Wacker Chemie AG

XETRA:WCH

Earnings Call Transcript 2018-Q2

[Jörg Hoffmann, Head of Investor Relations]

Welcome to the Wacker Chemie AG Conference Call on Q2 2018 results. 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 web page under www.wacker.com under the caption Investor Relations.Before they begin, however, allow me to point you to the Safe Harbor statement which you will find 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 Q2 2018 conference call.Our Q2 sales came in strong at EUR 1.3 billion. This is 9% better than last year in Q1. Group sales saw strong support from silicones, which grew by 19% over last year. Q2 EBITDA on group level was at EUR 261 million, 3% up over last year and 2% up over Q1. Our silicones division showed a great performance. The division runs at capacity limits. Q2 EBITDA climbed to EUR 177 million, which is 59% higher than last year. Strong growth in specialty product supports this development. Demand for silicones is strong across all industry segments and global markets are tight. Not all orders can be fulfilled. Given the size of the imbalance between supply and demand, we do not believe that debottlenecking actions alone will be sufficient to bridge the supply gap. Currently, I do not see short-term relief coming from new capacity additions. In this difficult situation, we try to serve our customers as best as possible.Polymers saw growing volumes in sales but it was not enough to offset other effects. The VAM turnaround in Germany added further cost to the quarter. In addition, effect of environmental reforms in China and an unforeseen series of force majeure declarations by acetic acid producers drove up the cost of vinyl acetate monomer to new historical highs. We continue to work hard to adjust prices to meet rising raw material costs.Polysilicon showed sequentially higher volumes in Q2. Sales were slightly below last year as prices declined towards the end of the quarter. This was due to policy changes for the solar market in China implemented by the regulators. Against this background, Q2 EBITDA came in at EUR 39 million. Bear in mind that this result contains no insurance reimbursements and it has backed by ramp cost from the Tennessee plant restart. We are ramping as fast as possible, and are very satisfied with the material quality that's coming out of the plant. Presently, we've see many polysilicon plants in maintenance shutdowns. Such a reaction is in line with historical precedent. We have seen similar patterns in the past when markets slumped as a consequence of changes to feed-in tariffs. Every time, these reactions have been followed by fairly quick recoveries. In my view, the announced policy changes in China are ultimately positive for the growth of solar installations. They help to speed up the arrival of subsidy-free solar power. In addition, the recent price adjustments for modules have stimulated exports from China into new markets. This is an excellent base for extended future solar PV growth. In addition, we see a shift to higher efficiency technologies using more high quality polysilicon.Across the group, we continue to push for productivity and efficiency improvements. Our initiative for digital transformation is a logical extension of these efforts. The systematically assess digitalization options in core operations along the supply chains are indeed [indiscernible] in acting applications. We see great opportunities for enhanced IT capabilities across business functions.Looking at the full year, we confirm our previous guidance for the group. We continue to see a low single-digit percentage increase in sales and expect a mid-single-digit percentage increase in full year group EBITDA. Since our last guidance, we have made a few adjustments on the segment level, which Tobias will explain now.

[Tobias Ohler]

Welcome to our call, ladies and gentlemen. Let me walk you through our financials and present you the outlook for each segment.Starting with the P&L on Page 3. Sales went up by 9% over prior year and quarter, following 7% volume and mix effects. Overall, prices increased by 5%. Polysilicon is the only segment with price declines. Currency slowed the development on the group level by around 3%. Gross profit was up by around 6% despite some EUR 30 million higher cost for raw materials and energy year-over-year. Our results benefited from the equity contribution of Siltronic at EUR 23.9 million after purchase price allocation effects. Our tax rate came in at 23.7%. Earnings per share from continuing operations went up 36% year-over-year to EUR 1.59 per share.Moving on to the balance sheet on Page 4. The balance sheet shows no significant changes to prior quarter. Although this is not evident here, we refinanced debt in 2018 at lower interest rates, which helped reduce our reported interest expenses.Silicones, on Page 5, expanded its Q1 record margin now to 27% in Q2. Sales in the quarter were up 19%, driven both by volume mix and price and held back by currency effects. With continued tightness in the market and a good operating performance at capacity limits, we have upgraded our guidance. We now expect sales of EUR 2.5 billion with an EBITDA of around EUR 600 million. This guidance assumes a seasonally somewhat weaker Q4.Polymers, on Page 6, reported positive pricing and very strong seasonal volume effect. A number of factors have performance backed and resided in an EBITDA of EUR 33 million. A series of supply interruptions and force majeure declarations for acetic acid and VAM contributed to tightness, driving up raw material prices. In addition, the Q2 turnaround of our VAM plant weighed on EBITDA with about EUR 15 million. For the full year, we continue to see mid-single-digit percentage sales growth based on volume growth and better pricing despite currency headwinds. However, our earnings expectations has become more muted for the rest of 2018. We now see higher raw material cost for longer than previously expected. As a result, we adjust our full year EBITDA guidance to about EUR 150 million with the second half -- half year performance being similar to the first half with the typical fourth quarter seasonality.On Page 7, BIOSOLUTIONS. Our guidance on sales is unchanged, but the integration and ramp cost as we begin the loading of the labor capacity additions from recent M&A weigh on EBITDA. With the mid-single-digit percentage sales growth, we now see EBITDA at about EUR 25 million for the full year 2018.Polysilicon, on Page 8, saw excellent Q2 performance in our German plants, but ramp cost and no insurance payment being recognized for the business interruption at the Tennessee site weighed significantly on the results. As such, our reported EBITDA does not accurately reflect the strength of our underlying business. While polysilicon sales volume, were overall slightly higher than in Q1, the quarter ended with soft pricing. The recent changes to Chinese solar policies resulted in a period of uncertainty. With industry-wide inventory clearance and widespread capacity shutdowns. In contrast to this, we keep our facilities running at the capacity limit and use the opportunity to rebuild inventories as we want to improve customer service. Overall, the temporary slowdown results initially in lower growth global installation for 2018. As other markets outside China benefit from the lower cost of solar installation, we expect global PV solar installations now to be in the range of 100 to 115 gigawatts in 2018. The ramp of the Tennessee plant continues in Q3 with its effects on cost. Full capacity should be available again in Q4. We also expect to conclude the claims discussion with our insurance provider in Q4.Following all of this, our guidance for polysilicon changes. We now see sales down by lower double-digit percentage while we see EBITDA now around 10% below last year.Relating to the other segment, we now see a lower double-digit negative EBITDA for the full year before adjusting for the Siltronic earnings effect. Our volume growth over the last 2 years put a lot of strain on our logistics infrastructure, from material handling to warehousing and loading facilities. As a result, we are stepping up technical spend to ensure smooth operations to our customers.In addition, we reinforce our efforts on productivity and deficiency and spend more to support our initiatives for digital transformation.On Page 9, you'll see how our net financial debt increased to about EUR 640 million in the quarter. Operating cash flow came down following seasonal effects, like variable compensation payment and higher tech payouts. In addition, we deployed some funds received from the insurance companies in Q1 to pay for the repairs of our Tennessee plant. Other items affecting cash flow were the 30% higher CapEx in the first 6 months than last year and the SynCo acquisition. Net financial debt was also impacted by our dividend payout in May, which was more than twice as much as last year. Including working capital and currency effects, we now see our net financial debt at year-end slightly higher than previously forecasted at about EUR 500 million.With this, let me hand you back to Rudi.

[Rudolf Staudigl]

Thank you, Tobias. Ladies and gentlemen, let me wrap up. The highlights in this quarter's numbers, as you know, is clearly our silicone division which performed exceptionally well. While we certainly benefit from the global tightness, the bulk of the improvement tracks back to the hard work done here to drive specialty growth and our uncompromising approach to cost reductions. This helped us sustain a period of pricing in the past which was not attractive for reinvestment. Therefore, now we can look again into financially sound brownfield expansion economics. As we always said, silicones provide a [ propertive ] -driven growth trajectory above other chemistries. We're happy to support our customers' growth and demand. Our polymers division, in general, is in a great business position but currently, squeezed by a series of unfortunate events. It started with the effects of Hurricane Harvey and was followed by a number of unexpected shutdowns of suppliers. As a result, prices for raw materials increased fast in a very short period of time. The underlying trends for long-term growth in the business, however, are unchanged as we see the market transformation and the regional growth trends uninterrupted.BIOSOLUTIONS is busy with integrating and starting up the recently acquired capacity. I expect loading these capacities will take some time so we'll most likely see positive effects of this in the next year.At polysilicon, the immediate outlook is somewhat uncertain as the main market in China adjusts its sales to the policy change implemented during the quarter. The temporary slowdown adds pressure to pricing but will also act as a catalyst to accelerate the transition to high-performance technologies which is a benefit for us.Solar is already competitive now to other forms of power generation. We believe that economic forces will drive the recovery in this market as it just makes sense to add solar power to the overall power mix.In summary, all our businesses did well in Q2. Silicones saw an exceptional performance. Each of our other businesses shouldered challenges in the quarter that were special. Polymers adjusted the cost of the turnaround amid market tightness. BIOSOLUTIONS starts filling up new capacities and integrates 2 organizations. Polysilicon, not only faced certain changes in demand, but also carries ramp costs and the fixed cost of a full site without relief from insurance payments yet. In light of this, I'm proud of the underlying strength of our businesses. As far as the rest of the year is concerned, we continue to see the biggest risk to our performance in a potential slowdown of the global economy as a result of general protectionism. To a certain extent, we have tried to take those macroeconomic risk factors already into account. However, assuming a continued positive development of the global economy, I'm convinced that we have a good chance to beat our full year guidance.

[Jörg Hoffmann, Head of Investor Relations]

Operator, we're ready to take questions now.

[Operator]

[Operator Instructions]

[Jörg Hoffmann, Head of Investor Relations]

Operator, the first question is from Mr. Patrick Rafaisz at UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

On the [ fumed ] silica expansion in Tennessee you were talking about, can you remind us about when this will happen? And can you give us also a rough indication of the size versus your current capacities in this area? That's the first question.

[Rudolf Staudigl]

Okay. The answer is the startup will be next year as scheduled. The project is going very well. And this will add about 13,000 tons of capacity.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Okay. And on top of what kind of capacity you have currently?

[Rudolf Staudigl]

Well, we do not publish exact numbers there, but it has significant percentage amount.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Okay, good. And then the second question on polymers, you've -- you're growing actually still in the business, right, but you get severely punished by these swings in raw materials. Do you have any plans here to maybe rethink your pricing policy? Have you approached your customers about maybe quarterly pricing instead of annual pricing you still have in some parts of the business? Second question.

[Rudolf Staudigl]

Well, we have different pricing schemes with different customers. And of course, when there are fast upward changes in the material cost, we try to adjust as fast as possible. And so that's a standard way of performing this business. However, sometimes, like this time, it simply was not possible to adjust the prices upwards as fast as the material costs went up. So these periods have been -- we have experienced these things in the past, just as we have experienced times when material cost or raw material costs came down much faster than we have to reduce our prices. And so we really have to have a long-term look on this business. And even with this -- its actual performance, it's definitely still a great business.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Okay. Good, good. And then a last question on polysilicon, and can you talk a bit about the inventory build you're seeing currently? And we know from the past that you use the environment as we're seeing now to build up some strategic inventories. Can you give us some more color here? Is that still ongoing? When do you expect that to reverse again and customers to draw down inventories? And sorry, just sneaking in another one here on polysilicon. What's your average price assumption for -- on the line in the guidance for polysilicon in the second half?

[Rudolf Staudigl]

Well, there is certainly a building of inventory happening right now because we simply do not sell it at any price, but it's also healthy to build up the inventory to serve our customers better. And the question, how long this period of depressed pricing will last. Of course, it's very difficult to predict in the past these periods of sudden price drops were followed by also nice increases of the prices. We certainly see some uptick in demands right now. The question is, whether this is already a sign of an overall acceleration of the market and how that can be sustained. But there are certainly some slight positive signs on the horizon. And but, yes, as I said, we will see how sustainable that is. But yes, as I said, of course, short term, it's unfortunate, but long term, I think it guides the market in the right direction.

[Patrick Rafaisz, Director and Chemical Research Analyst]

Okay. And the average price assumption for the guidance in poly?

[Rudolf Staudigl]

We do not give specifics there. However, I just want to remind you that in the beginning of the year, when we gave out our first guidance, we already predicted a lower pricing average than last year. So we did not perceive that this market simply goes on continuously over the year. I think something like that effect in China was -- the handwriting was already on the wall, I would say.

[Operator]

The next question is from Andreas Heine of MainFirst.

[Andreas Heine, Managing Director]

I'll have couple of polysilicons and 1 nonsilicon, please. I'd like to start with what you said about your PV installation you expect for this year, which is quite an upbeat number with 100 to 105, so at least flat up to 15% increase. According to what I read, China might go down from 50% to 35%, and U.S. is going down maybe 4% to 5%. So that would mean 20 gigawatts less from these 2 countries. Where do you see the growth? And what gives you the confidence that we will see then a very strong Q4? That's the first. And related to this, maybe, according to what I read, the mono share last year was about 25% in the installation. What do you expect the mono share will be this year and next year, as you highlighted that you expect a higher shift to the higher efficiency mono technology?

[Rudolf Staudigl]

Well, we -- as you know, we have published our expectations for the various countries, and we have quite the number of people working on these forecasts. So in the past, these forecasts were pretty reliable. And this gives us the confidence, we are not too far away from the reality with our forecast or with our expectations, I would say. I mean, nobody knows, of course, but I think at least a flat development this year compared to last year is, in my opinion, a very reasonable assumption with opportunities to even grow simply because of the fact that the model prices dropped down so fast and there are -- there's a lot of willingness to -- and actually significant need to install power generation, especially in countries like India, South America, et cetera, et cetera. And in the meantime, I think the world realize that it just makes a lot of sense to generate the power for air conditioning by solar. And as you can see in the market right now, I mean the ones that really continue to operate, at least at the highest level, are the mono silicone producers because of the demand or the continuing demand for high quality sales in modules. And of course, there are also very high quality multicrystalline [ base themselves ] in modules and those high quality multicrystalline and as well as mono are in the highest demand, and we expect the highest growth in that segment. What exactly it will be this year, I cannot predict especially, but the trend is in line of our expectations since many years, and the demand for high quality polysilicon certainly is getting higher and higher.

[Andreas Heine, Managing Director]

Then maybe 1 question on Q3. You build up inventories, could you explain a little bit what that means for the P&L if you build up inventories? So I guess it obviously does not have negative EBITDA impact. But what do we have to expect in a period where you cannot sell too much as the market is said to be very quiet right now on the P&L impact?

[Tobias Ohler]

Andreas, this is Tobias speaking. We typically do not go into that kind of detail with respect to P&L effect of inventory. But I can say, yes, we build and we would also expect for the remainder of the year to add to our hubs in Asia because as in previous situations, we really take those opportunities when the market is a little bit slower that we try to get closer to our customers. And that it was not -- I think, we shouldn't talk about the P&L here.

[Andreas Heine, Managing Director]

Okay. Maybe then the last question from my side on silicones. You said the market is very tight. It is basically tight in these 2 things. One was the closure of one your competitor's plant in Germany; and the other was a net cut in capacities in China, not least due to environmental reasons. Is there any chance that those capacity come back? And do you have visibility whether there are any Chinese player coming up with plans to build a new greenfield or brownfield expansion?

[Rudolf Staudigl]

Yes, there are certainly ideas and projects but not really concrete capacity of that are coming up very soon. The -- of course, the question is, and I think it's definitely the right consideration what happens to the plant that have been shut down for environmental reasons. I think there's certainly some of them might be able to be upgraded, but that certainly adds to -- adds significant cost to these plants, and most of these plants are under critical in terms of capacities. So if they really sort of have to come forward with their real costs, I do not see a big threat to the overall price level for silicones because of that.

[Operator]

The next question is from Chetan Udeshi, JPMorgan.

[Chetan Udeshi, Research Analyst]

I have a few actually. Maybe I'll start with the silicones first. Your sales were up 19%, and correct me if I'm wrong, but there was supposed to be some impact from IFRS 15 on reported sales. So can you just help us understand how much of the 19% is actually just pricing? And how much is actually driven by volumes? The second question on silicones is given that the tightness has lasted longer than expected and you think it will continue, what is sort of stopping you from beginning the brownfield capacity expansion just yet? I mean, in the sales, why are they not taking the call just now? And maybe I have a couple of questions on polysilicon, which probably I'll ask after your response to these questions.

[Tobias Ohler]

Well Chetan, Tobias speaking on the silicone's question and the 19% sales increase. Yes, in the beginning of the year, we have highlighted with the IFRS changes some EUR 30 million would go out not -- for the full year not being anymore reported as sales and according to the new standard. But I think with the 19%, this is just a very small number in comparison. So the 19% basic stems from a very good performance in growing volume for specialties and that leads to a much better mix. And then price increases, which are much stronger for the standard product and for the specialty product where we have more annual contracts.

[Rudolf Staudigl]

And in terms of capacity additions, of course, something like that, if we do, let's say, a big debottlenecking, it takes, not only the debottlenecking, but addition of capacity in an existing plant, careful planning in the beginning will speed up the investment later on. That's the answer. I mean, we simply are very meticulously planning all the individual steps that have to be taken to add to capacity in an existing, let's say, brownfield environment.

[Chetan Udeshi, Research Analyst]

Understood. And until that capacity comes online, when will you decide to add the expansion? I mean, is there room for you to grow your volumes from existing capacity? Because you guys have been running in silicones at 100% from -- for last 3, 4 years at least. So -- but still yet, you've been able to grow the volumes. Is there more flexibility to grow volumes you think for the next 18 months before your new green -- brownfield expansion happen in silicones?

[Rudolf Staudigl]

Yes, I mean, there's always a way to add a little bit of volume by small debottlenecking activities. On the other hand, of course, we especially this times, just have to be very much detailed in getting the highest value out of the volume you have available.

[Chetan Udeshi, Research Analyst]

Understood. And maybe just question on polysilicon, I know you did not say, I mean there was a question previously on what is the assumption prices which you didn't give. But is it fair to assume or at least understand that you think the market in terms of both volumes and prices will recover in the second half of this year? Is that what...

[Rudolf Staudigl]

[indiscernible] We are convinced about it.

[Chetan Udeshi, Research Analyst]

Okay. And one question I had was, I think, Tobias, you mentioned earlier in the call that there was some insurance payment which was used to rebuild the plant. Did I hear that correctly? So can you just, if possible, give us split of how much of the insurance is going to be between what goes in P&L and what goes into the cash flow line? And I think maybe it's related, to some extent is, there was a big material decline in the other liabilities line in the balance sheet. So I was just wondering whether part of that growth's related to the recognition of insurance payment on cash flow -- in cash flow, sorry?

[Tobias Ohler]

Yes, we received USD 100 million payment from the insurance in the first quarter, and we take this account of payments in order to take care of the spend that we have on rebuilding the damaged plant. And that's why that doesn't burden our P&L right now, and that is also what you have seen in the cash flow statement and in the balance sheet that is exactly the effect that is taking place there. But for the business interruption, it is, as we said before, we didn't book anything so far, and we expect that we book that in the first quarter when the plant is running at full steam again.

[Operator]

The next question is from Paul Walsh, Morgan Stanley.

[Paul Richard Walsh, Managing Director]

Can we just go back over the math around the insurance payment? I'm particularly interested in how much you are assuming in your new guidance for the polysilicon business for this year. So the quantum that you mentioned around Q4, but how much is included in that guidance? And then my second question around the silicones business. Now obviously, this is a chemical chain that is incredibly tight at the moment. And why should we not assume that these are deeply cyclical dynamics that are inflating profits in the silicones chain at the moment versus just simply structurally better margins in the industry, i.e., how much of these do you think is temporary versus sustainable, which I know is a tough question to answer, but I think you get the gist of my question.

[Rudolf Staudigl]

On the insurance payment, our assumption for the business interruption is unchanged. We said before that we do not disclose that number, but the guidance is not changed by that. And I want to highlight one thing, because I think in some -- at some market participants, there's a misunderstanding with respect to insurance. It just puts us as if the plant was running, and we would have run the plant if we hadn't had that incident in September last year. So it's not a special that you need to take out of our performance in 2018. And for that reason, it's part of our guidance, and it also compensates the burden that we have right now in ramping the plant in the second quarter and also in the third quarter.

[Paul Richard Walsh, Managing Director]

And just on that point, Tobias, so what you're saying is that the [ plow ] will run back up and add those EBITDA dollars anyway. The insurance payment just mitigates for the gap that's been left in the meantime?

[Tobias Ohler]

Exactly.

[Paul Richard Walsh, Managing Director]

Okay. And on the silicones business, please?

[Rudolf Staudigl]

Yes. I already mentioned in one of the previous calls that the total market size for silicones is about 2 million tons. And if we assume a growth rate of 5% per year, which I think is fairly reasonable, plus/minus in this business and an additional capacity of 100,000 tons per year is needed anyway, just even under present market circumstances. So in order to drive the prices down significantly, we would need an additional capacity of more than 100,000 tons per year, potentially sequentially, for maybe 2 years. And this is -- at this point in time, hard to imagine, let's say, for the next 2 or 3 years. In the past, if we look at the past 10 years, then a significant capacity was established. On the one side, we, for example, together with Dow Corning, built the, let’s say, roughly 200,000-ton plant in China, and there are many, many smaller plants coming up in China with capacities somewhere between 10,000 and 50,000 tons, as many of these has to be taken down because of -- or shut down for environmental effects. So I cannot foresee at this point in time that for profitability reasons, many small plants that are environmentally sound will come up soon in this new environment in China. And this is why there is this sort of lack of capacity that potentially is the same for at least some time. And I mean, nobody is able to predict what happens after 3, 4, 5 years. But these considerations lead us to the assumption that there is no, let's say, short-term drop off of pricing for silicones.

[Paul Richard Walsh, Managing Director]

That's very clear. Just to understand the 2 million tons, you're talking about siloxane capacity rather than downstream specialties?

[Rudolf Staudigl]

Yes.

[Paul Richard Walsh, Managing Director]

Okay, okay.

[Rudolf Staudigl]

Look, every downstream specialty needs siloxane. And every...

[Paul Richard Walsh, Managing Director]

Right. And -- sorry.

[Rudolf Staudigl]

Every [ composite ] material also needs siloxane. It's [indiscernible] percentage-wise even more.

[Paul Richard Walsh, Managing Director]

And I should not assume that you've been saying merchant volumes of siloxane given the tight mix specifically in that part of the chain that you are capturing the value in the downstream specialties?

[Rudolf Staudigl]

Yes, exactly. This is why -- this is what I meant when I said before that we are carefully considering to get the highest value out of our raw materials. Of course, if somebody out of the needs pays the appropriate price for a sort of a standard-type or commodity-type material, then, of course, if the value we create is higher than if we would sell a certain specialty, then, of course, certain percentage, we always consider selling so-called standards. It's really a question of, yes, creating the highest value for us, but also, of course, keeping the customer needs in our mind.

[Operator]

The next question is from Thomas Wrigglesworth, Citigroup.

[Thomas P Wrigglesworth]

A few questions. Just firstly, you mentioned ramp-up costs at the Tennessee facility. I'd just be interested to, obviously, noting that you will be paid insurance, but I'm just interested in what those ramp-up costs are? If you can provide any color there. And then, as you talk about the silicones market, of that 19% growth in sales, could you provide the split of how much was mix versus volume within that? That will be very helpful. And lastly, on silicones, as we think into 2019, obviously, you've given us a very explicit forecast for profit for this year. How do you think about the -- in a blue-sky scenario, as you optimize that value, what do you think the -- that blue-sky scenario would be if you could really maximize the business given that we seem to be in somewhat uncharted territories versus history in terms of your margin performance here? It'd be just nice to know what you think the very maximum would be.

[Rudolf Staudigl]

Well, we have some competitors that talk about sustainable EBITDA margins of 30%. Yes, and as you rightfully said, it's uncharted territory. That's why I think we do not want to add to the speculation.

[Thomas P Wrigglesworth]

Fair enough. And...

[Rudolf Staudigl]

Excuse me?

[Thomas P Wrigglesworth]

Sorry, I didn't mean to interrupt you. I was just trying to remind you of my previous questions.

[Rudolf Staudigl]

Yes, no, I was still aware of your question about the ramp-up costs. Ramp-up costs simply are inefficiencies that you have in the beginning in the whole production chain. And the production of polysilicon is a sequence of production steps that all has to be -- all has to perform extremely well. So you have to make sure that your yields are high, that the contamination is as low as possible. So in order to clean all the equipment again before you have really introduce final product, that all needs additional efforts that you don't have in a normally running production. So personnel costs, material costs, maintenance costs, analytical costs, all of these are ramp-up costs.

[Thomas P Wrigglesworth]

Are you able to -- sorry...

[Tobias Ohler]

Thomas, for your question on silicones, the 19% goes against prior-year quarter, what's the split between volume, mix and price. I mean, you know that we don't disclose that at that level, but we have been -- the wording of our [indiscernible] not at a great differentiation between the 2, and maybe that helps you a little bit in your modeling.

[Operator]

The next question is from Sebastian Bray, Berenberg.

[Sebastian Christian August Bray, Analyst]

My first one would be on polysilicon. I think it was mentioned in a previous answer that, in some respects, this insurance should not be treated as a one-off charge because it essentially makes [indiscernible] for volumes it could have achieved in that year. Of course, there is the fact that this plant, I think, came offline in September last year. Am I right in saying that relative to the guidance currently for polysilicon, which, in my view, I think implies about EUR 260 million of EBITDA for the current year, we should deduct off about EUR 20 million to EUR 25 million to get an underlying run-rate at the -- that's million EBITDA that would have been made by Tennessee to get an underlying run-rate for this segment? That's my first question. The second question is on the potential for earnings growth in 2019. And apologies, there's a bit of an overlap with previously asked questions. But if I look at the silicone segment, it's making all-time high margins, and it looks as if the scope for debottlenecking much beyond, let’s say, 1%, 2%, 2.5% next year is rather limited. Is there any scope? Are you starting to reach the stage where pricing increases beyond current levels are either not plausible or start to destroy demand or generally have unintended consequences? And finally, my last question is on phrasing during earlier during the call. I think it was mentioned that WACKER is hopeful of beating guidance in 2018. To clarify, does this mean the guidance of adding up the individual segments, which takes you to about EUR 1.15 billion in EBITDA, will be guidance for mid-single-digit percentage EBITDA growth in the year?

[Rudolf Staudigl]

I think on the insurance question, you're right. I stated you shouldn't take that out as a specialty effect and I can confirm that, but you're right assuming that a portion of that is from 2017 from last year, when the plant went down. But I think you can you view your assumption on how much is that.

[Tobias Ohler]

And on the silicones, 2019, of course, it's impossible at this point in time to really predict anything there, but I just would like to refer back to what I said earlier that, of course, in our times of tight raw material supply, we try to optimize the value. And there is still considerable amount of so-called standards business that either has to comply with the demand on pricing or is replaced by higher margin specialty material. And this is the way, of course, as I said before, it's also keeping mid- and long-term customer demands in consideration. But along these terms, we will certainly optimize the performance of the division.

[Sebastian Christian August Bray, Analyst]

Okay. That's helpful. And sorry, the last question the being hopeful to beat guidance, is this for the some of the individual guidances or the current group guidance as a whole for EBITDA?

[Tobias Ohler]

On the EBITDA guidance, you should take into account that we, for the first time, guided also to a low double-digit negative others, and then I would like to hand you again to the speech of Dr. Staudigl when he highlighted that we continue to see the biggest risk of our performance in a potential slowdown of the global economy, also -- and including general protectionism, and we do have tried to put that into our guidance. And the statement is on the group level that if that doesn't materialize and the world is -- and the global economy is developing nicely out of the second half that we are convinced that we have a good chance to beat our full year guidance.

[Rudolf Staudigl]

Maybe one more comment on the pricing of the silicone standards as well as specialty. I think we, all the producers, as well as especially the customers, have to keep in mind that for an extended period of time in the past, pricing for silicones simply was too low in order to justify the investments that have been made in the past as well as to justify investments to be made in the future. So it's just a normal correction now that `if you simply to the real value of this material. So in other words, the silicone producers are not trying to rip off anybody, I think it's just to really be able to long term keep this market growing and produce the value for the customer as well as their customers that is necessary.

[Operator]

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

[Laura Lopez Pineda, Analyst]

So first, on polymers, I just wanted to get your view, is there a structural supply-demand imbalance in acetic acid? Or is this tightness only driven by continuous unplanned interruptions? Or is it the need of new capacities also? So -- or if that's not the case, then should we expect like a sharply -- a sharp recovery when the capacities come back into the market? So that will be the first one. And the second one in silicones, can you also give us kind of an indication how your contracts work here? So how is it for standard silicones? Is it more in a monthly or just spot and maybe in the more specialized grades? And the last one, how good is your visibility to know how the capacity utilization rates will improve in the new plant in Spain and in the Netherlands for BIOSOLUTIONS? And I remember that in '17, you also faced some pricing pressure due to competition in '15 in gumbase and how has this developed in 2018?

[Rudolf Staudigl]

On the contract of silicones, of course, in standard contracts are shorter terms. Of course, in these times, there is the wish of customers also to get longer-term contracts and instability in specialty, in general, specialties contracts are longer terms. And so I mean, these terms and conditions are adjusted to the markets and the applications in the customer demands, et cetera. So it's fairly variable, but in general, the standard is shorter term, and for specialty, it's longer term.

[Laura Lopez Pineda, Analyst]

And sorry, in specialty, let's say, in a normalized market, will that mean, I don't know, quarterly or more like half-year contracts?

[Rudolf Staudigl]

More like half-year or annual.

[Tobias Ohler]

And for your question on polymers and the acetic acid suggestion, it's basically been a series of force majeures, and that, in a short period of time, that led to this tightness. And I would say, acetic acid is a general commodity and it behaves like a general commodity, which means that if price is -- allow for reinvestment, then there will be new capacity added. So I definitely do not see this current level that pushed out of VAM prices up sustainable. But we have muted our guidance in polymers because we see it continuing until the second half, that's reality. So we [ effected ].

[Rudolf Staudigl]

And then your question on the new biotechnology facilities in Spain and in Holland, and of course, we presently upgrade these facilities so that they have the capability of producing our materials, and this of course, takes some investment expenditures as well as just higher production cost in the beginning. But as I said, also in the beginning, these effects, I mean, we will try to compensate or reduce these effects as fast as possible, but this year, we definitely have a negative overall effect, but that's taken into account with our guidance.

[Laura Lopez Pineda, Analyst]

Okay. And sorry, the last one, just housekeeping. In your guidance today, did you change your ForEx assumption? So in the past, you had USD 1.25 euro change, did you change that?

[Tobias Ohler]

Yes, we did. We did change it to USD 1.20 now.

[Operator]

The next question is from Thomas Swoboda from SocGen.

[Thomas Swoboda, Research Analyst]

This is Thomas Swoboda from Societe Generale. I have hopefully 2 quick questions on polysilicon. Firstly, on your cost roadmap, could you give us a hint, if possible, how much of the cost reduction potential you have been expecting from your plant in the U.S.? And how much from the German plants? And the follow-up on this, is it fair to assume that once the Tennessee plant is back producing at full capacity, that it will come back with much lower production cost versus the status quo before the accidents?

[Rudolf Staudigl]

Let me put it this way. Our cost reduction efforts are on track with the roadmap. And once Tennessee is at full swing, it also will be back on the roadmap.

[Operator]

There is a follow-up question of Andreas Heine, MainFirst.

[Andreas Heine, Managing Director]

Again on silicones, you have 2 big investments running, one is the silicone metal extension, Holland, the other one, the silica plant, both starting up next year. On the EBITDA level, is that -- are these already contributing on a positive or a negative way in their startup year?

[Tobias Ohler]

Andreas, I don't have the detail in front of me, but the start up is late or in the second half of the year, so it's not significant effect that you should bake into an early modeling of next year. So…

[Andreas Heine, Managing Director]

Okay. Is the ramp-up something which takes -- if I take the Tennessee plant, which took more than 0.5 year to be fully ramped out, will that be with the silicone matter expansion and the silica plant?

[Rudolf Staudigl]

Well, the silica plant, it will certainly be faster than 0.5 year. I mean, I will be really surprised if it would take it half a year. With the methodological silicone plant, we do not have a lot of experience in getting it up so it's hard to say.

[Tobias Ohler]

But it's 1 furnace, so I would expect that you can't even run it at half capacity. So I would expect it to be a very fast ramp in silica.

[Operator]

There's a next follow-up question from Thomas Wrigglesworth, Citigroup.

[Thomas P Wrigglesworth]

Forgive me for kind of housekeeping question. Polysilicon prices. I just -- do you mark to mark your inventory -- mark to market you inventories each quarter? And if you are building inventories in China, should we expect more fluctuations there? And are there any of the long-term assets that may be changing with the volatility given the decline in the polysilicon price? Just wondering about the -- and if not, should we take that to mean that there's no material change in the medium term profit outlook for these businesses?

[Rudolf Staudigl]

The inventory, it's definitely valued, I mean, according to our IFRS standard, and that's mark to market.

[Thomas P Wrigglesworth]

Okay. And long-term assets, I mean, the possibility of the Tennessee plant, does that have to go through a market review with your auditors in terms of asset-carrying book value?

[Tobias Ohler]

No, not that we see that. We definitely look at all 3 plants, as we always said. As we have production system of 3 sites, 2 in Germany, 1 in the U.S., and we are selling to 1 big market globally.

[Operator]

The next question is from Sean McLoughlin, HSBC.

[Sean D. McLoughlin, Associate Director of Clean Technology]

Just around the Tennessee plant. You say you've sold your first volumes in the market already in Q2. I'm wondering can you share with us by when you expect to be at full capacity production at this plant?

[Rudolf Staudigl]

At the latest, by the end of this year.

[Sean D. McLoughlin, Associate Director of Clean Technology]

And what level of capacity utilization did you exit the quarter? I'm just wondering if you may have further ramp costs and how these are built into your poly guidance.

[Tobias Ohler]

Yes, we do have further ramp cost because we are still waiting for equipment for the repair. And so that's -- we are not -- while we are not running full yet, not in July and not throughout the third quarter, as Dr. Staudigl said. You should bake into your quarterly assumptions that we still have the ramp effect in the third quarter.

[Sean D. McLoughlin, Associate Director of Clean Technology]

Super. Okay, and I'm just thinking about the inventory build. It feels a little bit like a rerun of last year where you used a lot of the yearly volumes from Tennessee to build inventories. I mean, at which point do you think you will be selling openly into the markets full volumes from Tennessee without inventory build?

[Rudolf Staudigl]

Depends on the recovery of the market, I would say. But yes, as I said before, I think the market will recover again in the second half.

[Operator]

The next question is from Michael Schäfer, Commerzbank.

[Rudolf Staudigl]

This was not us.

[Operator]

Mr. McLaughlin, are your questions answered? Okay, I would go further to Michael Schäfer, Commerzbank.

[Michael Schäfer, Analyst]

Thanks for taking my 2 questions. Basically, I'll keep it short. On the polymer side, back in mid-June, you announced a 10% price increase effective July 2018. So my question is, do you think that this is sufficient in order to cover what you now assume as a cost run-rate for the second half? It looks like sort of -- my first question. And the second one is on silicones. You mentioned in the call early on that basically that primarily standard grades have been showing very strong price increases, whilst specialties are still lagging basically on the back of your terms of the contract. Is it fair to assume basically that looking into specialties and heading into 2019, that the bulk of price increases may come from there heading into 2019? These are my 2 questions.

[Rudolf Staudigl]

So the price increases [indiscernible] that standards are much stronger, but that part of the nature of that business, and I highlight that specialties haven't moved so much, but they are also priced at a different logic. It's more value-based pricing, while the standard prices are commodity driven, it's supply demand, and the value is created by the customers. So they need to face the prices that are possible in a specific market environment to then pass it on as we do need to pass on raw material price increases to our customers. And that basically leads me to your first question on polymers. We suffered a tremendous price hike along the raw materials in this year that was much bigger than we originally expected, and we pushed out the assumptions for easing off raw material prices further and further. That's why we see the second half of polymers from its performance similar to the first half, although we don't have the main plant turnaround in the second quarter. So overall, it's a challenging year, but we will see different times, and we push hard to increase the prices for our products to pass it on and as price [ prosper ].

[Jörg Hoffmann, Head of Investor Relations]

Operator, this -- ladies and gentlemen, this concludes our conference call today. We will be back in October, on October 25, with our Q3 call. If you have questions until then, please contact the IR department.e