Wacker Chemie AG

Thank you, operator. Welcome to the Wacker Chemie AG Q1, 2016 conference call.

My name is Jorg Hoffmann and I am the Head of Investor Relations at Wacker. With me are Dr.

Rudolf Staudigl, our CEO and Dr. Tobias Ohler, our CFO who will take you through our presentation in a minute.

The presentation is available on our webpage under www.wacker.com under the Investor Relations. Before I begin, please allow me to point you to our Safe Harbor statement, which you will find at the beginning of the presentation deck.

With this, let me hand you over to Dr. Staudigl, our CEO.

Dr. Staudigl?

Thank you, Jorg. Ladies and gentlemen, welcome to our Q1, 2016 conferece call.

You will have noticed that we are taking advantage of the new rules for quarterly reporting. We have reformed our reporting package also based on your inputs and hope that it now better meets your requirements.

That said your feed back is always welcome. Let me start now with Page 2 in the presentation.

For the strong volume and cost performance in chemicals in the beginning of large scale Polysilicon production in Tennessee, Q1 was certainly an exciting quarter. It saw sales of €1.3 billion within EBITDA of €229 million.

Strong demand and efficiency gains drove the share of chemicals and EBITDA up to 70% of the total group result. Polysilicon and Siltronic on the other hand, saw lower prices quarter-over-quarter.

In addition, ramp costs of about €30 million reduced earnings during the quarter in the Polysilicon segment as expected. For the solid EBITDA performance in chemicals and then improving pricing environment in solar, our confidence in the outlook for the full year has risen since we last presented to you.

We still see a slight increase in full year sales but now with more than just slightly better profitability for the full year. As a result, we are increasing our full year guidance to an EBITDA between 5% and 10% higher than in 2015 excluding special effects.

In Silicon and polymers, efficiency and productivity programs are supporting running even as some area see softer pricing. All our chemicals businesses benefited from strong growth in Asia.

Within Asia, regional performances vary. China for instance sees good volumes but with softer pricing.

India on the other hand maintains a strong upward momentum. At polymer, we are happy to have the new capacity in Calvert City to support very strong demand for dispersions in the United States.

In Polysilicon, we have just celebrated the inauguration of our plant in Tennessee. It is an impressive site with the latest and most advanced Polysilicon technology.

So far we have produced about 1,000 tons which we have currently shipping to customers for evaluation. The overall market environment in solar Polysilicon is improving.

We are facing very strong demand. Inventory seems to have almost been cleared out of the value chain.

Although Q1 ASPs were still below Q4, prices have been moving up with the clear positive trend for a few weeks now. Throughout the solar industry, power density and modules has become a focal point.

As a result, we are seeing faster growth in high performance and especially in monocystalline applications. This trend favors us as a market leader for high quality silicon material.

Let me now hand over to Tobias for more detail on our financials.

Thank you, Rudolf. I believe the slides on the segments are essentially self explanatory.

So let me focus on just a few items. Moving on to Chart 4, you will see our Q1 P&L with some comments.

Our gross margin decreased as expected by 4 percentage points to 16.7% after €30 million of ramp costs and additional depreciation in Tennessee. Other moving parts, we have year-over-year price declines in Polysilicon and Siltronic as well as volume improvement and efficiency gain in most segments.

Depreciation in Q1 increased year-over-year from €141 million to €170 million. This follows the Tennessee investment and the associated growth in the asset base.

For Q2, we expect this to grow to €180 million and depreciation for the full year will reach about €720 million. Page 5 shows our balance sheet.

Please note that the prepayment levels are now at €413 million and number that we expect to decline to below €300 million in the course of this year. Pension liabilities increased significantly as a reference basket of bond rates declined further.

We are now discounting pension liabilities in Germany at 2.15% and in US at 3.8%. On the next three slides you can see our chemicals businesses.

While some area saw price deflation all segments showed better cost performance leading to margin expansion. Both silicon and polymer generated strong volumes in Q1.

In silicon, the strong operational performance and efficiency gains from various initiatives were coupled with above average growth in specialty application. Polymers on the other hand saw very strong growth in dispersions and strong volumes dispersible powder also with a very good cost performance.

Looking ahead, our outlook for chemicals is basically unchanged. In Silicon and Polymers, we are seeing mid single digit sales growth at 16% margin in silicon and about 19% margins in polymers for the full year.

Biosolutions had solid start and our guidance there remain unchanged. At Polysilicon, page 9, prices were substantially lower than last Q1 and still lower than in Q4.

However, during the quarter industry pricing started to improve. We will see this effect in our Q2 results.

Cost reductions, debottlenecking efforts and productivity improvement in our German plant supported Q1 results. Excluding €30 million in ramp cost in Q1, we generated an EBITDA margin of 25%.

We are currently seeing very strong demand for our product as global demand increases and mono installation outpaced multi-crystalline modules with better conversion efficiencies. Siltronic on Page 11 have their own call today.

They spoke of slightly better than expected sales growth in softer industry environment and related effect on pricing. Against this background, Siltronic managed to keep its margin at Q4 level, achieving an EBITDA margin of 10.7%.

For the full year 2016, Siltronic has narrowed its guidance to low to mid single digit sales decrease, on EBITDA Siltronic has confirmed its guidance on a slightly improved EBITDA margin relative to 2015. Our net financial debt on Page 12 was essentially flat compared to year end 2015.

CapEx in the quarter amounted to €111 million more than a third below last year's Q1 CapEx. Cash outflows for investment were higher than the recorded CapEx for the quarter as some CapEx from Q4 was paid in Q1.

As mentioned on our last call, our guidance for CapEx for the full year stands at €425 million. As we increase our guidance for EBITDA, this also implies an improvement in underlying cash flow generation as a result net financial debt should come in slightly lower than last year.

Now let me hand you back to Rudolf before we begin Q&A.

Thank you, Tobias. Before we go into the Q&A, let's have a very quick look at current trading conditions.

In chemicals, we are seeing the typical seasonal improvements in Q2. As indicated Polysilicon its pricing moving up while we operate at a full rate.

The ramp at Tennessee continues and we'll hold earnings in Q2 back by about €20 million. Siltronic will see some relief from lower hedging losses against similar trading conditions as in Q1.

As I said at the beginning of this call, our overall confidence level has risen since we last spoke six weeks ago. Given the solid and profitable start in chemicals and improving pricing in Polysilicon, we see better than initially expected profitability now for the full year.

Therefore while we continue to expect a slight increase in sales, our projection for EBITDA excluding special income is now between 5% and 10% higher than last year. This concludes the presentation today Ladies and gentlemen.

Thank you for your attention so far. We will now happy to answer your questions.

Operator?

The first question is from Mr. Andreas Heine of MainFirst.

Yes. Thank you very much.

Can you hear me? I have question on silicon.

The silicon metal prices came down quite a bit. And I know that you have probably quite a number of supply contracts.

I would like to know whether the silicon metal price declined is something which we see immediately so within the coming quarters or whether this is more an issue for 2017? But even looking into lower raw materials, the strong increase in margin is probably not driven by that.

Could you elaborate whether the step up in margin from last year to this year is something which is first is sustainable and might continue like this in the coming years? Second on polymers, the polymer margin improvement was probably very much driven by raw material costs substantially more than silicon's.

Now raw material costs are increasing. How do you see here the margin progression in the framework of higher ethylene and potentially higher VAM prices?

And then last but not least, CapEx is -- they have given the guidance for this year. But as far as I know the CapEx for this year even includes some investments for the Tennessee plant.

So going forward into 2017, 2018, 2019 and so on is it fair to assume that the CapEx will stay on the level between €0.4 and €0.5 billion for several years? Thank you.

Okay. Andreas, this is Tobias speaking.

May I start with the silicon question? For silicon metal we have a bunch of different contracts and as you said some of those contracts will react immediately to the price decline that you see in published prices and others will trade trail that.

And I would assume that we see -- yes, we see something already in Q1 and we see that also going forward in the next quarters. And how silicon metals prices will look in 2017, yes, I think it's too early to say.

If you look at the margin start, silicon had an excellent start and above prior year. And that has a number of factors without rank order.

It is about that very good volume and product mix that we had with reasonable prices and some pockets lower but beyond that very good cost performance also in our upstream production unit. And for the full year we are targeting to achieve our margin of -- that we have set as target of 16% and that's guidance so it could be that the first quarter is margin wise the strongest.

For polymers we also have a very good start with strong margins. But here you can compare it to last year.

We also had a very strong start and that has something to that we now have -- after having achieved very good volume growth in last year on a different exchange rate level also we are now trying to keep that momentum and we see a little impact from raw materials and as you've said some of the raw materials are trending in the other direction already but if you look at key raw materials like ethylene and VAM, I would mostly see them flat for the next quarters. So our target there is to achieve 19% margin that is the number that we have achieved last year.

Okay, thanks. And on the CapEx line?

For CapEx, I think we have been explicit on this year, this is €125 million. We have been explicit on the next year.

It should be a similar number. I think beyond that we have always said that the capital intensive phase of Wacker Chemie has been completed with the Tennessee investment.

So I think that range that you mentioned is sort of okay.

Operator, the next question is from Laurent Favre, Bank of America.

Questions. The first one is one Polysilicon pricing.

I mean it looks like we are now at an interesting juncture where the data we get from Chinese customs show a price level for Germany which is now below spot level. Through last year when spot was coming down we heard on conference calls that the supply demand of your grade of your quality was actually not loosening.

So I am just trying can you talk about how you see the dynamics for the rest of the year? Do you think that actually -- the supply demand for your grade is tightening even more and therefore you can see price increases from here?

Or should we just forget about this spot price. That's the first question.

And second one on emerging market generally for the chemical and businesses. Now the lot of care obviously on conditions on the ground, it looks like this was more of scare than actual demand for, so I am just wondering have you seen a slowdown in demand for your chemical products earlier this year then acceleration that through the first quarter and/or would you just say it has been business as usual and for the rest of the year you think that it's going to continue to be a very strong growth center.

Thank you.

Laurent, this is Tobias. I start with the second question on the regional performance in chemicals and especially in emerging market.

I think it's little bit a mix bag, it's patchy. There is no clear result from looking at the numbers.

We have said that we had good volume growth in China, an area of concern but we've seen softer pricing. We had an outstanding growth in India that continues and is very dynamic market.

In silicon, we also had a very good strong growth -- very good growth in Southeast Asia. But for example polymers was little bit slower on that.

So I wouldn't draw any clear conclusion from the first three months of this year. But overall the performance in Asia for chemical was very strong.

And on your question about Polysilicon pricing. What you see in these input data and you have to consider that there all this is a time lag of something between six to eight weeks between the agreement with customers.

And what is recorded in the input statistics. So the agreements from quite sometime before you saw this price level.

This is really important to know. On the dynamic, there is this upward trend in general that is reported right now.

We can see that in our agreements with customers. And I am not in a position to really forecast pricing for the rest of this year.

It's certainly goes in the right direction now. What we are seeing is this trend for significant growth and especially in so called high tech application for monocystalline material and in order to really very efficiently grow singular crystals you have to use high quality material.

And that's very positive trend.

Operator, the next question is from Jean-Francois Meymandi at Morgan Stanley.

The first one is on your MOFCOM agreement Dr. Staudigl, can you tell us where we stand right now because the agreement is expiring in two days for your anti-dumping in Germany.

And if there is anything to report in the US as well because there is a lot of chatter around that at the moment. And the second one is in Polysilicon, we have seen let say supposedly good volumes in Q1, you start having some volumes in Q2 from Tennessee, are we going to see higher shipments quarter-over-quarter or the ship -- the higher shipments will come from Q3 onwards?

Thank you very much.

Okay. Let me maybe start with the volumes first.

Demand in the first quarter was certainly very strong so there I mean as a consequence there was some destocking as well. And so stocks there running very low.

On the other hand, we will see increased volumes from Tennessee in the second quarter. If you can put that together and you can make good guestimate.

On the tariff issue, as you know, and that you rightfully said the agreement expires on April 30, what you have to keep in mind is that our Polysilicon case always has been merit through the solar module case in Europe between the Chinese solar module produces and the European Commission. In December 2015, the European Commission has entered into so called expire review on the module case.

And as a consequence of that the price undertaking agreement, this minimum input price agreement for the solar modules into Europe has continued unchanged. This decision to open this expire review was officially communicated by the European Commission on the last day.

I mean on the expiry day. And therefore we expect the same behavior of MOFCOM in the Polysilicon case.

As I reported in previous conference calls, we said that we are in good communication between Wacker and MOFCOM and therefore I would summarize it that we have all reasons to assume that our price undertaking agreement, our minimum input price agreement continues unchanged after April 30. And we consider this very positive for our Chinese customers who depend on our high quality material.

And maybe I remark to the US there is heavy discussion between Chinese officials and American officials.

When was this -- [Multiple Speakers]

I don't know. In this case it's direct communication between government officials of both sides.

We are informed but we are not part of the discussion.

And is your big American competitor part of discussion or not?

We are -- In America we are an American producer. So we have the same -- we have the same rights and obligations as American producer.

Operator, the next question is from Simon Fickling at BNP Exane.

Hi. Good afternoon.

I have two questions please. And firstly on Polysilicon you mentioned the faster growth in mono and over multi.

Can we just tell us a little bit the current split between mono and multi in your business and how different growth rates and what the difference price points are and if there is a big margin difference just so we can think about the impact about trend going forward. And the second question is on the Calvert City plant in dispersion.

And is there any help you can give us to the scale of that and the potential impact on that one at the divisional level and so current levels of utilization at that plant and therefore spare capacity. Thank you.

Of course we cannot give you detail to split of our business for different application of the Polysilicon. But we have published and I think there are published data on the splits in general between mono and so called high performance multi applications.

And what you can see in the forecast is that the mono application is growing so over the years there will be -- there is definitely a trend towards more and more mono.

And with respect to the capacity increase. I mean we have additional reactor was 85,000 ton in capacity and we are really happy to have that now online.

What I can say is that we had record volume in the first quarter in the US, production volumes we have never seen at that level before. And I don't have the specific number on the utilization of a new asset.

But it is performing very nicely.

Okay. Thank you.

And what you do normally when you start up brand new asset like that, that are certainly much higher in productivity then some old assets. You fully run the new assets then you reduce the utilization, I mean if you are not 100% filled in production you reduce the utilization of older assets in order to improve productivity and efficiency.

Operator, next question is from Gurpreet Gujral at Macquarie.

Hi. Just a one question from me.

Your 16% target for silicon EBITDA margin implies that the Q1 margin just shows a 18% is seasonally very high. Can you just explain the dynamics there?

Why is Q1 usually very high in terms of margins?

Q1 is Gurpreet, Q1 typically strong as we start with very slow cost also in the area of technical spending for example. And then your production run at full steam as we did in the first quarter having also -- first decreases of silicon metal raw material prices that's helped a lot with the good product mix prices that we are mostly have.

There are some areas of price pressure but we ran really highly utilization. And all this put together, I mean led to that very good performance in the first quarter.

Operator, the next question is from Mr. Thomas Swoboda, of Societe Generale.

Good afternoon, gentleman. I would try four questions if I may.

Firstly, in silicon I think there has been a plant closure in silicones 1 in Europe. I guess that was somewhat reflected in your comment on the better mix.

I am just wondering if you think that this positive effect is sustainable or will it fade away over time. And secondly on Polysilicon, your comment about the normalized inventory across the supply chain, I am just wondering based on your insight to the market, do you think the normalizing of the inventory is just a function of the better demand you have been seeing and you have been commenting on or are there also some -- have there been also some limitations on the supply side.

Have anybody given up production? Have there been any changes?

If you could give us any insights on that, that would be very helpful. Very quick one on Tennessee costs.

I mean you plan to be fully up and running in Q3, Q4 is a slow quarter but beginning from next year, do you think you will have lower production cost compared to the average of the German plant in Tennessee already or will you still have to work on cost in Tennessee. And the fourth one very quick if other financial expense looks rather high in Q1 of this year.

I know last year there was a special income just in terms of a modeling, should we take the financial expenses as a run rate for the reminder of the year or would you have a better guidance for us. Thank you.

Maybe let me start with the silicon question you mentioned that silicones facilities are shutdown. Well, as far as we know there was no official announcement.

There was a report in the newspaper, there was financial reporting done in US. And this in the long run certainly will have an impact but I would guess mostly on the commodity side with improved conditions on the commodity side.

On the inventories in Polysilicon, of course demand for modules was -- and installation was very strong and definitely in the last quarter and it's continuing very strong. And that reduces inventories in the value chain.

In addition of course we have seen this closure of the Pasadena plant for granular Polysilicon from SunEdison. We have seen closures of smaller plants in China.

But so I think it was good supply demand balance ultimately. And especially with the growth of demand and we are seeing that of course customers are more and more aware of the advantages putting in higher quality material into their lines.

And on Tennessee, yes, we expect for the run rate at least by the end of the third quarter. And that means lower production cost certainly significantly lower production cost especially in the next year.

We will be at the lowest possible cash cost next year. It is a good question.

There are certainly still some improvements to be made but we definitely will see significant improvement compared to this year.

And on your question with respect to the financial results. I think to take the Q1 number as run rate would lead to too high number for the full year.

If you compare it to last year when we had €74 million in financial results. I mean that was a little bit lower from our capitalized interest on the investment and if you take that out you come to a number which is still below €100 million for the full year.

Operator, the next question is from Jean-Francois Meymandi.

Hi, again. Just a quick on.

On your full year presentation you were saying you were aiming at 5% top line growth in silicon and same in polymers roughly. If I remember correctly and let say especially in polymers we are markedly below that.

Can you comment on how you expect there to progress and can you reconfirm these top line growth ambitions for both divisions?

Also the number you said I mean might be little bit too high. I mean we said we are growing mid single digit but as you know that is a range.

As we've started as you said was 3.5% in silicon and 0.5 in polymers to be really ad the mid point of the range would be maybe a little bit too ambitious in that overall global macroeconomic environment.

What's your ambition? Let say more 3.

You are doing the model here.

That's exactly what I am asking.

But you can expect growth.

Operator, the next question is from Andrew Ben, Citi.

Thanks very much. Few points.

You mentioned on slide 7 softer pricing in some areas in polymers. I may have missed explanation behind that, if you could just give it again.

On Polysilicon pricing how far do you think pricing can go before it starts to damage demand because it does seem to go high price elasticity. Related to that and I maybe complete wrong here but there appears to be a bit of bottleneck at the ingot phase of the production process.

And if there is and allow me if I am just making this up, then to refill the transition to improve production rates that the purely Polysilicon the better, and you can probably get more productivity on that so if that's true it could imply a greater premium for high purity product. So I was wondering if you were seeing some capacity constraint among your ingot customers and whether that could allow you to command a slightly high premium.

And last over tax rate, when do you think it's going to normalize?

Andrew, I would start with the first question on polymers prices. We have the areas of softer prices and as we said part or 50% of our dispersion business has contract with raw material price formula.

And in that area raw material price go down, that hasn't immediate or with the time lag that has one to one effect on our sales prices. That's what we are referring to when we are talking about the areas of price reduction.

And the rest of the business is more driven value based, more on an annual negotiation. And with respect to your last question on tax rate.

We are still guiding for around 40% in 2016 for the full year. We started little bit higher that always something to do with the level of results and so you should see that decline especially in the second half starting so that we should come to an average of about 40%.

I was just wondering when do you get back to the I guess normalized charge of about 30% -- [multiple speakers]

We didn't give explicit guidance beyond 2016 but I mean that is what we are heading to after to normalize tax rate of 30% but maybe not in 2017 already but that should be the level mid term.

So should see that in 2019, could be there?

I am sorry. Please repeat that.

Would it be 2018 you get to the 30%

Maybe in 2018

Yes. Okay.

On the poly pricing, as you know we are not making explicit forecast I said this is good to see right now that the price trend is in the right direction. I am not 100% sure whether we should already call it bottleneck of -- our Polysilicon being a bottleneck for ingot production because of courses you can use Polysilicon of many suppliers to produce ingot.

But it's certainly a fact and we see that also in our semiconductor production that with high purity material the so called dip in time is lower when you start production of ingot. The dislocation rate is much lower.

So the quality or the productivity is enhanced through improved quality of Polysilicon and the capacity utilization of the ingot equipment can be driven up through higher quality Polysilicon. Therefore we see a significant demand on that side.

And, yes, there is a higher premium for such kind of material because it really delivers better performance and advantages for the customers.

You know I wasn't implying there was bottleneck on the availability of Polysilicon, I was -- what I have read is there that there could be this year a bottleneck at the ingot phase so there could be constraint on the -- sorry availability of ingoting, what you are saying about you get better capacity utilization, is what I am thinking could it be that high purity product could see why a bigger premium during the course of this year, if ingot constraint for product -- concern production of ingot is there or you just not see that as an issue, do you think there is plenty of ingoting capacity.

I would not rule that out for this year. It could happen.

Operator, the next question is from Patrick Rafaisz from UBS.

Yes, good afternoon all. Just one question really.

I was wondering can you shed some light on your new product rate going into 2016 in the chemicals businesses and was that part of the improving product mix and margins for these segments. Thank you.

I think I mean there is no -- I mean as we measure new product which are products that are younger than five years, I think you won't see a quarterly leap in those ratios. What we have communicated at the chemicals day was that we have the new product revenue rate of around 10% in chemicals.

But we have seen a very strong specialty growth but that can also be product much older than five years. But new to some applications, new to some markets to some customers and that was the performance we were alluding to in the first quarter of silicon.

Operator, the next question is from Peter Spengler from DZ Bank.

Hi. Good afternoon, gentlemen.

Two of my questions have already been asked. Just two left.

First is on the CapEx development in Polysilicon in the first quarter. So is this a run rate?

Is this already a normalized CapEx level that we can model for the next quarters to come or is it still higher? And what can we expect for the second quarter and so on.

And then for Siltronic, could you tell us the share of -- the sale share of Poly going to Siltronic currently roughly? Compared to the solar industry.

I mean we have never spelled out the detail numbers as you know. And by far the most Polysilicon is going into solar.

And on CapEx development, I think Q1 was the -- entire yes final work at the Tennessee side is not a good indicator for the run rate for Polysilicon. So it is lower.

And overall CapEx for the group should be at around €425 million for the full year.

So can we expect similar CapEx number in the second quarter then and then in third quarter lower.

Yes. I think overall Polysilicon should be at the full year below €130 million.

So it should be become lower quarter-over-quarter.

Operator, there seems to be no more questions in the queue.