Wacker Chemie AG

Thank you, operator. Welcome everybody to the Q1 2015 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 our 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, a press release on our numbers, and an excel file detailing our data. A written version of today's presentation which will be posted on our website about half an hour after this call.

You will find all of it on our website at www.wacker.com under the caption Investor Relations. Staudigl?

Ladies and gentlemen, welcome to our first quarter 2015 conference call. We have a strong segment in comparing currency fact, Wacker recorded what we think is a very good result today.

We achieved sales of €1.33 billion of €267 million in the first quarter. Last year the tax was retained to payment and damages had a big impact on Q1 results amounting to €114 million.

In comparison, today reported Q1 results I think we should look at underlying profitability of our business that we have seen a significant improvement in earnings, excluding special effects, our Q1 able to 53% or €91 million higher than last year. Compared to last year, chemicals increased its absolute EBITDA contribution by almost €50 million Siltronic saw a very impressive improvement year-over-year of €25 million.

Year-over-year Polysilicon, excluding special effects, was up 12% despite already absorbing rent up cost in Tennessee. As you know, we are looking at a strategic shift in our portfolio with a change in the only sheer structure of Siltronic.

That talks about our rational for this move and in our view of Siltronic today, reshaping the Siltronic ownership structure, efficient for both, Wacker and Siltronic. As a result, Wacker could invest additionally available funds in reinforcing its chemical and Polysilicon businesses.

In the event of an IPO, Siltronics harnessed additional growth opportunities by expecting the capital market itself in case it does. The further option under consideration as communicated on March 10 is divestment towards strategic investment, presenting stands that we can discuss the current projects better for obvious reasons.

Siltronic has done its homework over the last year and the response agreeing threshold it has improved mid-level manufacturing footprint by reducing the complexity and the number of balance sites. The acquisition of the majority of the transaction in Singapore created a new impetus for costs reductions, sharing best practices reports now that continuation of ambitious cost estimate across the entire business.

Siltronic was able to withstand the major price declines we have seen in this industry for the last year without much of an impact on the EBITDA. For Q1 EBITDA margin of about 17% demonstrates perpetual effort to maintain market share in the growing market through operational excellence efforts and through reduced cost significantly at the same time.

Demand for ratios is growing at above the market average rates, markets are now driving this business effectively complimenting and even substituting PC demand. More and more, everybody devices such as Smartphones and Car Sensors require enhanced semiconductor contents.

As a result Wacker as an information technology research and advisory company has raised its market growth forecast for 300 millimeter to 6% for 2015 from the 4.5% of its previous forecast. Given already high utilization rates in the industry, it is likely that the value chain will soon come under pressure to improve yields and operational excellence with product demand.

For a strong volume in the semiconductor wafer industry to higher industry operating rates there is some good news on pricing. We are observing stabilizing prices for 300 millimeter and some improvements in 200 millimeter in Q1.

As this far from what the industry needs to get back to the investment level but it is a good start. We are looking forward to see if the industry's efforts to raise prices from new report.

The potential changes at Siltronic considers a strategic shift in our portfolio. Siltronic is a highly competitive technology leader in this industry recognized by its quality product, delivering into all of leading centers.

The team at Siltronic is working hard to bridge the gap with profitability with a much larger competitors in the Far East, and they are making very good progress. I recall that Siltronics potential exit from our portfolio would lead to an increasing focus on our energy activities which provides for a much clearer industry profile and the reduction in the midst to long term capital intensity of the group.

Going forward, Wacker will continue to focus on its successful cost revenue and forming our business by investing more into downstream activities resulting in lower capital intensity growth. This means for instance, adding more tax centers who are needed to be even closer to our customers with tailor-made specialty provisions coupled with a strong focus on process improvement and productivity.

All of this of course are linked to our Polysilicon and chemicals business, our target is to achieve higher levels of fresh generations and return on capital employed. All of this increases in ability in reacting to future challenges can advance financial and generate value for our shareholders at the same time.

Before the opening details our performance this quarter as we stated, overall, I think we achieved a good result for this quarter. Yet looking into the details of course I see that there is still more to do and to gain.

We continue to drive our cost reduction roadmaps which have already contributed to this good result. Joachim?

Yes, I will provide you now with more detail on our segments and other items. In addition, I would touch on guidance at segment level in line with our visibility.

Our chemicals business reported Q1 phase of €809 million, up 15% over last year and 13% over Q4. EBITDA in the chemical segments in aggregate improved by 54% year-over-year and increasing by €74 million to €136 million in Q1, higher volumes, positive effects from currency, and better pricing in some products supported this result.

Higher costs compared to Q1 last year for silicon material and then however reduced the result. Silicones report higher sales at €475 million, 12% over Q1 at sequentially 13% better, positive price to volume and currency effects supported this.

EBITDA in the quarter was at €68 million, sum 38% higher than last year and twice as higher as even though slow Q4. We saw good volumes in electronic automotive and medical applications.

Holding performance back, the industry proteins personal care and giving the winter season some slower construction products. Our capital intensive silicon plants operated at full utilization rate during the quarter.

Looking to the next quarter at silicones, we expect to accelerate the positive trend in volumes although a slower European macro environment possess a risk factor. Looking into the full year we now expect to report sales growth of more than 10% with improving margins.

When volumes of full year reminds that the first quarter tends to see lower sales and earnings for the seasonal reason. Earnings improvement in silicones depend on volume growth and currency movement, expectations on raw materials are mixed.

Polymers reported sales of €285 million, about 90% better than last year supported by currency. In dispersion powders we achieved low double-digit volume growth while liquid dispersion showed lower growth rate.

EBITDA in this segment moved up sharply, at €60 million EBITDA was only as twice the level of Q1 2014. Currency effects compensated for rising raw materials year-over-year.

Good utilization, positive mix effects, and productivity gains supported EBITDA in the quarter. For full year we are looking in Polymers at sales growth of about 10% with an EBITDA margin in the high teens.

Volume increases in new powder markets compliment dispersion growth in coating and packaging. To support this we expand our VAE dispersion capacity in the U.S.

and specialty in monomer production in Bughausen. The pipeline lead to a refinery in Kentucky to give us our ethylene sourcing and promise to generate cost reduction, a direct access to the ethane based refinery supplement costly cooled rates [ph].

Biosolution reported Q1 sales of €49 million and an EBITDA of €9 million following higher volumes and price increases, and some currency support. The quarter saw good volumes in pharma and agro application.

For the full year we expect sales in EBITDA and Biosolution to increase substantially. Sales in Polysilicon reached €289 million in Q1, 11% higher than Q1 last year, and over previous quarter following strong demand for high purity solar silicon at slightly pricing.

EBITDA came in essentially at guidance when we last meet. You will remember that I asked you then to model the year with about €25 million per month in EBITDA as we expand more rem cost in Tennessee and at current exchange rate.

This quarter in Polysilicon was expected as guided with EBITDA of €79 million but improving €4.7 million in prepayments in damages. Excluding last year's special effects, EBITDA increased by 12% year-over-year, sequentially however, EBITDA was down as rem cost intends to increase significantly.

Europe pricing Polysilicon has made or less left sequentially despite a significant U.S. dollar and renmimbi price declines observed in the Chinese market.

Construction at the site in Tennessee proceeded as planned, CapEx in the first quarter was €134 million. Looking into the next quarter for Polysilicon, you see our full year pre-operational expenses for the Tennessee plant increasing now to almost €100 million, the increase being largely due to currency.

At current Polysilicon price levels, we still want to generate about €25 million per month in EBITDA, which is an ambitious target. Siltronic sales came in at €239 million, 17% higher than last year, and supported by a weaker euro.

EBITDA of €40 million reflects high utilization, good cost performance, and a pricing environment that stabilized during the quarter despite slightly lower average prices versus Q4. Net currency effects on EBITDA were small as transaction effects on accounts receivables almost compensated hedging losses in Q1.

As a result, the EBITDA margin was 17%. At €9 million, EBIT in the segment was positive for the second quarter in a row.

While 300 millimeter US dollar prices today are about 10% lower than in Q1 last year, the euro conversion almost corrected. In euro terms, prices for 300 millimeter today are at the level of Q1 a year ago.

Good progress on its cost roadmaps coupled with higher utilization rates lead to significant improvement in Siltronic's operations. Industrial utilization during the quarter were in the 90s, this reflects a slowly tightening market for 300 millimeter wafers in our view.

For the next quarters we expect to see the weak euro continue supporting sales, while hedging costs for the next three quarters should amount to about €40 million. Siltronic has improved so much that absent hedging effects at similarly utilization ratio [ph] and even without prices increased from today but now has the potential to reach 20% EBITDA margin in line with Wacker's 2017 target.

For the 2015 full year, we expect a significant EBITDA increase over last year as mentioned in the last call. Sales in others came in at €52 million with EBITDA amounting to €12 million, this reflects a strong business, the icing salt, during the quarter.

Currency effect on sales and EBITDA were substantially in Q1. Currency effects contributed almost €100 million to sales in Q1 when compared to Q1 last year.

In addition to this translation, transaction effects on accounts receivables supports profits in many of our businesses. For the full year 2015 we now expect a positive impact on EBITDA from currency of €125 million, of which about €70 million show in EBITDA.

Q1 saw positive net cash flow at €17 million, substantially below from Q1 last year, when net cash flow was €105 million due to the absence of large special effects and prepayment inflows, as well an increase in CapEx for the Tennessee project in the quarter under review. The level of prepayments in our balance sheet decreased by 6% to €646 million as we shipped under legacy prepaid contracts.

Net financial debt increased to €1.2 billion, 11% higher than at year-end following CapEx and reductions of prepayments. The translation effect of a weaker euro on debt was about €90 million.

We expect CapEx for the full year now at €725 million, as we finish the Tennessee project among cost inflation and the US dollar appreciation. For the full year, we expect a further increase in net financial debt between €200 million and €300 million year-over-year, both from CapEx and translation effects, as our local financing in the U.S.

and other countries increases in euro terms. This translates into the positive net cash flow for the full year 2015.

Our financial result improved in the quarter under review to minus €7 million, this includes construction related interest, interest accruals on pensions and other provisions, as well as positive impact of €12 million from the appreciation of certain assets values. Our tax rate in Q1 was 41%, the higher level reflects non-tax deductible startup losses and losses at overseas subsidiaries.

Our tax guidance for the full year remains unchanged, we still expect a tax rate of about 50% for the full year as non-deductible expenses for the ramp in Tennessee increase through the year. We talked about the group effects of these non-tax deductible costs before, they weigh on profit-before-tax but offer no relief in the tax line.

With increased earnings, however, this effect gradually decreases and we should see lower tax rates conversion to the German statutory rates of about 30%. You will note in our balance sheet the significant increase in pension obligations during the quarter; these reflect the net liability of defined benefit obligations.

The increase of pension liabilities during the quarter of €460 million relates to a significant quarter-over-quarter decline in the discount factor from 2.3% to 1.65% in Germany. My view on this is that it exaggerates [ph] the economic liability embedded in our pension scheme.

The historical performance of our pension fund is around 4%, using a smaller - in particularly the return rate today will only result in a distorting positive impact on the financial results going forward as pension funds returns exceed the discount rate of 1.65%. Net income for the period amounted to €70 million, about 10% higher than last year despite lower special effects resulting in €1.42 earnings per share.

Siltronic had a positive contribution to group net income in Q1. Let me sum up guidance now.

We are looking confidently into the second quarter and expect sales and EBITDA performance at about the level of Q1. Please bear in mind that the currency tailwinds will wind down in the course of the year as raw materials and other input factors influenced by foreign exchange may see some inflation.

Overall, our guidance given at the last call remains essentially unchanged. As I said at the last call, we are still seeing some risks to the development of our business this year, full year GDP forecasts for instance are still difficult today.

We should also consider the risk of Greece exiting the Eurozone, a potential deeper crisis in the Ukraine, as well as the monetary policy changes and the effects on exchange rates. Against this background, we expect full year group sales to increase about 10% per year-over-year with support from the weaker euro.

Following cost; strong shipments in our cost reduction efforts, we expect EBITDA, excluding special effects for the full year 2015 to increase somewhat over 2014 to about €900 million. While there is a risk associated with the forecast, as mentioned before you should note that our conviction to achieve and maybe even get to a small upside to this forecast has improved.

For the remainder of the year, we expect to see retentions of prepayments and inflows from damaging payment again. While these special effects in 2015 will not reach 2014 levels, we believe today they could run well over €100 million.

In summary, this means that with some potential prepayment retentions and damage payments, we are confident that we can reach €1 billion in reported EBITDA for 2015.

Operator, we are ready to take questions.

Operator, the first question is from Laurent Favre from Bank of America Merrill Lynch.

Can you hear me?

Yes, we can hear you.

Very good, thank you, good afternoon, and I've got three questions. The first one is on Polysilicon, we have seen spot prices moving down quite substantially over the past three or four months, and I'm just wondering what in your view it means for your business?

And for Wacker Chemie in general, if I look at the Chinese customs data, it seems that prices initially followed a bit with a lag versus the spot market but [indiscernible] the March data, clearly that reversed. So I am a bit puzzled by that.

The second question is on silicones; you mentioned in your presentation that you were running at full rates in siloxanes, so I am just wondering if you could talk about the outlook for pricing, given what we are seeing on the raw material cost for that division in particular? And the third question is on polymers.

Twelve months ago, the business was squeezed on things like VAM. And I guess VAM has come down sharply end of last year and during Q1.

I'm just wondering to what extent the Q1 margin of 21%, EBITDA margin of 21%, has been positively impacted by that VAM decline and where you could see some lag but lower prices in the second quarter, and therefore to what extent the 21% is really exceptional and should not be extrapolated. Thank you.

Let me answer the question on Polysilicon. Yes, we of course observed all the official and unofficial pricing data that are published and we are of course looking especially on the import pricing as well as the Chinese pricing data.

And let me make first a statement on our policy on that. We always strive to sell our products at the highest prices possible and we certainly think that for premium product we should get premium prices.

And if we look at the data that are recorded, then you can see that the import prices from other Asian competitors are falling well ahead of some small reductions from our import data, and the Chinese prices are falling basically in line with the other Asian import prices. It clearly shows that there are some competitors in Asia, and in China and neighboring countries that are pushing obviously new capacity into the market.

But we certainly are not part of leading a price reduction in the opposite, I mean, our intention is really to get as high prices as possible. So, that means in effect additional capacities with maybe more reduced demand in the first quarter or in the fall of last year in the first quarter is combined with the new capacity which is the reason for this price drop.

On the other hand, the market for Polysilicon will grow further, there is no question about it. The market participants are now expecting installations of over 57 gigawatts, and at the top end people are talking even about between 57 gigawatts and 60 gigawatts.

But we will see what the actual data then for this year will be, but some model makers are already discussing a potential shortage of materials in the third quarter given the expected drive in demand. And other observers like market companies like Gardner [ph] just has raised the expectations for semiconductor growth which I mentioned in my talk.

And that adds to the demand for very high quality Polysilicon this year as well.

Thank you. If I may just follow up on - in the comments you made, earlier on you said that you were still targeting €25 million - it's already down per month to €300 million.

And you said at current prices, I mean, what price are we talking about? Are we talking about at current - what we are seeing in spot, early Q1, late Q1, average Q1, your prices, the Chinese data?

I mean, you can imagine that we are struggling a bit.

I talked specifically about our pricing, and I think so far it was a good policy to do that.

Okay. Thank you.

And with respect to your question on silicones, the utilization in silicones was not that bad last year; nevertheless, we experienced a negative price trend. So, finally we had a negative price trend if you compare to the previous year.

And overall, I think the best and fair assumption for this very competitive industry is that we will have stable pricing this year. With respect to your question on polymers, you are right; we enjoyed the benefit of an attractive raw material cost in the first quarter on the polymers business.

And the VAM costs were actually higher than in the first quarter last year, but the expectation is that they are lower than in the second quarter of last year, and we had more favorable pricing for ethylene. So this supported too this really high EBITDA margin of more than 20% for Polysilicon, as well as for polymers but some of these price movements in our contracts - we have to give to customers, and so that's why I said you have to normalize it, and at current exchange rates we expect to achieve an EBITDA below 20% in the high teens for the full year.

Okay, thank you. Thanks a lot.

Operator, the next question is from Mr. Alexander Karnick at Deutsche Bank.

Yes, hi, thanks for taking my question. One - a very - just, I guess, housekeeping.

Could you help me understand sort of what you've discussed in the sense of your Siltronic outlook? I'm particularly interested your hedging cost remarks, €40 million over the next couple of quarters, how do they relate to a further cost reduction which you are obviously very focused on?

Can we expect - conceptually, a flat margin over Q1 or how do we need to think about that? And the second one is a more strategic one around Siltronic, flat pricing in euro terms, fine, that's helped by currency.

We are still down in dollar terms despite the fact that we are running very close to capacity utilization. You mentioned the Gardner [ph] upgrade, etcetera, etcetera.

At what point or what would be driving a stabilization on the dollar basis in your point of view and when would we see that, not to mention sort of the potential increase in price but just a stabilization in dollar terms, I would be very interested in hearing your views on that. Thank you.

Please understand that we cannot - with respect to potential plans, make any forward-looking statement on Siltronic. With respect to questions in the past, I would like to reiterate that the really - and if I talk about pricing, I look to pricing in U.S.

dollars, that sequentially if you compare Q1 with Q4 last year, we have got a slightly positive movement on 200 millimeter and a very slightly negative movement on 300 millimeter, but you can say stabilizing because there are some smaller customers where price increases have also started. So this describes Q1, and please understand, I cannot go forward with any further statements.

Okay, got it. May I take the opportunity then to ask one just clarification question on the silicones.

You mentioned, I think that above 10% or 10% topline increase with improving margins, did you refer to Q1 - relative to Q1 or year-over-year improving margins for the rest of the -

No, no. No, the 10% is the guidance for the year, it is also supported by the currency exchange rate.

Of course, yes.

And the margin improvement - I think that's what we said already when we talked about compared to the previous year, when we talked about our outlook in the last call. We are expecting improving margins.

Okay, thanks very much.

Operator, are there any more questions?