Wacker Chemie AG

Thank you, Operator. Welcome to the Wacker Chemie AG conference call on our Q1, 2018 results.

My name is Jörg 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.

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

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

Dr. Staudigl?

Ladies and gentlemen, welcome to our Q1, 2018 conference call. We saw a strong performance of our businesses in Q1 despite some headwinds.

We reported Q1 sales of over €1.2 billion at the level of last year. Q1 EBITDA came in at €255 million, 11% over last year.

The main drivers for the earnings growth were higher prices and improved product mix in chemicals, especially in the blend silicones division. Markets for polysilicon however saw a slow start to the year.

In addition, polysilicon as you know operated with reduced capacities because our Tennessee plant was still down in Q1. Raw materials and the stronger euro provided headwinds throughout the quarter.

Silicones saw a strong quarter as supply is tight. Prices increased in standards and also in specialties.

We are moving our mix towards the larger share of specialties in our volumes. Rising raw material costs have some negative effect.

The tightness in silicones is sometimes is very challenging for our customers. We are doing our best to service them.

Our plants are running at full capacity and our logistics department is stretched. We look to provide relief to our customers by expanding our production.

However this will take some time and very careful planning as we need to keep our costs competitive. Trade politics stay an important factor in our business.

The U.S. Trade Court recognized unanimously that the requested tariffs in silicon metal were without merit.

As a result, there will be no additional tariffs on silicon metal shipping into the U.S. This confirms our position on this matter.

In response to the activities of some silicon metal manufacturers, we look to expand our backward integration over time. Polymers increased prices and volumes, but these were not sufficient to compensate for the strong and recently accelerating increases in raw material prices.

In addition, the strength of the euro had a negative impact on sales and earnings. Demand for solar products were seasonally slower in Q1.

Many competitors chose to curtail production and went into maintenance mode. Our German operations ran at full capacity with a good costs performance during the quarter.

We used the mid-quarter softness to replenish some of our inventory. Since the start of April we see demand strengthened.

Polysilicon is looking to startup production at the Charleston Tennessee plant over the next weeks. We expect to ship first material out of the plant in Q2.

Overall demand for polysilicon remains solid, especially in monocrystalline applications. The industry saw a number of long-term supply agreements closing in the quarter.

Large mono customers are looking to lock-in deliveries as they grow their capacities aggressively outpacing supply growth. At BIOSOLUTIONS we just announced the acquisition of SynCo Bio Partners of Amsterdam.

This move doubles our overall biopharmaceutical capacity and as such provide the fast growth option for the segment. Now let me handover to Tobias.

Thank you, Rudy. Welcome to our Q1 2018 call, ladies and gentlemen.

I will just go over our group financials and present the segment outlook. Let’s begin with the P&L on page three.

Sales days essentially flat year-over-year as volume and mix are pretty much balanced. Price increases of 3.9% supported sales, but the strong euro lowered sales slightly more.

Our gross margin increased by over 200 basis points to 19.9% as depreciation fell by about 15% to €133 million in Q1. In addition, mix effect and efficiency gains help to lower our costs of goods sold by 3% over last year.

Our results benefited from the equity contribution from our holdings in Siltronic. Our tax rate came in at 24.5% as the Siltronic contribution is effectively a post-tax item.

Earnings per share from continuing operations in the quarter more than doubled to €1.52. Moving on the balance sheet on page four, the balance sheet shows no significant changes to the prior quarter, pensions were slightly up as the discount rate declined a bit to 2.01%.

Our biggest business silicones on page five, achieved a record margin level of 24.5% in Q1. We now expect full year sales to grow by high single-digit percentage and full year EBITDA to grow at low double-digit percentage.

This further improved outlook is based on pricing and mix as well as high plant loading and a good costs performance. At polymers on the next page, our price increases took hold, while volumes stayed solid.

However, increases in acetic acid and VAM, as well as strong euro are challenging. In Q2 the segment will see a planned turnaround as communicated previously.

We now expect the full year EBITDA margin somewhat below the chemicals margin target of 16%. On page seven, BIOSOLUTION expects mid-single digit percentage growth in 2018.

EBITDA in the segment will be just below $30 million as we start loading our new facilities and digest some integration costs. We now look to fill our new capacities with our own products and custom manufacturing orders by continuing to support SynCo’s existing customers.

Guidance on the polysilicon also stays the same as we continue to take conservative view on pricing. Our focus in this segment is on continuous costs reduction and on higher share of high efficiency systems and semiconductor volumes in our portfolio.

Our Tennessee plant is about to start producing again in the next weeks. Overall we expect to ship this year about as mash as last year.

We see sales in polysilicon being down by high single-digit percentage, EBITDA should come in above 2017. As discussed previously, our insurance should compensate us fully for the Charleston incident.

So far we have received a down payment of €100 million -- $100 million in January. We have not accounted for the business interruption as part of the insurance compensation in this quarter.

Let's turn to the cash flow bridge on page 10. Please note that the operating cash flow shows the strong business performance and also includes the insurance down payment.

This lowers our net debt to about €300 million. As you project cash flows and net debt for the full year, please bear in mind two items.

First, our CapEx guidance of €470 million for the year, which is some 50% above the prior year; and second, the dividend payment in May, which amounts to €224 million. With this, let me hand you back to Rudo.

Thank you, Tobias. Ladies and gentlemen the strong quarter shows how our strategy deploys.

Our strategy in silicones of combining aggressive cost cutting and upstream materials with growth in specialty applications bears fruit. At the same time, we are mindful of our customers' needs and are looking to expand capacities to better serve them.

You saw us acquiring capacities in Amsterdam as part of our efforts to keep the momentum in our biopharmaceutical business. The complimentary skill sets at SynCo coupled with well trained employees are a great step forward to us.

SynCo expands our reach in bio manufacturing and adds much needed capacities to our fully utilized operations. While polymers works to overcome temporarily rising raw material costs, polysilicon demonstrates a great cost performance in our German plants.

We have raised guidance in silicones and adjust our outlook for the polymers to reflect current trading. We've chosen to keep our overall outlook unchanged at this time as we also watch the disputes on trade fairs and higher increases in raw materials than originally projected.

We continue to see a low single-digit percentage growth in full year group sales. Despite that full year EBITDA for the group will come in higher than last year by a mid-single digit percentage as some volume growth, better mix and pricing as well as cost performance and equity results support earnings.

Overall, the quarter leaves me very confident about our future. Strong market conditions persist in all our businesses.

We are on a good track. If there are no unexpected changes to this favorable business environment, we might exceed our guidance for the full year.

Jörg?

Thank you. This concludes our presentation today.

Ladies and gentlemen, thank you for attention so far. We'll now be happy to answer your questions.

Operator?

Yes, thanks for taking my question. First, I’d like to ask two questions on polysilicon, could you give please some more details on how you see the demand, when you were talking about the seasonal pattern?

And that you see now in April demand going up, is that already enough to tighten the high end segments where you’re in? And what does it mean for the price trend in the second quarter?

Secondly, you said that big mono customers went into long-term contracts to we notice did Wacker also went into a long-term contract with these players, or is that of no interest for you? And lastly, on silicones one question, very strong results indeed for the first quarter, was there anything special in?

Or can we take the Q1 earnings as a good guidance, what we can expect for Q2 and Q3 as well? These are my questions, thank you.

Yes, Andreas on the polysilicon, yes, we see very healthy demand, especially compared to parts of the first quarter. And this you can see also on the PV insides price trends, it came down in the first quarter and now it has stabilized for quite some weeks.

There is healthy demand especially for monocrystalline silicon applications. And there were some long-term -- or let say longer-term contracts announced.

What we can say is that we’re a significant participant in that market. And then you can imagine that we are a player in all segments.

And people are interested to enter into a longer-term commitment. That is all I can say.

And is Wacker also interested?

Yes, of course. High quality long-term, stable, reliable supplier of polysilicon and we play in the same market.

Yes, everyone should be interested to have a long-term contract, is Wacker as well as more that Wacker is also interested to get in these contracts or…

If the conditions are right, yes.

Okay, thanks.

Excuse me, the silicones, whether they’re special or…

On silicon, Andreas there were no special items in the first quarter and we increased guidance for the segment to high single percentage sales growth and low double-digit percentage EBITDA growth. So, fundamentals of the segment yes, unchanged very positive and here we don’t give any specific guidance now for the next quarters.

Okay, thanks.

Thank you and good afternoon, everyone. Three questions please, the first one would be, also on silicones, can you comment a bit on what you’re seeing in the competitive landscape, here happening, when would you expect more capacities to come online?

And can you update us also on your capacity expansion plans in a bit more detail, you mentioned you’re looking for some expansions. So, that’s the first question.

The second would be on your backward integration into silicon metal, you mentioned you’re looking to expand that in the future is that just the reiteration of the existing expansion plan in Norway or do you plan to expand your backward integration even above the 30% you usually had in the past? And then the last question on the Charleston ramp, can you give us some more details how you see this progressing over the next three quarters please?

Thank you very much.

Yes, let me start with the question on silicones on the competitive landscapes. It’s probably best explained by let’s say a rough example the total siloxane raw material capacity for silicones in the world is little bit over 2 million tons per year.

And there has been shutdown of certainly over 100,000 ton capacity last year and if you assume roughly 5% growth of the silicones business per year. So that means there is the need in the growth for an increase in capacity of roughly 100,000 tons per year in siloxane.

We don’t see that capacity on an annual basis coming, of course there will be additional siloxane capacities from few players in the market. But 100,000 tons per year is pretty hectic.

So in other words we see this let’s say tight supply in silicones going on for quite some time at least we do not see an end to that as of now. And, I mean, we said that we are in the midst of the planning phase for a significant expansion of our siloxane capacity.

And as I said the capital planning needs to be done because you have to do these expansions so that you don’t compromise your costs position. You even have to increase or improve your costs position and this is what we are targeting and this is what we are going to achieve with such an expansion.

And can you say when you have an uptick?

That will come in time.

Okay.

We will not plan forever. We want to implement, but planning needs to be done and everything including capital expenditures needs to be carefully looked at, and that’s exactly what we’re doing.

And on silicone metal, I mean, we are in the midst of significant capacity expansion right now. We have not decided on an addition of capacity expansion yet, but our let’s say our result is pretty clear that we do not want to get into a squeeze by suppliers who want to play the political game.

And third, on the Charleston ramp well this has to be done very carefully as a ramp up of such a sophisticated capacity has to be done. And we assume right now and I think that’s very real that we will achieve our capacity, our total capacity at least in the fourth quarter of this year.

Okay, thank you.

Yes, good afternoon gentlemen. I have three questions one on polysilicon and two on silicones.

On polysilicon, I'm just interested in your inventory levels. If I understand your comments correctly, you had the opportunity to rebuild inventories in early Q1.

Could you comment whether your inventories are back to normal or are still below normal, any indications yet will be very helpful? The second question on silicones, I think it's perfectly understood that you are in a sweet spot here probably for longer.

Two related questions on that. Firstly, the improvement in Q1, could you give us a help how is the split between volumes?

I think that that was very, very little price and mix. And the second question is the question on this is there a natural barrier to price increases where clients started to look into alternative materials.

And just asking in order to make sure that we do not overshoot in our pricing expectations. Thank you.

Thomas, Tobias speaking here. On the silicones, sweet spot here for longer it's a nice wording.

The improvement in Q1 as you rightly said is not there much from volume as we are capacity constraint. But in this situation, we improved our mix considerably and it means that specialties grow while we have less volume available for standards.

On the price side, it's different. There are standards to increase much stronger, but also specialties growing in price.

So that is the composition of the improvement of the first quarter. And with respect to your question on the limit of price increases, there are not many substitutes for silicones in there are tremendous applications that you have.

But on the other hand, as we also see it from our own raw materials, I mean, you need to be in a position to pass it somehow on to your own customers. If not, it doesn't become feasible to work with higher input cost than normal.

That's why I would take the guidance as we have given them. And it's a very good environment and we see the price increases to continue.

So strong fundamentals, but please bear in mind that there are some limits at some point. And to polysilicon, we mentioned that we took the opportunity to put something into our inventories when the demand was a little bit slower around Chinese New Year.

We would always do that. Again because we had very limited inventory recently, but it's not back to normal as you phrased it.

It's very little in comparison to the big demand that we see in Asia.

That’s very clear. Thank you very much.

Yes, hi, it's actually Chetan Udeshi from JPMorgan. Few questions, number one, can you give some indication on how much price increases have you seen in the polymers business?

Because if I just look at your reported sales, it doesn't seem like you are still seeing any material price improvement there, to the extent that you are seeing the squeeze on raw material. So just wanted to understand where are you in terms of increasing the pricing in polymers?

That's number one question. Number two question is more just looking structurally, and last year was the first time you gave numbers ex-Siltronic, so maybe it might not be fully reliable.

But if I look at your working capital as a percentage of sales, it is over 20% and most of the other chemical companies have range of say 15% to 20%. So why is this structural, I mean, do you see a room to bring that down going forward?

And if not why does Wacker need to operate at higher working capital as a percentage of sales than rest of the industry? Thank you.

Chetan on the working capital question, percent of sales we have seen in the first quarter an increase in working capital from the business pickup that’s one course. And then also in our inventories as we just discussed little bit in polysilicon, but also in silicones where when we run production really at the capacity limit also focusing on specialties you need more intermediates and that’s optimizing our assets, but it comes with a higher working capital.

And my answer to is that at a competitive level in the industry we’re more integrate -- I mean as a chemical player we are more integrated, we have a huge production complex on our sites and book house and interest. And if you compare us one-to-one to our peers we have very competitive working capital ratios.

On the question, number one on polymers, how much was the surprise increase against the raw material increases it was not enough, we had significant increases more than last year, over last year step-by-step we improved quarter-over-quarter. But in the full year we still had a negative pricing, now in the first quarter we have a positive pricing, but the raw materials specially VAM turned much stronger against us and that is also linked to the higher oil prices and coal and in addition to that both segments polymers and silicones felt exchange rate headwind.

Understood. Maybe the last question I would have is just on structural capital intensity of the chemical businesses, especially silicones.

I mean, of course you have two new projects at the moment with expansion of silicon metal capacity and HDK silica plant in the U.S. But structurally speaking just outside of those two projects, do you see a reason why structurally the capital intensity of your chemical businesses should be structurally higher in the mid-term than what it has been for the last 10 years on average?

No, not really, not really. I mean, in times of extremely high demand for example in silicones, that puts a lot of stress into the manufacturing operations and we have to restructure some of these to make the material flow a little bit easier.

And that certainly will review the working capital overtime, that’s certainly an effect that we have to keep in mind presently.

Understood.

May I add to this, if you look at CapEx profile of the group, we definitely -- we focus on silicones, and it’s not that it’s stable year year-by-year in 2018 we will have a CapEx budget, which is almost three times depreciation in the segment. But overall Wacker Group will stay in CapEx below depreciation.

Because we see tremendous opportunities in the silicones to grow that business in a very profitable manner.

Understood. And maybe can you give us some sense of how much of the margin improvement in silicon is just commodity siloxane and derivative price increases driven and how much is actually just business mix driven, just to understand the level of froth if there is in the margin because of say currently tighter markets in the commodity parts?

I don’t want to go to that details, but I can tell you it’s good to be an integrated player and have a standard business at a very attractive costs and to have a specialty portfolio with a lot of innovation.

Understood, thank you.

Good afternoon. My first question is on polymers, so you announced since the beginning of the year your maintenance shutdown in the second quarter.

So can you maybe give us a guidance of the impact that it will have on polymers this quarter I don’t know if you have some inventories so there won’t be a significant volume impact that maybe there is? So maybe if you can share us a little bit of the details there?

And since offering polymers today in the press release you mentioned again some price increases in polymers to counter effect the high raw material prices, where you there referring to the ones that started already or for the price increases? And lastly with that addition of [indiscernible] you doubled your biopharmaceutical production capacity and how much of increased capacity is not being utilized in currently with projects?

And do you have enough visibility to know in how many years Wacker could fill this capacity?

Maybe let me start with SynCo, presently the capacity utilization there is really low and of course since we are at the very limits of our capacity of our existing -- so far existing facilities we believe that we can fill it very soon, but definitely between one and two years.

And for the polymers maintenance question we have flagged that we have turnaround in one of our plants in the second quarter that is now in the process of being prepared that would be low double-digit million euro number in maintenance costs that needs to be absorbed in that segment, but it would not have an impact on the sales.

Okay, perfect. And the price increases in polymers?

There’s more to be done, as I said before.

Okay. And so…

But it’s a challenge to have moving targets on the raw material side as again we also lowered our guidance for polymers for the full year and said that we will only come in somewhat below our target margin of 16%.

Thanks. And just very shortly on silicon metal, so you please again tell us what the situation there is with the tariffs?

And do you believe that it’s now there’s no tariffs and the price pressure in silicon metal should disappear now or prices I believe shouldn’t go up anymore?

Generally it was good news, positive news that the tariffs were dismissed and that’s rightly so because they were not based on facts. And it could mean that there is some pressure now on silicone metal prices.

So we would assume slightly lower prices in the second half of this year. But this is only one side of the metal, the other side of the metal is you also need to look at the cost structure of silicon metal and there increases in gold prices and increase in graphite electrode prices to also play a role.

But we would assume slightly lower silicon metal prices in the second half.

Thanks, that was very helpful.

Good afternoon, gentlemen. Thanks very much for management answering my questions.

First on silicones, firstly we understood there were some outages in Asian markets in addition to a well-publicized Western closure last year in silicones, is your sense those tons are returning to the market? And whether you think -- whether that could still lead to the market being tight, but whether you think those are back in the market already post Chinese New Year?

And the second question is obviously you note obviously your plants are fully loaded and following on from Thomas’s earlier question about specialties where are you in the kind of specialties versus non-specialties kind of mix? And how much more beyond the guidance you given for 2018 would you think there could be from further kind of upgrading of the mix from specialties?

That would be very helpful. And lastly, I mean, obviously you talk about planning of debottlenecking, which sounds like capital investment, but are they other kind of maybe more operational excellence kind of better management of whole site that would enable you to get some volume maybe in the next 12 to 15 months?

Rather than having to deploy obviously building another line or whatever ground field would be? Thank you.

Let me answer your question. Let me at least try, of course there has been additional closures of Asian plants.

However, this is never really totally transparent. I would assume that some of the capacities could come back.

But if they come back then it’s considerably higher cost because, they have to adhere to let’s say standard -- environmental standards. And fortunately the Chinese government has done the right thing to really demanding higher environmental standards for the production facilities.

So, there will not be let’s say significant increase in capacities through these facilities or very low cost increase in capacities. We’ve made significant progress of course in the share of our specialties in silicones over the last few years, since we established this strategy, and I think we have really done what we have planned to do.

But in the meantime, you’ve to understand that because of the material shortage, the so called standard materials also have significantly increased in the profitability, due to higher pricing. And of course, we always try to do as much, let’s say standard debottlenecking through better operational efficiency and so on.

I mean, we do that on a regular basis, and that provides also some additional growth opportunities. We do not only rely on big capital investments for additional capacity, that’s -- I think it’s standard in the well performance chemical industry.

Okay, thank you very much.

Hi, good afternoon. Three questions if I may, first one is on BIOSOLUTIONS, could you tell me when you expect the integration costs you guide for to be incurred?

And what can we expect from the recent acquisition in terms of sales and EBITDA contribution this and the next year? And also some clarification -- that’s the second question on the insurance payments, did you expect any significant additional cash payments from the insurance any timing on that would be helpful?

And also how much do you expect to be booked as EBITDA, as it is part of the polysilicon guidance? And lastly if you could provide us an update on your stake in Siltronic do you still feel comfortable with the stake or would you also consider further selling down on the stake?

Yes, that’s it. Thank you.

Maybe on the Siltronic to jump in there, we feel very comfortable with those stake in Siltronic.

In BIOSOLUTIONS, we have already baked-in, the integration costs into our guidance, as the closing -- just the current two weeks ago, we already knew that it was so likely. And so additional revenue and the costs impact from the integration is part of the guidance that we show.

And as Rudo mentioned we derive the technology to fill that capacity quickly and that will bear fruit mostly in the year 2019 and following. And for the insurance payment, there is no news to that.

As we said we got an advance payment of $100 million. And yes for sure, we do expect more.

It's a sign that the insurance accept our claim and that we are talking about bigger numbers and that's why they sent the $100 million in advance. But the recognition for the business interruption that we will decide when we have full clarity on that.

And we expected that it will be settled at the latest when the plant is running again at full capacity.

Okay. Great thanks a lot.

Good afternoon, and thank you for taking my questions. My first one would be on the quarterly run-rate for silicones as it relates to your guidance for low double-digit EBITDA growth.

Is there any reason seasonal silicon metal wise why you would expect the figure that you reported in Q1 to decline on a quarterly basis in any of the subsequent quarters during the year? My second question is on your expansion at Holla into silicon metal in 2019.

Do you expect this to be margin positive in 2019? So is there still further upside independent pricing to silicon margins.

And my follow on is on additional cost related to polysilicon. Just the EBITDA guidance of be having flat 2018 EBITDA for polysilicon includes a set of ramp up costs, and if so what are these please?

Sebastian, I thought it was the last question. Our guidance for polysilicon includes also the insurance as we said before.

So we have an increase in EBITDA including everything. That means that we are put as the incident in Tennessee hadn’t happened by the insurance.

And that also includes the absorption of ramp up costs. But that could deviate quarter-by-quarter as I said.

Because we would expect that we would recognize the business interruption only when the plant is running from today's perspective. The second question on the Holla expansion, I'm not entirely sure but I think it's a second half of 2019 that we have the silicon metal furnace available.

So do not bake too much of costs improvement for 2019 from that expansion into your model. And for silicones, as I said before we don't want to give quarterly guidance we said that the overall performance in silicones is very strong that's why we upgraded and we now guide for low double-digit percentage in EBITDA growth.

Alright, thank you very much.

Thank you, operator. Thank you all for joining us today and for your interest in Wacker Chemie.

We’re looking forward to further discussions with you as the quarter progresses. If you would like to meet us next time, we are in your city.

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We will be back again with the conference call on Q2 on July 26. Good bye.