Wacker Chemie AG

XETRA:WCH

Earnings Call Transcript 2018-Q1

[Jörg Hoffmann, Head of Investor Relations]

Welcome to the Wacker Chemie AG conference call on our Q1 2018 results. My name is Joerg Hoffmann, and I am 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 Web page 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?

[Rudolf 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 EUR1.2 billion at the level of last year. Q1 EBITDA came in at EUR255 million, 11% over last year.The main drivers for the earnings growth were higher prices and improved product mix in chemicals, especially in the brand 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 a 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 a larger share of specialties in our volumes. Rising raw material costs had some negative effects.The tightness in silicones is sometimes 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 play an important factor in our business. The US Trade Court recognized unanimously that the requested tariffs on silicone metal were without merit. As a result, there will be no additional tariffs on silicone metal shipping into the US. This confirms our position on this matter. In response to the activities of some silicone 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 cost performance during the quarter. We used the midquarter softness to replenish some of our inventory. Since the start of April, we see demand strengthen.Polysilicon is looking to start up 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 remained 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 biopharm -- excuse me, biopharmaceutical capacity and, as such, provides a fast growth option for the segment.Now let me hand over to Tobias.

[Tobias Ohler]

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 3. Sales stayed essentially flat year-over-year as volume and mix were 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 EUR133 million in Q1. In addition, mix effect and efficiency gains helped to lower our cost of goods sold by 3% over last year. Our results benefited from the at-equity contribution from our holdings in Siltronic. Our tax rate came in at 24.5% as the Siltronic contribution is effectively a posttax item. Earnings per share from continuing operations in the quarter more than doubled to EUR1.52.Moving onto the balance sheet on Page 4, 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 5, 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 a low double-digit percentage. This further improved outlook is based on pricing and mix as well as a high plant loading and a good cost 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 a strong euro are challenging. In Q2, the segment will see a plant turnaround, as communicated previously. We now expect the full year EBITDA margin somewhat below the chemicals margin target of 16%.On Page 7, biosolutions expect mid-single-digit percentage sales growth in 2018. EBITDA in the segment will be just below EUR30 million as we start loading our new facilities and digest some integration costs. We now look to fill with our new capacities with our own products and custom manufacturing orders, while continuing to support SynCo's existing customers.Guidance on polysilicon also stays the same as we continue to take a conservative view on pricing. Our focus in this segment is on continuous cost reduction and on a 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 much as last year. We see sales in polysilicon being down by a 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 EUR100 million -- $100 million, excuse me, 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 EUR300 million. As you project cash flows and net debt for the full year, please bear in mind two items, first, our CapEx guidance of EUR470 million for the year, which is some 50% above the prior year and, second, the dividend payment in May, which amounts to EUR224 million.With this, let me hand you back to Rudy.

[Rudolf Staudigl]

Thank you, Tobias. Ladies and gentlemen, the strong quarter shows how our strategy deploys. Our strategy in silicones of combining aggressive cost cutting in 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 complementary skillsets at SynCo coupled with well-trained employees are a great step forward to us. SynCo expands our reach in biomanufacturing 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 raise guidance in silicones and adjust our outlook for polymers to reflect current trading. We have chosen to keep our overall outlook unchanged at this time as we also watch the disputes on trade barriers 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 this, 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. Joerg?

[Jörg Hoffmann, Head of Investor Relations]

Thank you. This concludes our presentation today, ladies and gentlemen. Thank you for attention so far. We will now be happy to answer your questions. Operator?

[Andreas Heine, Managing Director]

First, I would like to ask two question on polysilicon. Could you give, please, some more details on how you see the demand trends? 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 are 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. Two we noticed. 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.

[Rudolf Staudigl]

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 Insights price trend. It came down in the first quarter. And now it has stabilized for quite some weeks. Yes, there is healthy demand, especially for monocrystalline silicone applications. And there were some long-term or let's say longer-term contracts announced. What we can say is that we are 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 longer-term commitments. That's all I can say about --

[Andreas Heine, Managing Director]

And are you also interested? Okay.

[Rudolf Staudigl]

Yes, of course. Of course. We are a high-quality, long-term, stable, reliable supplier of polysilicon, and we play in the same market.

[Andreas Heine, Managing Director]

Yes, everyone should be interested to have a long-term contract with Wacker. It was more whether Wacker is also interested to get in these contracts, or --

[Rudolf Staudigl]

If the conditions are right, yes.

[Operator]

The next question is from --

[Rudolf Staudigl]

Excuse me. There -- on silicones, whether there are special --

[Tobias Ohler]

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

[Operator]

The next question is from Patrick Rafaisz, UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Three questions, please. The first one would be on -- 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 here. So that's the first question. The second would be on your backward integration into silicone metal. You mentioned you're looking to expand that in the future. Is that just a reiteration of the existing expansion plan in Norway, or are you -- do you plan to expand your backward integration even above the 30% you've 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.

[Rudolf Staudigl]

Yes, let me start with the question on silicones and 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 a little bit over 2 million tons per year. And there has been a shutdown of certainly over 100,000 ton capacity last year. And if you assume a roughly 5% growth of the silicones business per year, so that means there is the need in the world for an increase in capacity of roughly 100,000 tons per year in siloxanes. We don't see that capacity on an annual basis coming. Of course, there will be additional siloxane capacities from a few players in the market. But 100,000 tons per year is pretty hefty. 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 we said that we are in the midst of the planning phase for a significant expansion of our siloxane capacity. And as I said, careful planning needs to be done because you have to do these expansions so that you don't compromise your cost position, even have to increase or improve your cost position, and this is what we are targeting, and this is what we are going to achieve with such an expansion.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Can you say when you have an update? Do you know when we get --

[Rudolf Staudigl]

That will come in time. 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 are doing. Good. And on silicone metal, we are in the midst of a significant capacity expansion right now. We have not decided on an additional 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 is -- 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, yes, very real that we will achieve our capacity, our total capacity, at least in the fourth quarter of this year.

[Operator]

The next question is from Thomas Swoboda, Societe Generale.

[Thomas Swoboda, Research Analyst]

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 here would 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 this split between volumes -- I think that that was very, very little -- price and mix? And the second question on this is, is there a natural barrier to price increases where clients start to look into alternative materials? I'm just asking in order to make sure that we do not overshoot in our pricing expectations. Thank you.

[Tobias Ohler]

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 very much from volume as we are capacity constrained. 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, standards do increase much stronger, but also specialties grow in price. So that is the composition of the improvement of the first quarter. And yes, with respect to your question on the limits of price increases, there are not many substitutes for silicones in their, yes, tremendous applications that you have. But on the other hand, as we also see it from our own raw materials, you need to be in a position to pass it somehow onto your own customers. If not, it doesn't become feasible to work with higher input costs 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 yes, 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 slow 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, very little in comparison to the, yes, big demand that we see in Asia.

[Operator]

The next question is from Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

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're still seeing any material price improvements there to the extent that you are seeing the squeeze on raw materials. 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? And then do you see 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 the rest of the industry? Thank you.

[Tobias Ohler]

Chetan, on the working capital question, percentage of sales, we had seen in the first quarter an increase in working capital from the business pickup. That's one course. And also, in our inventories, as we just discussed a 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 a competitive level in the industry, we are more -- as a chemical player, we are more integrated. We have a huge production complex on our sites in Burghausen and Neunchritz. 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 price increase against the raw material increases, it was not enough. We had significant increases, more than last year. Over last year, we -- 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, especially 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 the exchange rate headwind.

[Chetan Udeshi, Research Analyst]

Understood. Maybe the last question I would have is just on the structural capital intensity of the chemical businesses, especially silicones. Of course, you have two new projects at the moment with the expansion of silicone metal capacity and the [ SPK ] silica plant in the US. 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 midterm than what it has been for the last 10 years on average?

[Rudolf Staudigl]

No, not really. Not really. 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 reduce the working capital over time. That's certainly an effect that we have to keep in mind presently.

[Tobias Ohler]

May I add to this? If you look at the CapEx profile of the group, we definitely -- we focus on silicones. And it's not that it's stable year by year. In 2018, we will have a CapEx budget which is almost 3x depreciation in this segment. But overall, the group, Wacker Group, will stay in depreciation -- in CapEx below depreciation because we see tremendous opportunities in the silicones to grow that business in a very profitable manner.

[Chetan Udeshi, Research Analyst]

Understood. And maybe can you give me -- give us some sense of how much of the margin improvement in silicones is just commodity siloxane and price increases driven and how much is actually just business mix driven, just to understand the level of [ relative ] there is in the margin because of the currently tighter markets in the commodity parts?

[Tobias Ohler]

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

[Operator]

The next question is from Laura Lopez Pineda, Baader-Helvea.

[Laura Lopez Pineda, Analyst]

Good afternoon. My first question is on polymers. So you are now at the beginning of the year, your maintenance shutdown in the second quarter. So can you maybe give us a guidance of the impact that this will have on polymers next quarter? I don't know if you have some inventories so there won't be a significant volume impact, but maybe there is. So maybe if you can share with us a little bit of the details there. And just for polymers, today, in the press release, you mentioned again some price increases in polymers to counter affect the high raw material prices. Were you there referring to the ones that started already or for the price increases? And lastly, with the acquisition of SynCo, you doubled your biopharmaceutical production capacity. And how much of SynCo's capacity is now being realized currently with projects? And do you have enough visibility to know in how many years Wacker could fill this capacity?

[Rudolf Staudigl]

Maybe let me start with SynCo. Presently, the capacity utilization there is really low. And of course, since we are at the very limit of our capacity of our existing -- so far existing facilities, we believe that we can fill it very soon, but definitely between 1 and 2 years.

[Tobias Ohler]

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

[Laura Lopez Pineda, Analyst]

Okay. Perfect. And the price increases in polymers?

[Tobias Ohler]

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

[Laura Lopez Pineda, Analyst]

Thanks. And just very shortly on silicone metals, can you please again tell us what the situation there is with the tariff? And do you believe that it's -- now there's no tariff, then the price pressure in silicone metals should disappear or prices at least shouldn't go up anymore?

[Tobias Ohler]

It was good news, positive news that the tariffs were dismissed and that 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 silicone metal. And there, increases in coal prices and increases in graphite electrode prices do also play a role. So but we would assume slightly lower silicone metal price in the second half.

[Operator]

The next question is from Thomas Wrigglesworth, Citigroup.

[Thomas P Wrigglesworth]

Focus on silicones. Firstly, we understood there were some outages in Asian markets in addition to a well-publicized Western closure last year in silicones. Do you -- is your sense that those tons are returning to the market and whether you think -- and whether -- obviously, 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've given for '18 would you think there could be from further kind of upgrading of the mix from specialties? That would be very helpful. And lastly, obviously, you talk about planning of debottlenecking, which sounds like capital investment. But are there other kind of maybe more operational excellence kind of better management of the 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 the brownfield would be? Thank you.

[Rudolf Staudigl]

Yes, let me answer your questions, or let me just try. Of course, there have 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 at considerably higher costs because they have to adhere now 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, a significant increase in capacities through these facilities or very low-cost increase in capacities. Yes, we have 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 have 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. We do that on a regular basis. And that provides also, let's say, 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-performing chemical industry.

[Operator]

The next question is from Martin Jungfleisch, Kepler Cheuvreux.

[Martin Jungfleisch, Junior Equity Research Analyst]

Three questions, if I may. First one is on biosolutions. Could you tell me when you expect the integration cost you guide for to be incurred? And what can we expect from the recent acquisition in terms of sales and EBITDA contribution this and next year? And then also some clarification -- that's the second question -- on the insurance payments. Do you expect any significant additional cash payments from the insurance? And 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, yes, further selling down on the stake? Yes, that's it. Thank you.

[Rudolf Staudigl]

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

[Tobias Ohler]

On biosolutions, we have already baked in the integration costs into our guidance. As the closing just occurred 2 weeks ago, we already knew that it was so likely. And so additional revenue and the cost impact from the integration is part of the guidance that we show. And as Rudy mentioned, we do have 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's no news to that. As we said, we got an advanced payment of $100 million. And yes, for sure, we do expect more. It's a sign that the insurance accepts 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, yes, full clarity on that. And we expect it that it will be settled at the latest when the plant is running again at full capacity.

[Operator]

At the moment, there are no further questions. [Operator Instructions] Next question is from Sebastian Bray, Berenberg.

[Sebastian Christian August Bray, Analyst]

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 silicone metal or otherwise, 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 Halle into silicone metal in 2019. Do you expect this to be margin positive in 2019? So is there still further upside independent of pricing for silicone margins? My final one is on additional costs related to polysilicon. Does the EBITDA guidance of the having flat 2018 EBITDA for polysilicon include a set of ramp-up costs? And if so, what are those, please?

[Tobias Ohler]

Sebastian, I start with 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 if 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 Halle expansion, I'm not entirely sure, but I think it's the second half of '19 that we have the silicone metal furnace available. So do not bake too much of cost improvement for '19 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 a low double-digit percentage in EBITDA growth.

[Operator]

As there are no further questions, I would like to hand back to you, gentlemen.

[Jörg Hoffmann, Head of Investor Relations]

Thank you, operator. Thank you, all, for joining us today and for your interest in Wacker Chemie. 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, please send us a message or register your interest with a corporate access partner. The link can be found next to the financial publications and IR presentations on our Web page. We will be back again with a conference call on Q2 on July 26th. Bye.