Wacker Chemie AG

Thanks you, Operator. Welcome to Wacker Chemie Q3 2016 conference call.

My name is Joerg Hoffmann, and I am the Head of Investor Relations at Wacker. With me are Rudolf Staudigl, CEO and Tobias Ohler, our CFO who will take you through our presentation in a minute.

Presentations available on our webpage on www.wacker.com, under the caption Investor Relations. Before they begin, allow me to point you to our Safe Harbor statement, which you will find at the beginning of the deck.

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

Dr. Staudigl.

Thank you, Joerg. Ladies and gentlemen also welcome to our Q3 2016 conference call.

Let me walk you through our presentation starting on page 2 with a Q3 highlights. We reported a good quarter in Q3, our chemicals businesses continued the strong operations supported by efficiency gains and good volumes.

Polysilicon saw a split quarter with two good months in July and August and weak volumes in September. Sales came in at €1.35 billion slightly below both last year and last quarter.

Supported by volume gains and a good cost performance EBITDA reached €301 million representing a 22.4% margin. Excluding special income EBITDA was even 22% better than last year.

Good volumes and efficiency gains continued to drive chemicals EBITDA. Siltronic saw higher sales in the firmer demand environment.

At Polysilicon we have completed the technical ramp up of our Tennessee plant. The plant has demonstrated it's capacity and has now started to work on productivity, process optimization and cost reductions.

Therefore we do not see the need to report on ramp cost anymore. There was also a no special income in the quarter, the market environment in polysilicon was volatile in Q3 with July and August rather uneventful, September saw very weak volumes.

For the Chinese end market housing at the end of July, customers had inventory for a much higher run-rate of production and reduced orders as a result. Many of our peers went into maintenance mode or choose to add to inventory in this time.

Some of you have described this as an airpocket and I think that is a good description of how it felt. We use this opportunity to optimize our logistics given the long distance main market from Germany to Asia.

This in mid-October however the market is rebounded. Orders and volumes has increased substantially.

We have concluded our 8th Capital Market Day earlier this month [indiscernible]. You will find the Capital Market Day presentations on our website.

Now our main Capital Market Day caused growth and cash represented five targets for the next years. These are shown on page three of today's slides.

First we intend to extend our leverage phase to 2020. As you know we have described our investment program over the last decade with development stages.

For the Tennessee investment now behind us we have definitely concluded the create phase of this month. Now we’re looking to a leverage phase into 2020 during which we expect to benefit from our strong upstream position.

We plan to keep CapEx below depreciation and to focus local investments with bottlenecking and smaller projects that take us closer to the customer and increase value creation. Second, we look to continue to grow [indiscernible] global chemical production.

Of this product decisions and exit to markets will enable us to get them. Market transformation, innovation and regional expansion are key drivers for this growth.

Thirdly, we continue to focus on sustainability. With our so called [indiscernible] integrated production systems, we already have an optimized structure in place that looks at [indiscernible] streams as well as valuable inputs for other businesses.

Our processing and product strategy supports this. From enabling solar growth to water based paints and leading insulation material Wacker's portfolio has a clear focus on sustainable business development and growth.

Fourth, with target EBITDA margins in chemicals over 16% and in polysilicon of more than 30% which should generate significant free cash flows going forward. Our businesses should be able to sustain attractive margins throughout the economic cycle.

Fifth, for the leverage phase we have now defined a new target level for the dividends. Looking to payout around 50% of our net income to shareholders going forward.

Our previous target was to payout a minimum of 25% of net income. This year we have concluded the largest investment in our history with a benefit [indiscernible] operation our CapEx comes down significantly compared to last year.

We expect to spend about €400 million less this year than in 2015 and the reduction has not slowed on our growth in [indiscernible]. Looking into the fourth quarter we expect the usual seasonal behavior in our chemicals businesses with high utilization in Siltronic and the light year [ph] Q4 business then in September in polysilicon.

Hence our guidance for the full year remains unchanged. We continue to expect slightly increase in sales and the full year EBITDA excluding special income to come in at the upper end of our projected 5% to 10% increase over last year.

Let me now hand over to Tobias for more details in our financials.

Thank you, Rudy. Let me start with our P&L on page 5, we reported an EBITDA of €301 million, 14% over last year and at the level of Q2.

The resulting group level EBITDA margin was 22.4%, while Q3 last year saw some €18 million in special income, we reported none in this quarter. At the Tennessee plant reached technical completion during the quarter and demonstrated its capacity you essentially had no more rack costs.

You can see these effect in the year over year comparison of the other operating income and expenses. The interest resides is lower than last year as we had to capitalized interest during the construction period in 2015.

Our nine month tax rate decreased faster than expected to the target rate of close to 30% falling special tax effect overseas. We expect a tax rate close to 30% now for the full year and for 2017.

Our balance sheet is discussed on page six, prepayments at the end of the quarter were down to €322 million in-line with guidance. Working capital stood at €1.3 billion following a combination of slightly higher inventories and lower payables.

Following lower bond trades the discount factor for pension declined to 1.38% from 1.60% at the end of last quarter resulting in an increase in pension liabilities from €2.42 million to €2.57 billion. The pension related deferred tax asset now stands at about €440 million.

These pension liabilities relate to defined benefit plans that were closed to new entries over 12 years ago. Since then new employees are on defined contribution schemes, we discussed this at our Capital Markets Day so you will find slides on this in the presentation.

Let's moved on to our segment from page seven. The chemical businesses also saw some price pressure and solid volumes while benefiting from high plant loading, our chemicals business has contributed almost 2/3rds of EBITDA in Q3.

Delinquent [ph] reported slates at the level of prior year and slightly below the last quarter following good volumes negative currency effects and some price pressure in selected product groups. Good plant loading, a good cost performance and mix effect supported an EBITDA margin of 20% in the quarter.

Sales in polymers were below prior year and last quarter as strong volumes in dispersions did not fully offset price declines in various product groups. Year-over-year EBITDA benefited from volumes and high plant loading, leading to a good cost performance, absolute EBITDA was lower than Q2 following lower sales and some raw material cost inflation.

Looking into the full year we confirm our guidance for the chemical segment at single digit growth with full year EBITDA margins at 17% of silicones and about 20% for polymers. At our Capital Market Day we communicated and over 16% margin target for our chemicals businesses.

We plan to sustain margins over 16% in chemicals via operational excellences and with an increasing share of specialty applications. As Rudy said [indiscernible] weak September volumes.

As a result sales in the quarter fell behind last year and Q2, at €82 million EBITDA was only slightly ahead of reported Q2 as ramp costs faded. EBITDA was over 10% better than last year when adjusting for special income.

We have seen some market recovery since mid-October, we continued to operate at full loading and to focus on cost reductions. Our market growth projections for this year looked into 2016 global installation of between 60 and 70 gigawatt after about 56 gigawatt in 2015.

We believe that the market could come out at the upper end of the range and for 2017 we now see installations between 65 gigawatt to 80 gigawatt. Siltronic reported today Q3 sales of €237 million and an EBITDA of €37 million both slightly better than Q2 and EBITDA better than last year following lower FX charges.

Operating at full capacity in Q3 in 300 millimeter and 200 millimeter Siltronic shipped wafers out of inventory to meet the strong demand. With firm demand for wafers Siltronic used tight market conditions in 300 millimeter and 200 millimeter in the fourth quarter.

Our net financial debt decreased to €968 million following a strong cash flow generation in Q3. Net cash flow in Q3 came in at €229 million over 80% better than in Q2 and more than six times better than in Q3 last year.

CapEx in the quarter was at €99 million at less than half of the amount spend in Q3 last year and slightly higher in Q2. Now let me hand you back to Rudy.

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

The first quarter we expect the usual seasonal effects in chemicals resulting in lower sales and EBITDA. Especially in polymer we expect effects from some raw material appreciation as ethylene cost have gone up.

From today's point of view however some of the seasonal effects in silicones maybe cushioned by silicon metal price increases. For the silicon reports increased activity with strong shipments resumed by about mid-October.

Siltronic reports market tightness in 200 millimeter and 300 millimeter with operations at very high utilization rates in the industry. We remain confident about our performance for the full year and expect to reach the upper end of the range of our guidance for EBITDA excluding special income effectively targeting an EBITDA for the full year of about €1 billion.

As we said last time if everything goes well we could slightly exceed it. This concludes the presentation so far ladies and gentlemen.

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

Operator?

Operator, the first question is from Andreas Heine of MainFirst.

I like to ask on polysilicon you had looked on your comments that the volume was sequentially significantly down from Q2 to Q3 and looking on your sales and basically the impact on prices was very limited. I’ve expected different.

Could you elaborate a little bit what the [indiscernible] was, I do understand there is some mix effect but nevertheless prices have fallen down throughout the quarter and there was not materially anything seen at your site. Then going into Q4, if volume is picking up and you haven't seen anything on the price side, what does that mean then for Q4 and then in that line to your guidance still looks a little bit cautious.

Well explain we had volume short fall in sales in September, we continue to produce it full out. Sort of filling the logistics pipeline in Asia and -- so we use that time period, simply to the advantage of the customers in the future.

Yes, I do understand what you said about the volume and the inventory increase you have done in various reasons be able to act more flexible, but looking on the sales decline if I try to figure out how much volume it was down in this particular quarter and look on the sales development then it looks like that wasn’t a price decline, so your average price was probably not much down. So what I’ve seen on the market was a little bit different.

So maybe you haven't but you anticipated very low prices and then I would like to know how I have to reading the market at prices being still very low and whether you are at all affected by this in Q4?

Well as I would say one of the significant market leaders we always think about our responsibility not to follow the lowest prices in the industry and so we certainly did not business that we thought was ridiculously low. This is just as a general statement but without talking about individual prices of course.

But of course if the total price trends is going down this also have certainly an effect on us, I mean the question.

And I think we had a question on Q4, I mean as we said we saw orders picking up in the second half of October and I think that’s past it's momentum for the rest of the quarter.

And it's still that you do not make too many compromises at the price.

We are certainly one of the players in the whole field that is trying to keep the prices up as possible but before if there is the general trend I mean that’s -- follow but we were certainly in terms of reducing prices if necessary we are definitely not the leader.

Operator the next question is from Jean-Francois Meymandi.

My first question is going to be on CapEx, if I remember well at your Capital Markets Day you saw $400 million to 450 million CapEx for next year, if I look at your ongoing CapEx now in polysilicon I more get to the level of 300 which means I am missing 100 million to 250 million that I should put on chemicals therefore looking at your expanding only downstream that should mean that you’ve something penciled in for the -- in terms of silicon in your guidance, is that correct or is there anything abnormal about your CapEx and the second one going back to polysilicon how should we think about volume development for the overall for this year and let's say will the sales jump in the second half of October make up for the slow volumes in the first half of October. Thank you.

On the CapEx, yes I think we gave you the right indication during the Capital Markets, Jean I think if you let's say model next year with 450 million it's definitely in the right range, I mean I do not expect to for it to be more of it in -- yes, the conclusion is right I mean the investment in polysilicon is significantly down so that means there might be some projects in [indiscernible] that’s right but all--

Since you’ve put it in your guidance can you share with us what's behind your guidance?

Well let me put it this way it's certainly in-line or it's obviously in-line with what we said that we want to improve our position in downstream chemicals and there are certainly -- there are some projects in there that are very interesting. As we said for Tennessee I feel silicon plant would be the next logical step but there are no decisions on that and no timelines that’s why I cannot confirm your conclusion that it will be in the plan for 2017.

So in other words we will not disclose yet what the major projects is 2017 will be or potentially.

And let me reverse without big project would we be around the 300 mark?

I think that’s -- we are pursuing the strategy of investments in downstream in order to even improve our chemicals business further and that’s how you have to look at it. The volumes, the question about volumes, I think we gave sort of an indication once that we want to be or we want to sell this year somewhat close to 75 tons, of course with the drop in sales in September this might be ambitious volume but as we said we want to take this time to improve our logistic chain at Asia.

This is not a development, I think it [indiscernible] of improving the service to our customers.

Would 65,000 tons be a better proxy or?

We will not forecast that.

Okay.

Great. The next question is from [indiscernible].

On the poly market situation, how long do you expect the current situation, we will ask what the main drivers. Is it more like over capacity or do you see demand in China?

What are the parallels to the last situation with price pressure where you gained market share and my second question is on the Siltronic. Do you consider to sell, or what is your exit strategy, can you update on this, do you consider to sell several blocks or do you have a minimum price which you would like to have and do you see your cyclical upside which could increase the share price in near term?

In polysilicon I mean Tobias had mentioned in his section, also in the slide deck, you see our assumption on the market. So the solar market is still continuing to grow and there might be fluctuations of demand like we had in the past but overall as I’ve said we see growth in the market and that is important and it's very difficult to predict these mini cycles where we see sometimes [Technical Difficulty].

But solar is and will remain a very, very important development and important business for energy demand or providing enough energy for the group. So that’s why -- and so polysilicon will be the basis for that for a very long time.

And on Siltronic there is no change to what we said in the Capital Market Day, at some point in time we’re looking at selling off our ownership in Siltronic whether that will be in one portion or in several portions, you cannot say and there is no special preference there, it's really depends on the market but on the other hand there is no need, there is no urgency behind that. Siltronic is an excellently positioned company, excellently managed company.

So we will find the right timing for that.

The next question is from Gurpreet Gujral at Macquarie.

I’ve got three questions if I may, firstly how much of the operating expense in Q3 2015, the €74.2 million is ramp up cost, can you remind me of that. My second question is on China demand if the proposed feeding tariff cuts proposed by the government is implemented, how will that impact the margins in 2017 as per your forecast in slide 11.

And finally my third question is around the chemicals business, you are obviously approaching very high [indiscernible] right now what's the scope there in terms of increasing [indiscernible] capacity perhaps deep bottlenecking. Thanks very much.

Maybe on the tariffs in China, of course there is no final decision made here. It's expected by mid of November of the right information, and the current -- China has surprised us in the past and especially this year and I think there are still cost cuts possible as well in the whole value chain, so we’re not too worried about the growth in China as you can see our estimates on page 11.

It should be in 2017 again in the range of 16 to 23 gigawatt.

Is that forecast assuming a certain scenario in terms of that proposed change to [indiscernible].

Well we certainly did have some underlying estimates on the feeding tariffs but I think they are within the range that are in discussion right now.

Okay. With respect to the preoperational cost in 2015 you said that the full year impact of that was some €19 million and we didn’t give any specifics of the quarter so you know as we approach the ramp we had more cost preops in the second part of the year so if you are sort of try to model that long -- that slope I think you would get a fair number.

Okay. And actually the third part we really did not understand it, could you repeat that?

I was just wondering what the scope is in terms of increasing the nameplate capacity of your chemicals business, you are obviously reaching very high utilization. Can you provide us some color as to the possibilities of increasing the overall capacity of the silicon and polymers business.

I mean it's a challenge to look into the future and give you a precise number for the next year as we certainly have opportunity to debottleneck. We have some material in the Capital Market Day presentation for two key products, siloxane for silicones and dispersions for polymers where you can see that we typically we have the opportunity to go far beyond the capacity.

I would suggest to look at that page, that gives you an indication.

For the raw materials of siloxane. Of course we have enough capacity, we have opportunities to debottleneck at very low cost.

We certainly will not put a lot of money in the upstream capacities not at all and in silicones we also have the opportunity to turn material that is used more on the commodity side or standard side on to products in the specialty side. So we have these two variabilities that we can use to grow definitely with the demand of our customers.

So there is no restriction on capacity there.

Operator, the next question is from Ms. Tanja Markloff at Commerzbank.

Would it be possible to have an indication on your U.S. dollar sensitivity next year in terms of revenue and costs taking into account the new plant in Tennessee.

Yes I would go for the 2016 numbers, we don’t have a plan for next year yet, but I wouldn’t assume big changes, so if you take one cent change that gives you roughly a €10 million change in chemicals and €2 million change in EBITDA because we have some quite substantial natural hedging in chemicals. In Siltronic that one cent change in the exchange rate would mean some €5 million in sales and some €3 million in EBITDA for Siltronic.

Typically we do some 50% hedging so the numbers that I set for EBITDA impact is typically 50% when assuming a hedge rate of 50%.

Operator, the next question is for Mr. Andrew Heap of Berenberg.

Could I just ask about inventory levels, so we have had a step up of about 80 million if it excludes Siltronic I think we can very safely assume that pretty down to polysilicon. What do you see the current level with extra logistics at a sustainable level or would you like to reduce that back down and reduce the inventories you built up either in Q4 or in 2017?

And then secondly could I just ask what pricing pressure you are feeling in polymers from by recent capacity additions from competitive in Asia.

In terms of polysilicon volumes that we have increased in inventory, we do not see a reduction of that, we really want to keep that in order to improve our service capabilities for the customers.

Okay.

The second question on polymers, could you repeat it again?

Just how much pricing pressure you’re feeling for the likes of [indiscernible] in Singapore?

We see prices decrease at a similar magnitude over the quarters, again prior year so there is no fundamental change and if you’re asking about the reasons that yes there is more pricing pressure in Asia that’s right. But it's not trend that this is increasing against last year.

Operator the next question is from Peter Mackey at BNP Paribas.

Yes I’ve just one simple question or very naïve question remaining, if I look at the polysilicon division if I just very simple sales minus EBITDA and adjust for the ramp up cost you guided to in the first couple of quarters, those sort of cash costs have actually been declining quarter on quarter for the last three quarters, and that’s despite the ramp up of Tennessee. I assume that an element of that is capitalized some cost into inventory in the third quarter but I just wonder if you could sort of talk a little bit about that the fixed cost base in light of Tennessee ramping up and how we should think about fourth quarter please?

So you’re right -- I mean we the ramp cost in the first half, some 30 million and 18 million in Q1 and Q2 which are very much cash cost, we’re talking about EBITDA cost, but in thought that is due to the ramp so you’ve to ramping such a plan, you need to prepare for the processes for all the loops and that is additional cost which is not recurring but on the other hand if you’re starting a plant like Tennessee you get very close to the level of the fixed cost already early on as soon as you start because it's fixed cost and you do not detail that but it's a function of the two elements.

But in the third quarter particularly you have capitalized a chunk of the fixed cost presumably.

Yes but that’s typically accounting if you’ve an inventory increase that we talked about, you’ve that capitalization of the fixed cost, that’s right yes.

Next question is from [indiscernible].

I'm just curious you mentioned that polysilicon demand improved substantially or improved in October, I'm left to quantify I'm sure you wouldn’t want -- are you still building inventory as of today, the production is still outstripping demand?

Well as I’ve said purposely build inventory.

In September I guess and October.

Yes, I mean in October as well but less in September but if we wanted we could sell the inventory but it's at a level that we’re not interested in.

And just now going into November so sort of as of to-date are you still building inventory, or is it no -- sort of imbalance production and demand.

We do not forecast that but the momentum that we are seeing an increase in orders looks promising.

And do you see competitors revamping capacity already again or as to shutting down?

They have -- some of them has regular maintenance shut downs just as we have sometimes, they did really at the right time just as we have maintenance at the right time in the third quarter but I assume they will ramp up capacity very soon. I mean I don’t know the details of it.

And when that is -- on Tennessee production volume, should we model full volumes for Q4 already or should we wait until Q1 product?

I would say it's very close to full capacity. With such a movement I think the ramp up was beautiful for such a big addition on the greenfield I mean you’ve to consider that so the ramp basically was very similar to we had a new [indiscernible] so there is obviously an existing chemical plant with experience operating etcetera, etcetera and Tennessee basically is almost the same.

So, after nine months of ramp up being very close to full capacity I think to something our people can be proud of.

Yes, definitely so [indiscernible] is a market to take the volume, that’s great. Thank you.

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

I’ve only one question left and it is on chemicals, and especially on the price pressure you mentioned in both in silicones and polymers. I mean I still a little bit intrigued you at the same time said the utilization rates in Q3 which were 90% which is quite good.

So could you take us through the areas where you see the price pressure and what is driving it and what should we think about the next couple of quarters? Thank you.

The price pressure definitely comes from -- also our raw material input prices. I mean we have some areas where we also said from our pricing that is 1 to 1 pass through but overall I mean given the suggestion on our input side, our net pricing is still positive and net pricing means the pricing of our product against the pricing of raw materials and it's depending on product by product and also reach, so there is no clear picture and it's been very similar over the quarter so year-over-year comparison Q1, Q2, Q3 looked very similar with respect to price development.

And may I ask you a little bit differentially, are your customers asking you actively for pass through on the raw materials or is it -- would that be going to be too far?

Well customers ask for pass through of raw material prices and raw material prices are going down and then forget it, prices are going up. So I mean with many customers and semi-annual contract and every time we go into the discussion with the customers of course there is a discussion about pricing that’s similar.

So it's not unusual that customers are asking for low prices. You just have to convince them that they get so much additional value from our material that we can resist this wish.

Operator, do we have more questions?

Operator, we have one question from Mr. [indiscernible].

Actually two questions, one is on the Siltronic [indiscernible] biosolutions as this is coming from the gun products on your fine chemical productions and secondly can you give us an update on the process of your large maintenance work and book housing [ph] is it running well?

You probably mean the shutdown of the chemical--

Exactly.

Balance sheet?

Yes.

That actually has been restarted today, energy is produced hydroelectric energy is produced again today and the whole project went extremely well. It was finished almost two weeks earlier than the originally planned in about 10% under budget.

And with respect to pricing and price solutions that is mainly indeed gum [ph] as you assume and that’s perfect example for raw material path through from your pricing because then pricing our input material is lower than last year.

Operator, we have a question from Mr. Martin Jungfleisch with Kepler Cheuvreux.

Just few questions of polysilicon to follow-up. Do you expect volumes in the fourth quarter to recover to level seen in the first or second quarter this year, so will be less or more volume and in terms of demand is it just China that was weak in September or is it also other regions and then lastly on the cost performance do you expect further production cost improving for polysilicon especially in Germany?

Well we never made forecast on polysilicon volumes specifically for the quarter. As I mentioned before it's very difficult to do that at this point because we select whether we put material in the inventory or over the we going to sell it and -- but overall I would say momentum is good but it's very good difficult except for long term contracts but on short term contracts it's hard to say we also in December but at this point in time we have no reason to assume that we see something like in September.

With respect to polysilicon cost reduction I mean we communicated that this is a strong focus of all our businesses and this is -- it's a clear cost roadmap for all plants, all polysilicon plants and that definitely includes the two German plants and that also includes now Tennessee. We do not give the details on that but there is something baked into our future.

And to the end markets it is China that has slowed, I mean there was so much discussion about that’s very strong first half of the year and then slowdown in the third quarter, yes it was very much China.

Thank you all for joining us today for Wacker Chemie. We’re looking forward to further discussions with you as the quarter progresses.

We expect to publish our full year preliminary results at the end of January and early February next year so stay tuned and we will be back again with the conference call on March 14th with a full year results in 2017. Good bye.