus the 100 year anniversary to the employees and that is around €35 million. And so if you add this up then you come to a financial figure of close €1.1 billion.

Okay. And on Polysilicon supply and then for future capacity.

I think there are many notes in the market about additional capacities from smaller players and there are also big announcements and we cannot disregard that. And this is why we come to higher supply of Polysilicon in the market for the future years compared to the past.

But on the other hand, if demand grows, if Photovoltaic grows and the growth as is projected, not only by our market analysts, but especially by our customers. Then I think we are very confident that we can place our material in the market because of also the quality of the material that we can provide.

Okay.

I’m sorry; you had the question about the inventory?

Yes, absolutely.

We do not see excessive inventory in the market. We see healthy demand from the customers.

So no impact to note in Q3 in terms of slow-down in shipment as a result of high inventory levels of customers?

In our Q3, no.

Yes. Okay.

I would like to add, certainly it is difficult to forecast the policy of taking inventory at the end of the year by the Chinese customers, because sometimes, as you know, they have financial weak balance sheet, and they have to manage their balance sheet. But this is always an open question every year.

And if I look to the past years, there was quite usually strong demand in the fourth quarter.

And if this comes true, it will be a very short-term effect only.

Okay. Understood.

Thank you very much.

Operator the last question from is Mr. Jean-Francois Meymandi at UBS.

Hi. Thanks for taking follow-up.

As I heard you, you are going to pay a 35 million bonus for 100th anniversary, 150 anniversary.

No, no. It’s a combination of the bonus and parties that people earn in November [13th] salary because Christmas is coming.

Okay. And another quick question on the dividend side, can we expect an anniversary bonus, to match interest of employees and shareholders at the same time?

That’s the first one. And the second one, on Siltronic, when I look at your slides, it looks like two third of your net U.S.

dollar exposure is in Siltronic. And it seems that the benefit there has not kicked in yet.

Can we expect starting in Q4 the majority of your €4.4 million for $0.01 movement in euro dollar to come there and how much are you hedged, do you think, in your dollarized position in Siltronic?

Let me start with answering the dividend question before I turn to Joachim. We have a very clear dividend policy as you know.

But the final dividend is decided in the spring by -- well actually it’s proposed by the supervisory board and decided at the annual meeting.

Okay.

That feature and this procedure will be kept.

Now your question concerning hedging, you are right, there is a significant currency exposure in Siltronic with respect to the dollar and we see strengthening of the dollar compared to the euro. This is beneficial for Siltronic.

We usually hedge 50% of our exposure for one year and with respect to Siltronic a smaller portion for another six months. So, the impact, the immediate impact of the appreciation of the U.S.

dollar we will not see to that extent and especially we will not see a very much effect in the fourth quarter because we have to take the hedging of one year later or one year before and then it means that we have hedged at 1.35 euro cents looking to today’s figures not a very good hedge.

Okay. And just your Japanese competition says they are looking at increasing pricing.

How do you see that on the ground yourself? Do you see them moving prices up, or pretty much stable?

If I read what the industry analysts say, then there is expectation of increases in pricing in the next year, maybe in the mid next year. And currently what we observe is that prices are more or less stable.

Okay. Thank you.

Ladies and gentlemen, this concludes the Wacker Chemie Q3 2014 conference call. The next time we have a conference call is going to be on March 17, 2015.

If you wish to reach us in the interim, please contact Wacker Chemie Investor Relations. Thank you very much for your interest.