Wacker Chemie AG

Thank you, operator. Welcome to the Wacker Chemie AG Q3 2017 Conference Call.

My name is Jorg Hoffmann, and I'm 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 website under www.wacker.com, under the caption Investor Relations. Before I begin, please have a look at our safe harbor statement, which you'll find at the beginning of the deck.

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

Dr. Staudigl?

Ladies and gentlemen, welcome to our Q3 2017 conference call. This quarter showed a good performance with strong results in cash flow generation.

Our strategic plan is working, and this quarter shows typical results of the so-called leverage phase of our strategy. As presented in our last capital market day, we still to our strategy.

We look to keep CapEx below depreciation. The stride for growth higher than the chemical industry and work hard to sustain attractive margins throughout the economic cycle as our assets generate cash.

Led the very strong volumes in chemicals and driving demand for mono capable material in polysilicon, our Q3 sales increased 14% over last year and 8% sequentially to €1.3 billion. Strong demand, high loading, and good cost performance and the contribution from Siltronic throughout EBITDA in Q3 up to €298 million, that is 18% better than last quarter and 13% over last year.

We achieved this despite higher raw materials and some currency headwinds. As we previously recorded, we had an incident in Tennessee on September 7, that resulted in a shutdown of the polysilicon plant at the side.

A hydrogen explosion damaged piping, which resulted in a chlorosilane leak. Importantly, there were no serious injuries to our employees and thanks to the immediate action of the response teams, there was no risk to the surrounding community.

We are investigating the root cause of the incident without site helps and have started repairs. From today's perspective, it is not clear yet when the plants will restart, we expect the outage to last a few months.

At this time however we expect no meaningful financial impacts from this incident as our insurance should cover the damages and business interruption. We are seeing a strong growth in the solar industry, targeting about 25% growth in global insulations to almost 100 gigawatts this year.

A big driver here is the industry wide efforts to increase conversion efficiency, which further unlock the solar cost competitiveness. Solar PV has reached a point now where this comparative to fossil fuel based power generation.

In polysilicon, we will focus to expand our cost leadership while maintaining industry leading quality level. Our chemicals businesses reported strong volumes in Q3, especially silicon benefited from a global tightness in silicon products and from an improved operational performance.

We are looking at the bottlenecking efforts to meet customer demands. In line with our strategy, we will continue to improve mix, while we maintain a full portfolio with benchmark costs for the industry.

Polymers saw strong volume again in Q3, but suffered from higher raw materials as price increases and dispersions continue to take hold. In addition to growth in traditional applications, we drive the replacement of other SILPURAN by a better performance based value offering in VAE.

In powder, we pushed the transformation of construction material towards higher building standards, deploying advanced additive material. Fire solutions is well on track with good demand in Pharma & Agro.

We are making good progress in developing our biotechnology businesses, by leveraging our knowhow and assets. Given the strong performance of our businesses and higher Siltronic equity results, we now increase our EBITDA guidance for the full year 2017 to €1 billion, up from €935 million last year.

Tobias?

Thank you and welcome. We show our P&L on page 3.

Strong demand for our product led to a 14% increase in sales with a volume and mix being the primary drivers. Our strong operational performance drove operating profit up 28%.

Things to note here, the improved mix business at Siltronic increased our Q3 at equity results by €16 million. Our reported tax rate declined in quarter due to the Siltronic at equity result and following better results in overseas operations.

Hence, we adjust our guidance here and now expect for the full year the tax rate of around 25%. Moving on to the balance sheet on the next page, not much news here, please note that we have stopped reporting on the remaining prepayment levels in our presentation, because that number has now dropped to below €200 million and there is no longer an important factor.

On page 5, Silicones saw Q3 sales increase by 11% to €559 million, following very strong volumes and global tightness. High loading and operational efficiency drove EBITDA up by 27% to €128 million in Q3.

Given the strong performance and the order book, we upgrade our full year 2017 outlook for the segment. We now look at full year sales growth in the high-single digits and in EBITDA margin of about 20%.

Looking to page 6, Polymer sales came in at €318 million, helped back by currency effects. EBITDA was as expected sequentially somewhat down at €57 million.

Strong volumes and pricing initiatives in dispersions were not sufficient to counter the effects of higher raw material cost. While we continue to see strong volume growth in both dispersions and powders, we keep our full year guidance for this segment unchanged.

Bio-solutions reported sales of €53 million, but €10 million in EBITDA. We reached our original guidance for the 2017 numbers with our 9 months result today.

We now see full year sales at prior year, given the impact of currencies with somewhat lower Q4 EBITDA contribution than last year. Polysilicon on page 8, saw a strong demand at lower average pricing.

Sales in the segment reached €342 million, up 35% despite reduced availability of material out of Tennessee. EBITDA came in at €85 million, following cost reductions and inventory effects.

For the full year, we are raising our guidance and now see EBITDA in polysilicon at about 10% over last year, excluding special income effects from prepayment contracts. On page 9, gross cash flow from operations is at €548 million, our net financial debt is at €464 million, over to €200 million less than at the end of Q2.

Net cash flow in Q3 was €205 million, underlining the strong cash generating capabilities of our assets, while continuing to fund growth in our chemicals businesses. Moving on to page10.

With upgrades in 3 out of 4 segments, and the better result from Siltronic, we increased our annual EBITDA guidance now to €1 billion. We also upgrade our cash flow guidance for the full year, given our CapEx plans for the last quarter, we now see net financial debt at about €500 million, at the end of the year.

With this, let me hand you back to Rudi.

Thank you, Tobias. Ladies and gentlemen, we have seen a strong performance in our businesses this year so far.

The recent trends have set to continue into the fourth quarter. The tightness in Silicons continues as demand for our value-added silicon base strong.

We work with our customers to help them navigate the tight market conditions globally in this business. Polymers' volumes remain strong despite than expectation of the seasonal downturn, even though raw material dampen short-term performance.

Polysilicon reports strong orders for high performance enabling materials starting into Q4. We're looking into the very high capacity utilization rates in our businesses, and are increasing efforts to debottleneck plans to provide some relief.

These developments are the result of a lot of hard work and dedication to cost efficiency and the close commitment to our customers from our entire organization. We are positive about our demand in all our businesses.

And we are very confident that our market position and the strategic direction of our businesses.

Operator, we're ready to take questions now.

Thank you very much for taking my question. I'd like to start with polysilicon.

As far as I know you have not booked any insurance coverage in the third quarter. Could you outline a little bit what the impact was from the incident you have in Tennessee?

And how you see this in Q4 and have you have baked this in the guidance you have just given? And maybe a little bit on the pricing.

The price you booked, so what you have in your P&L is obviously lagging to what we see on the spot market. But I would assume there was only a slight increase in Q3 but the stronger one in Q4.

Is that what you have also baked in the guidance? And last but not least, having no volume from Tennessee for a couple of months so that means nothing in Q4, and already working down quite a bit on the inventories I guess.

Does it mean that Q3, Q4 the volume will be significantly down in polysilicon? And maybe if I have a chance and also a one question on silicons, if you would do a ranking, what has driven the margin up, what would be the ranking for these three factors operational leverage, the product mix and the increase in prices?

Thanks.

Andreas, quite lot of questions, I will start out with the question on the insurance coverage. You're rightly assuming that there was no booking in the third quarter, the incident happened on September 7.

And as claim is complex, there was no big accounting for that. But we felt already the impact that we have to reduce our spot sales.

So we do a lot on the inventory and that means that we can expect for the fourth quarter that our volumes will be as we said, significantly down. It means it will be only the German plants available for production.

With respect to pricing, there is always the discussion about the time lag. And maybe that little bit difficult to read out.

I put it simple, what we baked into the guidance as we said; we are now expecting about 10% increase in EBITDA. And if you do a rough calculation on that that could mean that we are expecting somewhat about €300 million in EBITDA and that leads you to our assumptions for the fourth quarter.

But it also means that we would need to account for the business loss in the fourth quarter as the insurance negotiations will proceed. We will need book a claim also against the insurance in this quarter.

But the revenue from Tennessee we will definitely miss. Yeah, that's how we see it for the rest of the year.

So in Q4, you baked in an insurance claim?

Yes.

Okay.

On the silicon, Andreas, I think you have to look at the total scenario there. First silicon, I mean the demand is very strong and we certainly have made significant progress in our strategy towards higher value add material.

And I think our cost position especially in the basic siloxine is very good and certainly up to part with the best in the industry. And as you know in Europe, there has been one siloxine facility shutdown, which contributed to less availability of basic material.

In China, there have been many small players shutdown for environmental and safety inspections. And of course when demand is very high, production usually excels in operational performance.

And so these are the main effects at this point. At this point I would not put price on top of the list of the impacts right now.

Thanks a lot.

Thank you. I have three questions so please.

The first is on Tennessee, obviously you said to financial impact is small because of the insurance claims, but do you think there are some other lost markets share or reputational issue for U.S. operations there that could impact to business in the mid-term?

Then the second question BIOSOLUTIONS, are you still expecting to incur total integration cost of around €10 million, is that still the case? It seems to me that profitability is stronger than the narration [ph] we planned here?

And then the last question on the Siltronic contribution, how much do you build into the new guidance for EBITDA this year, contribution from Siltronic? Thank you.

Let me answer your question about polysilicon market share. Of course I mean this is our market share will be influenced in the fourth quarter up until we are running again in Tennessee.

I mean in the past, Tennessee has proven to be world leading quality. And this is why we certainly will be able to sale the full amount out of Tennessee again once we started it up.

So in other words we do not expect longer-term impacts on market share from that incidents.

Patrick, Tobias speaking. With respect to BIOSOLUTIONS, we upgrade our guidance here.

And part of that is also that we see now lower integration cost. So, that plays the role in our change forecast.

For Siltronic, we typically, we generate look at what we have that consensus for Siltronic net income. Because we overall calculation as we take the Siltronic net income and take off from that their purchase wise allocation effect which I quantified at €5 million a quarter.

So, when we increase our guidance to €1 billion in EBITDA, the change in Siltronic expectation was from a net income that was at when we released Q2 numbers at around 140 something to 173. So that delta was around €30 million in expectation for net income.

If you take our share of it, the 31% of net income which equates to a roughly €10 million increase just from Siltronic consensus going up from the second quarter to the third quarter.

Okay, understood. Thank you.

Hi, good afternoon and thank you for taking my questions. I would have three please.

The first is on polysilicon, I think if with regards to the margin development sequentially Q2 to Q3, some of the decline was due potentially to fixed cost management in the way in which product sold out of inventory. But the press release also make reference to makes, which is bit surprising given that I think more know is gaining.

Could you perhaps pass the bit more light on this? Secondly, is it a bit clear of which stage, I know you are in negotiations on insurance.

How lumpy the impact will be the payments from the insurance will be? As for example if the plant is still offline in Tennessee next year in Q1 2018, are we essentially going to just use the best way to model is just to pretend the plant, even offline and look at the EBITDA from this?

And finally, presentation also makes reference to some pricing or mix effects in BIOSOLUTIONS is being difficult. Could you talk of about which product categories in particular were affected by this?

Thank you.

Sebastian, Tobias here. I start with the question on the insurance, I think it's a good approach to model our financials from the insurance I mean from Tennessee and insurance coverage that if the incident hasn't happened.

I mean that's how the contract with the insurance work. So the damage and the business loss is compensated, while the revenue is diffidently we will miss.

And there might be just also, from the complexity of the discussions with the insurance, there might be deviations between how we account into P&L and what we see in the cash flow statement. But those deviations I think we should manage.

With respect to BIOSOLUTIONS, as a mixed effect, your question. We had a very strong pharmaceuticals and biopharmaceuticals business.

And I think that's basically we have a lot of different products going in BIOSOLUTIONS that was what we were alluding to in that statement.

And so as the question on the mix, in polysilicon?

In polysilicon, the key effect for understanding the margin development is really to look at to consider the inventory change. We have so strong demand that and with the Tennessee incident holding us back from starting from September 7, that we had quite substantial draw on the inventory.

And it means if the inventory goes up, you do not show the revenue that you get sort of some of the profit into the inventory. And if you then draw the inventory you show the revenue so denominate that gets bigger, but part of the profit was already in the inventory.

And that explain those changes from quarter-to-quarter.

Understood.

And the product, I mean the mix, it's about product mix and contract mix. We always said that we are selling a lot of different specs, so ranging from semi to mono capable solar material to multi-capable solar materials.

I mean that changes from quarter-to-quarter, but also the mix in the contract which changes from more long-term contract to frame contract to more spot business. And from the product spec, I mean we also sell different chunk sizes and that plays a role.

So there is lot of factors going into that.

Understood. Thank you.

Hi, thanks. I had question on the silicon, where margin has continued to surprise on the upside through this year.

And I heard Dr. Rudolf saying earlier that the price increases haven't been a key driver.

So the question now, I think on top of everybody's mind is how much of this is sustainable or what could derail the margin forward? Do you see any new capacity coming online, which could sort of have an impact?

Or this is essentially going to be demand driven that whenever macro slows you could have some issue on the margin?

I don't think that there will be significant additional capacity coming online within the foreseeable future. And of course prices need to go up in order to build the good basis for additional capacities in the long run.

So, I think there will be a continuation of the good performance in silicon.

That's useful. And on Polymers, clearly raw material prices continue to go higher VAM et cetera.

So, at what point do you think you will be able to capture that raw materials in terms of your own prices offsetting the impact or headwind that we've been seeing on the margin for a last few quarters? And then last question is on CapEx.

Can you explain the reason for the reduction in CapEx guidance for full year? Thanks.

For polymers, we've just announced in October price increases for dispersible powders and for dispersions. And we would expect most of the effect to be seen in next year, in 2018.

But you said that, yeah, we still see raw material inflation from VAM ethylene and we have now year 2017 which was up again, but you'll always compared it to very low raw material prices of 2016. With respect to CapEx, it's a slight adjustment.

We now see that, I mean just from the progression of our CapEx plans are for the previous three quarters, that it might look a little bit too ambitious to go for €360 million in CapEx. So, we might end up closer to €340 million, that's basically the change.

Okay, thank you.

Hi guys. Just a couple of questions from me actually.

Earlier this year there was a lot of noise around stockpiling of solo components in the U.S., primarily due to the Section 201 case. Do you think this is still going on?

I've been interesting getting your thoughts on that as well as the Chinese solar market next year. I'll be interested here what are views are on that market next year?

Do you think it will get growth from where we're right now? And then I have follow-up after that if that's okay.

Well, on the Section201, in the U.S. it's just progressing.

As everybody was expecting there is the proposal for tariff increase increases. And it's really not decided yet whether there will be tariffs or not.

Because there is a strong movement against it, because it will certainly cost many, many, many more jobs than it would save jobs in the U.S. And I think these arguments are very strong, and that will be considered by the U.S.

government. And your second question on the growth in China, of course it's hard to predict, but to the other hand, solar is becoming so attractive.

And cost wise or price wise, and certainly China needs, and the strategy is to review the impact of coal fired power plants. So, there is strong incentive to move to the renewable energies, which is the right path to progress on, and no question.

But we've certainly have a hard time predicting an effect number for China. I think there are other people to ask that but, in general, the long-term growth of solar I think, it's absolutely impact.

Okay, fine. And just back on to the product mix and contract mix, that you guys were talking about earlier on in the Q&A.

Is that just a quarterly nuance, or is that something about a structural trend, here? I'm just trying to get a sense of how important that change was in terms of your product mix and contract mix change?

It's a nuance in the quarter and nothing else. And the main impact in the quarter was from inventory changes, Tobias explained.

Okay, thank you.

Thanks very much, just a few quick ones. When do you think the Tennessee plant will be mechanically complete?

And have you identified the cause of the problems? So in other words, do you think does delay will be sort of inspection driven rather than technically driven?

Secondly, tax rate, I mean, can you give us some indications for the mid-term. Certainly, is there anything you can say on timelines for your remaining stake in Siltronic?

And can you also just give a bit more flavor as to what's going on in China with regard to inspections and environmental compliance? And how that might affect into 2018 both the silicon and on the polysilicon business?

Thanks.

On the cause of the in Tennessee, of course we have a clear view of what caused the incident. On the other hand we have hired an independent investigator to really be sure that we don't overlook anything.

They are absolute specialist on things like that. But as long as we do not have the official paper, the official document about the root cause, we are not in a position to publish anything about that.

But I don't think it will be magic. I think as I said we have a clear understanding of the cause.

And the timeline is driven by just, let say repairing everything. So technical driven as I said.

So that's going to take a couple more months, is that?

Yes, as I said.

Okay.

With respect to the tax rate. Andrew, I think what we'll not go away in 2018 is that when booking the equity results from Siltronic, which is already tax at Siltronic, this will lower the tax rate.

But I need to look into the number before we give guidance for 2018. So yes, we are still not there yet.

And with respect to the timeline of the Siltronic equity stack, there is no news to that report.

And by the way, on the Tennessee incident. Of course as soon as we officially know the root cause we will make it available and the corrective actions.

We will make it available to competitors who run very similar equipment, in order to make sure that does not happen second time neither in Wacker or anywhere else in the industry.

No it was, the last almost was about the environmental compliance positioning in China. How that's likely to affect silicons and polysilicons in 2018?

We know that there is an impact as I previously stated on the silicon or let's say siloxine productions quite a few plants have been shut down. I think there is an impact on smaller polysilicon plants in China as well.

And I mean what the impact of let say additional environmental standards is on other competitors in China I think it's best to ask them. Of course we do not know that very clearly, but in order to adhere to standards as they are in Europe and United States and so on certainly some additional investments have to be made here and there.

But we do not have the clear view on where and with whom?

Alright. Thank you very much.

Hi, good afternoon. So two questions from side.

First on BIOSOLUTIONS, so are there CMO players and apart from them but fragmentation or high-quality fragmentation capacity is rather tight at the moment. And we see in general the sector developing very well.

So maybe it will be good to know for Wacker what are your current capacity utilization rates by the CMO industry? And do you think you will make capacity expansion soon so that you don't limit your growth potential?

And then secondly also BIOSOLUTIONS, so I think Sebastian already asked that question, but it will be good to know on what exactly and what kind of products are you seeing lowered prices? So it's more in the food sector or in the pharma or in agro?

And then and last but not least on polysilicon again. So and what does Wacker expects in or what is Wacker's positions, what do you think will happen if they approve the import duties in the U.S.

next year? So if that happens would you be positive for you in the short term or not, what is your position, or do you think will happen?

On BIOSOLUTIONS the CMO fermentation capacity. Yeah that's certainly true that fermentation capacity is tight in mainly as well as or at least in bacteria based CMO production where we are active in.

And this is why we are certainly looking at the bottlenecking and potential additional capacity. And I am not in a position to make a statement about the median capacity.

As you would need to ask people who are active in these markets. On the polysilicon, if the import duties in the U.S are approved, it certainly means job losses in installation in the United States.

I think it will have an impact in the United States. And so it will let's say slowdown the growth of the PV industry worldwide, but we do not expect a contraction in the PV industry in the wealth because of that.

I think the U.S. if they would put up chariot [ph] we will take a big gun and shoot them in their foot.

And I think there is lot of reason in the U.S and they will think about it.

With respect to that BIOSOLUTIONS question on prices, we definitely seed more in the food sector and not in pharma, agro. And the food from 2015, being price lower and also from some trading effect in our gum base business.

Okay, thank you. And if this like now a sustainable level of current prices or do you think there is more a downside potential or maybe an increase coming.

I think there is no big change to be expected.

Okay. Thank you.

Good afternoon, thank you. Question on polysilicons, coming back to your strategic rationale for the inventory build, you had said it was to be back to prepared to react to demand swings quickly.

I see our channel shipments increased significantly in Q3, so does this mean that you are able to sell more than you would have otherwise sold without this excess inventory, in other words, you able to react more quickly or more short-term contracts.

Yes, that's the case.

So I guess than there is a follow on. Is it fair to assume that you will be selling through inventory in Q4, given the lack of Tennessee?

Should we expect you than to be rebuilding inventory through Q1 or as soon as Tennessee is back up and running in order to reestablish that two months offer?

Yes that's certainly our intent. But as you can imagine it depends on the market condition.

Okay. Could you elaborate on that, so what?

If demand is very strong, and prices are reasonably high, and customers have no problems with ordering material and getting it the few weeks later out of the cost for example, then of course there is no incentives to build inventory. On the other hand, if prices are low, we will be thinking about using this time to build more inventory.

So, it's really short term standard business decisions, so, no magic behind it.

Thank you.

Good afternoon, gentlemen. There's three short questions if I may.

And sorry if I miss the tax question before, can you confirm what do you expect in the longer term in terms of a sustainable tax rates? That's the first one.

The second one, a follow-up on dividend from the capital market side actually. I mean, the guidance on financial debt, you're giving over on to 500 and the EBITDA guidance of €1 billion for 2017, we already bring you to the low end of your net debt-to-EBITDA range, at least financial debt.

How should we think about that, is this target range of 0.5 to 1 financial net debt, or is it all in? How do you think about a share order returns any change on that, please?

And the third one on polysilicon, on volumes, if I understand you correctly that the first two months of the quarter, demand was extremely good. Historically, there was always some lumpiness to the volume development.

If you could comment on September and how you start in October from the volume momentum wise, what you see in the market? That would be helpful, thank you.

Maybe, starting with your last question, demand is still very good, and especially on the high-quality side. On the material for mono and high performance mostly material.

And Thomas, to your question on tax. As I said, we've the impact of the net income from Siltronic, coming into the equity result already taxed, which lowers the tax rate.

But as I said going forward, we don't have the number for 2018 yet. So, I think it's fair to assume for the rest that we would have the statutory tax rate as guidance, but we will update to you on that in March when we come up with first news on 2018.

For the dividend policy, we discussed at Capital Market Day, that we confirm that 50% payout ratio of net income. And that will be also adjust depending on where we are and where we see us developing with respect to the leverage target range.

But I think, it will be decided when we come there. So, it's nothing that we should speculate today about it.

Can you confirm please should the net debt to EBITDA range 0.5 to 1, this is financial debt, right?

Yes.

Perfect. Thank you very much.

Yes, I'd like to come back in the tax rate. Is it better to just say, that you stay 30% before the Siltronic, because Siltronic earnings might increase quite a bit to next year, and then you would probably come up with even lower tax rate.

But my understanding is that the underlying tax rate basically 30%. If you extract what is already tax rate Siltronics?

That's the first question. And then the second, I'd like to understand a little bit more on the pricing policy you have in Silicons.

You said that in this year, prices were not the major driver, most of the operations and leverage and mix effects and so on. But you on the other hand said that, the market is very tight, usually than you've price in power.

Going into 2018, could you little bit elaborate what you think, your pricing policy will be is the market accepting price increases now-a-days?

Pricing power certainly, fairly strong in silicon, and prices definitely need to go up.

Is that 1% to 2% or is it 5% to 10% or what do we have to have in mind?

There is certainly more than 2%, certainly.

Thank you.

That takes right questions is rather complex, Andreas. I would suggest that we follow up on that.

As I also explain there is an improvement in the overseas operations that is also lowering tax rate. So we were looking to that and come back.

Okay. Thanks.

Thank you, operator, thank you all for joining us today and for your interest in Wacker Chemie. We look forward to further discussion with you as the quarter progress.

We expect to publish preliminary full year result January early February next year. And we will be back on the conference call on March 13 with our full year results.

Good bye.