Wacker Chemie AG

XETRA:WCH

Earnings Call Transcript 2022-Q2

[Dr. Christian Hartel, CEO]

Thank you, Joerg. Welcome, everyone. Q2 was another very strong quarter with solid demand in all of our segments. We reported sales of €2.2 billion in Q2, which is up 45% year-over-year. EBITDA was at €626 million reflecting a strong performance across the entire portfolio. Silicones and polymers, polymers again saw a strong demand and delivered both year-over-year and consecutive sales growth. Both divisions exhibited strong pricing power, enabling earnings growth despite unprecedented raw material and energy headwinds. Tobias will tell you more about this.

Polysilicon stayed tight and benefited from higher prices, but earnings were held back by higher energy and silicon metal costs compared to the previous quarter. After a force majeure at Biosolutions at the start of the year, we are now back to full operations. We successfully closed the CECO transaction during the quarter, which we announced last year. The joint venture is an important step in our strategy to expand the share of high-margin specialties in our silicones business worldwide.

CECO performed materials operates very profitably. It closes the technological gap in our specialty silicones portfolio. The acquisition also helps to drive regionalization of our business in fast-growing markets. We welcome our new 500 employees to the silicones division at Wacker. Wacker has promulgated new diversity targets. By 2030, women should hold one in three management positions.

We are accelerating our growth outside of Germany, focusing on serving our customers in the regions. Therefore, we will have more international managers to ensure that we have the right local experts. Wacker plans to have every second management position outside of Germany. We are convinced that diversity makes us more flexible, makes us more creative, makes us more successful and creates an even strong team than today.

Looking at Page 3, the ongoing war on Ukraine has triggered the geopolitical crisis. Uncertainties around the gas supply from Russia dominated political agenda and are a reason for concern for the European chemicals industry. Gas supply disruptions have triggered the second level of the German gas emergency plan. Our production and our energy hedges are unaffected. However, the effect on the market prices for electricity and gas have been dramatic as seen in the chart on the left-hand side of the slide. Wacker is prepared. We are prepared.

We have a longstanding energy hedging policy in place, which has shielded us so far from some market turbulence. In February, we set up a taskforce team to examine operational and technical issues and to come up with solutions for various scenarios. Natural gas is critical to our chemical plants, which are used to produce both steam and electricity in our highly efficient cogeneration plants.

Should there be a gas shortage, we would reduce our gas consumption by only producing steam, not electricity. We could offset the lower electricity production with higher purchases from the grid. Now please note that the grid regulator considers our gas turbine in Burghausen has system relevant for the stability of the regional high-voltage power grid. Even if the gas shortage were to escalate, we expect to maintain the system relevance and receive sufficient gas to run our power plants.

If there's a further necessity to reduce our gas consumption, we could use alternative fuels for steam production. So we do have some opportunities to compensate for the consequences of potentially lower gas supplies. But it's also true, as many other industrial companies, if there were to be a major supply restrictions for natural gas, this would have an impact on our production. Now as a precautionary measure, precautionary measure or a measure of prudence if you want, we therefore included additional charge of €200 million to €250 million at the lower end of our EBITDA forecast in addition to the price increases already expected for energy and raw materials.

Now coming back to business here we had a strong first half year 2022 with new best marks sales and earnings. Going forward, we remain optimistic despite the obvious challenges. Therefore, we are increasing our full year guidance substantially. Our new group guidance for 2022 now looks for sales between €8 billion and €8.5 billion.

For EBITDA, we expect a range between €2 billion and €2.3 billion based on our own operational performance, including the provisional charge for energy, the precautionary measure and the raw material inflation in case of natural gas curtailment, the lower range of the guidance would be at €1.8 billion. So overall EBITDA guidance up to €1.8 billion to €to 2.3 billion.

Now let's look beyond today and focus on how we see our future shaping up. We have shown an outstanding performance this year, and we are delivering towards our strategic targets despite adverse conditions. Let me quickly recap our strategy and targets, as presented at our last CMD in March. We want to grow our business beyond sales of €10 billion with an EBITDA margin of over 20%. We are focused on profitable growth and ROCE should be 2x our cost of capital.

We will focus on chemical specialties, delivering high value to our customers. We will expand our biotechnological capabilities, growing sales in this area with earnings above the group average. In polysilicon, we focus on high-quality applications in the semiconductor and high-efficiency solar markets. Our recent CMD was about accelerating [indiscernible]. In the past month, we made good progress towards our new '23 charges.

In silicones, we opened a new production site in India, close to Kolkata, and we are expanding our capacities in Germany. In Biosolutions, we broke ground on an mRNA competence center in Halle and on a dedicated research center for our biotechnology R&D activities in Munich. And in Ann Arbor, we opened a new regional headquarters and innovation center. Here, we will develop future silicone and biotech specialties. And in polymers, we are doubling our capacities in Nanjing.

Beyond these milestones projects, we have launched some highly promising projects. We have started the feasibility study to expand low carbon silicon metal production capacity at our Norwegian site in Holland. And we are looking to expand our site in Charleston for silicone specialties products. We will keep you posted on how these and other exciting projects are developing. These products will allow us to strengthen our position in key markets and service our customers even better.

I invite you to look at the appendix to today's presentation. It will give some additional details on a few of these milestones. Now before I pass on to Tobias, let me provide another perspective. Sustainability is a very important pillar of our strategy. The massive inflation in power and gas costs has accelerated the drive for energy savings, smart construction, electrification and power generation from renewables. These are all sectors where Wacker provides essential materials and is a leading solution provider.

Now looking only to renewables, Europe, our targets to increase PV solar installations to 600 gigawatts by 2030, requiring some 50 gigawatts per year. This is a step change, representing more than twice the level installed on average in the last three years in Europe. The current natural gas prices have certainly increased the importance of energy independence in Europe and abroad.

I'm absolutely convinced that the response to the current prices will trigger significant demand growth for our products today and into the future, supporting our ambitious 2030 targets. But in the very short term, the coming months may be challenging. Rising raw material and energy costs and stressed supply chains are already playing out. Potential demand uncertainty from inflation is expected by everyone, but hasn't really materialized yet.

All of this puts a heavy strain on the global economy and will probably also demand a lot from us at Wacker. But we are convinced that with our strong Wacker team, our new sustainability and growth goals and our demonstrated price of power, we have found good long-term and viable answers to these challenges. Tobias?

[Dr. Tobias Ohler, CFO]

Thank you, Chris. Welcome. I will now walk you through our Q2 performance and provide an outlook on the full year and on Q3. Let's begin with the P&L on Page 5. Group sales increased by 45% over Q2 last year. Price was the single largest driver. Continued volume and mix improvements and the stronger U.S. dollar supported the positive sales trend. Gross profit increased year-over-year to €646 million.

The gross profit margin came in at about 30%, reflecting firm pricing. The operating result increased to €507 million, more than twice as high as last year. EBITDA was €626 million. Net income for the period was €391 million. Earnings per share amounted to €0.70 -- €0.67.

Moving on to Page 6, the balance sheet. Our balance sheet came in with a higher equity ratio of over 50%. Shareholder's equity is now at €4.6 billion, up from €3.1 billion at the end of last year. This was primarily due to the strong earnings and the significantly lower pension deficit following a higher discount rate. Working capital increased due to high sales volumes and raw materials to €1.9 billion.

On Page 7, you'll see the significant change in our pension deficit. Our pension liabilities are now at €664 million. This is roughly €2 billion lower than what we saw at the end of 2020 and about €1.1 billion lower than at the end of 2021. Since the end of last year, our pension liability saw a decrease of over €23 per share. This is really significant, and you may want to recognize this change in your valuation model.

Silicones continued the strong performance shown in Q1. Q2 sales were €936 million, about 44% higher than last year. Sales were supported by strong specialty pricing. Silicon EBITDA in Q2 was €277 million resulting in a 29.5% margin. We saw the strongest increases in health care and consumer applications.

The Q2 results include CECO consolidated since May 1, contributing €23 million to sale and €8 million to EBITDA. Overall, H1 sales came in at over €1.8 billion and EBITDA at about €560 million. Looking into Q3, we continue to see price and volumes largely stable for specialties. However, some segments like construction or textiles see slowing demand. Given the strong performance in Q2 and strong volumes in specialties, we now update our guidance for the full year. We now see sales at about €3.5 billion with an EBITDA between €900 million and €1 billion.

Polymers achieved Q2 sales of €553 million, 37% over last year. We protected our margins with over 10 pricing rounds since the first quarter of 2021. EBITDA came in at €91 million, benefiting from a good cost performance, strong demand and our pricing efforts. Looking at H1, polymers came in with sales of close to €1.1 billion and an EBITDA of about €180 million.

Today, we see some signs of weakening demand, particularly in Europe and China as well as some destocking at our customers. Despite this, we keep our guidance for polymers unchanged. We see sales at €2.1 billion with margins at last year's level. Polymers benefits from higher volumes and all these. Polymers will continue to raise prices matching input cost inflation as demonstrated last year. Please note that the third quarter performance will be held back by a scheduled turnaround at our plant in workhouses.

Biosolutions reported sales of €84 million with sales in Bio [indiscernible] accelerating. EBITDA came in at €8 million, with force majeure situation holding us back through many. Biosolutions achieved €161 million in H1 with an EBITDA of €8 million. For the full year, our Biosolutions forecast needs adjustments. We continue to see a low double-digit percentage increase in sales. Segment EBITDA will now be significantly lower at about €25 million. Here, we adjust our last guidance for a customer serving its contractual obligations.

Polysilicon reported Q2 sales of €568 million or 60% higher than last year. Prices for the quarter sequentially were higher with very strong demand in both solar and semi. Q2 EBITDA came in at €214 million. Results were held back by substantially higher energy and silicon metal costs.

In H1, polysilicon achieved sales of about €1.1 billion and EBITDA of about €440 million. Solar pricing is firm up for longer than initially expected. With continued strong demand for solar and semiconductor products, we update our forecast for polysilicon. We now expect sales of about €2.1 billion. Given the strong pricing into Q3 and with higher energy and silicon metal costs, we guide to an EBITDA between €700 million and €850 million.

Moving on to the net financial position on Page 12. We recorded a net financial asset of €190 million at the end of June. Gross cash flow year-over-year was somewhat lower as working capital decreased. Cash flow for long-term investing activities reduced our cash balance by about €340 million, reflecting our strategy of investing in growth and mix improvements.

This position also expects a payout of €165 million for 60% of CECO performance materials and our share in their working capital. Please bear in mind that M&A comes on top of our full year CapEx guidance. A significant factor in cash outflows in the quarter was our dividend payment of €8 per share. This reduced our cash balance by about €400 million. Lease liabilities increased as we opened our new regional headquarter and innovation center in North America.

On Page 13, our updated group guidance for 2022. First, let's recap our energy hedging and raw material situation. We have a longstanding policy in place. We typically hedge our energy exposure on a rolling forward basis for the next 36 months with a decrease in coverage for this period. Today, we are largely hedged for the remainder of 2022. For 2023, we are about 2/3 covered and for 2024 about 1/4.

Last year, we spent about 7% of sales on gas and electricity, which was about €450 million. In 2022, we now expect our energy build to slightly more than double. Adding the raw material cost increases, we now expect our total raw material energy build to increase in the order of €1.5 billion over last year, and this is incorporated into our full year guidance. Let me repeat what Chris said about our guidance. We see full year sales between €8 billion and €8.5 billion.

Following a strong operational performance, we expect to reach €2 billion to €2.3 billion in EBITDA before any potential gas shortages, which we estimate could have an impact in the range of €200 million to €250 million. Taking also this into consideration, our full year EBITDA guidance range is €1.8 billion to €2.3 billion. Other changes to our guidance are on the net income, which we now see clearly above last year and on the EBITDA margin. The margin is now expected to be on par with last year.

Looking at Q3, we see our businesses largely continuing their performance of Q2. In silicones, we are seeing some slowdown in demand and in certain segments, especially in construction and textiles. Pricing is firm in specialties, and we have a strong order book for specialties. Polymers reports some signs of weakening demand in Europe and China and some destocking to our customers. The teams continue with their pricing strategy effectively sharing cost inflation.

Polysilicon continues to move ahead with very strong demand for both its key end markets, semiconductor and solar. Biosolutions makes good progress in bio ingredient at BioPharma. So putting all these together on Q3, we see a strong performance in July and expect a good Q3. Looking to our balance sheet, we are currently financed. Our businesses are highly cash-generative and our CapEx drives growth and value. We have shown with the BioPharma and CECO transactions that we can move swiftly and decisively on selected M&A opportunities, and we continue to stream such bolt-on opportunities.

Summarizing, we have leading market positions, great technologies and the right strategy to convert this strength into better service for our customers. We continue to do our homework and we are well prepared to address near-term challenges and to reach our aspiring target for 2030.

[Joerg Hoffmann, Head, IR]

With that operator, we're ready to take questions.

[Operator]

[Operator Instructions] The first question is from Matthew Yates of Bank of America.

[Matthew Yates, Bank of America]

Couple of questions please. Firstly, another exceptionally strong quarter in your silicones business. Perhaps you heard some of the comments from DOW expecting a slightly softer Q3 due to some supply additions in China and weaker demand generally in Europe.

I know you've worked very hard over recent years to improve the mix of the portfolio into more specialty products. But as you look at the back half of the year and what seems to be a broad economic slowdown, how do you think about the resilience of your specialty products, both from a volume and a price perspective? And my second question on polysilicon, not sure if you and the team have had the chance to read all 700 pages of the bill proposed by the U.S. Senate overnight.

But is your interpretation that Wacker will now be getting a $3 per kilogram tax credit on its domestic production? And if so does that make you think in any way about extra CapEx investments to expand capacity or do you stick really with the strategy of just allocating capital on those areas where you've got fundamentally good market shares and pricing power?

[Dr. Tobias Ohler, CFO]

Matthew, Tobias here. On your first question on silicon. As I said, we are seeing a strong continuation into July, and yes, we also see some slower order entry also for specialty, but especially there, we have a very strong order book. And we have, yes, largely a rollover of pricing into Q3. So I think we will continue to benefit from megatrends that silicones, I mean, play a critical role in. But we would see some softening and it very much depends on that softening in overall demand. But for the time being, we are working from a very strong order book and prices are firm.

[Dr. Christian Hartel, CEO]

Okay. And Matthew, I will answer on the second question you asked on polysilicon. And well, I haven't read all the 700 pages, but rest assured that our team there of course are heavily into that. And well, in general, I would say it's a positive message if the solar supply chain gets additional support regional wise, you also know that program in the EU, REPower Europe is a similar thing. What both have in common is, I think we are at a preliminary stage at the moment. So it's really hard to judge. It's not yet a law. It's not yet in place, so we have to very diligently look onto this.

The trend of reshoring definitely, we see that but I think what the challenge might be for the market is that today, wafering especially and the ingots are made in China. And I don't think it's a quick fix to bring them to Europe and also to the U.S. So again, in a nutshell, it's an interesting opportunity. We also look at it at the current stage, would that change anything in our investment strategy, no, definitely not. And as you said, we keep focusing on projects where we have a high market share and a good return and the high power pricing.

[Operator]

The next question is from Jaideep Pandya of On Field Research.

[Jaideep Pandya, On Field Research]

The first question really is around the whole energy domain in Europe. Chris, when you're discussing with the governments in Europe, how aware are they of the situation of in the solar value chain, which is basically a repeat potentially of the gas situation where Europe or other rest of the world is very heavily dependent on China. And so how willing are they to sort of provide you with support and the solar industry rather with support on whether it is tech subsidies or whether it is whatever carbon credits or what have you, to really ensure that elaborate solar plant that they have actually materializes and they're not importing everything just from China?

The second question I have related to this is we're seeing a lot of vertical integration in China with investments in silicon metal from non-silicon metal players. Is your view structurally that in the longer run, silicon metal is going to be a bottleneck for the solar polysilicon and silicones business?

And then the third question really is on Biosolutions. Could you provide us with sort of more 2023, 2024 pipeline update in terms of what you expect from Genopis in terms of contribution from the German government and the blocker pipeline, excluding all of this. So should Biosolutions go towards the €75 million, €80 million level in EBITDA on a 12 to 18 month view or is there something blocking that?

[Dr. Christian Hartel, CEO]

Okay. Jaideep, thank you for your questions. Let me start with the first one on the energy debate in Europe, and I mentioned this program on REPower Europe. So yes, so we want to take an active role, and also we talk to the government. And you know our message is in the solar supply chain, we are already here. So if you talk to us, you talk to the guys that already have capacities in the grounds.

So I think the German government is well aware that the reshoring debate is getting difficult if you don't have the right setup or conditions. And we have been lobbying for many, many years about a competitive industry power price. And I think that is still for me the essential part, if you want to reshore the solar supply chain into Europe.

The positive message is that in the program of the German government, the current German government, you see that industry power price has been taken up as a measure. And we also got reconfirmation from the government that in the fall of this year, there will be some industrial power prices, I think they call it industry contracts, which they want to develop for different industries. We haven't seen more details on that, but we will keep a close touch on that mainly.

Then your second question was on the China and silicon metal, will that be a bottleneck going forward? I mean what we see is that there are different projects on silicon metal taking place both in China, but also globally. And the key is, of course, having competitive power pricing. There are some expenses also in Indonesia, which we have seen lately. We published that we closely look into options for expanding our [indiscernible] site. So from that perspective, I don't think that the world will be running out of silicon metal. But again, it needs the right setup and competitive power is the key driver for that.

Then your third question that was on the Biosolutions pipeline update, CMO, I think specifically also pDNA. Well, I cannot disclose any details on these projects. But I can tell you, we do have a good pipeline filling up with projects from different stages for clinical trials and that also the team, the new team in San Diego, which is onboard since the beginning of the year is very strong in acquiring new projects.

But you also know in the pharmaceutical industry, not every project is successful, and it takes some time. And so we will definitely keep you updated if there are progress to report. In many cases also, our customers are the ones who do not want us to speak about specific projects.

[Operator]

The next question is from Chetan Udeshi of JP Morgan.

[Chetan Udeshi, JP Morgan]

Just a few questions. I'm just looking at the Slide number 6 of the presentation, which gives the sales bridge. And I see there is a $538 million price benefit. But then on the bullet upstairs, we talked about $600 million of cost increase. So it suggests that net pricing is negative, which I don't think is the case. So can you help us understand those -- that bridge and the raw material number that you have provided? That's the first question.

The second question was just around the hedging impact. Clearly, in this environment, having that long-term hedging is proving beneficial. Can you help us understand what is the average hedging rate that you have for 2022, both for gas and electricity in Germany? And as we think about rolling it forward into '23 and 2024, what is the average rate that we -- you think we should be using for next few years?

[Dr. Tobias Ohler, CFO]

Chetan, on your first question on the page with the bridge and our price increase by the sales price increase by €538 million in comparison to the €600 million in raw material and energy and put in place number €600 million is for the first half of the year, not for the quarter.

And in the bridge, you see just the second quarter. So we definitely have a net pricing benefit in the second quarter. And the €600 million in the first half, I mean, we also talked on that last conference call about trading effects from some beneficial costs from the last year that we have rolled into the first half. I mean this would go away in the second half, obviously. And we have a total number of input cost inflation in the magnitude of €1.5 billion. So approximately €1.5 billion, €600 million in the first half, so some 50% more in the second half. And this is also an idea how we come to our guidance.

On the second question, hedging, we have this hedging policy in place for many years, and we do it in a rolling manner. And for the remainder of the year 2022, we are largely hedged, which is good news. I mean, we have some opening business still, but I think it's at a very high level. So -- and for the next year, we are hedged at about 2/3 of our energy requirements and for 2034 at 1/4. I cannot provide you with the prices that we fixed, but I think you can come up with an idea from us doing this on a rolling basis. I think this is a good way to think about it.

[Operator]

The next question is from Thomas Swoboda of SocieteGenerale.

[Thomas Swoboda, SocieteGenerale]

I have two questions, please. Firstly, coming back -- two questions actually on the energy situation. Coming back on the issue of increasing prices, there is apparently a decision in Germany on surcharges on gas prices from October. Could you give us an indication what headwind this decision would mean to you for the remainder of the year and if possible, for next year? And the second question is, I simply would like to understand what is in your buffer of €200 million to €250 million you included at the low end of your EBITDA guidance. If I understood you correctly, in case of gas rationing in Burghausen, you would basically just need to pay up for the electricity, whatever the price will be. Is this -- am I getting this right?

And secondly, I was missing Nunchritz. So what would happen to Nunchritz in such a case in rough terms, obviously. And is this included in the €200 million to €250 million?

[Dr. Christian Hartel, CEO]

Thomas, on the headwind of a potential surcharge for gas that was discussed, I think I will come back to the €250 million question that you also had a second one. This would be part of that scenario. And the order of magnitude is about €15 to €25 megawatt power that would be rolled on all gas customers. So also on us and also on us the high hedging level that we have. And if you take our total consumption of gas, which is about 4 terawatt over the year, take this maybe for the remainder of the year. This is a 1 terawatt hour and multiplied by 20, you come to €20 million. So this is the amount that you can calculate. And if you take it for the full year, it's obviously 4x that number.

Thomas, let me make a general remark again before we talk more in detail on that $200 million to $250 million buffer. And to be very clear, we included that as a precautionary measure, as a matter of prudence. The key point is that our biggest site, which is Burghausen [indiscernible], this is regarded as system relevance for supporting the high-power voltage grid in that region. And we have clear sights that this also will be the case in the situation of gas curtailment.

Nevertheless, as I said, if there is a gas shortage, we could use gas consumption and not produce electricity or less electricity. And as you rightly said, we would buy it from the grid. But again, this is not a scenario which we would consider as the most likely. So we did this calculation and Tobias can give you some more light into that.

[Dr. Tobias Ohler, CFO]

Thomas, we did the calculation and thinking it through potential scenarios of gas items, we came up with many different ones that we try to pick one and use some assumptions. For example, we assumed that there is a true gas curtailment also for [indiscernible] in contrast to what Chris just said of 20% to 25% starting from September. September 1, so four months of the year. And then we did the calculation. We said, okay, we would -- as Chris said, we would produce less electricity with our own power plant and purchase more, definitely at much higher price. We have assumed price escalation because we are in a situation of true curtailment of gas, which goes beyond today's price levels.

But I would not disclose those. I mean, because it's just numbers. And the majority of the impact is definitely from this additional costs and price escalation and the majority of the impact is from Burghausen, but [indiscernible] is also included in that calculation. And we also included about €20 million surcharge that could happen in the gas market. I think it is definitely a cost estimate for a series to change, but it's not worst case.

And it's really hard to assess because no one can really foresee what it gets curtailment what would mean to customer demand and all the network effects, it's such a complicated model. And what we also did not include in that, I mean, we are working with a strong team on preparing counter merits. We do have something in place also to mitigate potential gas curtailment, but we assumed that calculation that maybe it doesn't work from the first day because we already started in September 1st scenario calculation.

So it is definitely that there's many open questions. I think I would strongly ask you against, yes, using that number and taking it by 3x3 before the four months and then we had circulated to 12 months because no one really talked about a gas curtailment of 20% to 25% for industrial users for a full year. And I think in such a situation, you would definitely also have to do much better network effects on the supply side and on the demand side. And I think no one can really do this today.

[Dr. Christian Hartel, CEO]

So again, this is a measure prudent scenario, which we calculated. It is not the most likely scenario that may not. And also for both sides, Nunchritz and Burghausen, as Tobias pointed out, the taskforce teams are working on also using alternative fuels for steam production. So that's another option which we obviously also include and evaluate.

[Operator]

The next question is from Sebastian Bray of Berenberg.

[Sebastian Bray, Berenberg]

I have three, please. The first one is on the other segment. Is there something going on here in quarter two that wasn't just to do with Siltronic? The reason that I ask is that if I take the Siltronic pro rata income for Wacker, there appears -- the underlying result appears to have been more favorable for Wacker than in previous quarters? My second question is just to clarify a number of the statements that have been made related to power costs and other figures for Wacker, can I confirm that the €450 million mentioned for 2021 refers to the global natural gas and power cost and not just the component as it relates to Germany, if it would be at risk if the gas has cut off?

And finally, a quick question on following on from Matt's earlier on the potential solar tax credit legislation in the U.S. I appreciate it's early days, but my understanding is that a large portion of the volume at Tennessee goes to the semiconductor industry. Would the credit as it stands apply to everything, semi and solar or just solar?

[Dr. Tobias Ohler, CFO]

So about that on the first question on the average results, I think it's mainly Siltronic, but there's another -- is also connected to energy. We do have our own micro power plant in Germany, and this runs at market prices. And as we had a strong deviation between land prices and market prices that showed up in the quarter, I'm actually not sure whether this gets rolled into the divisions and energy consumers at the year-end, but this yes, an uplift in the second quarter and in first half.

To your second question, the €450 million in energy costs, this is truly a global number. It's not just Germany. Bear in mind that we have also Norway, where we run on hydropower for our sediment production, and we have Tennessee where we also have, yes, a significant power consumption for our polysilicon production.

[Dr. Christian Hartel, CEO]

And your third question was on the polysilicon credit in the U.S. So my understanding of that program is currently focused on solar. But though the U.S. government I think is also trying to bring in more semiconductor stuff in the industry, but so far from our understanding, early stage is that this is focused on solar.

[Sebastian Bray, Berenberg]

That is helpful. Just to follow up on the points of clarification. The €450 million refers to global natural gas and energy consumption. Does the 1 terawatt hour refer to global or German natural gas consumption on an annual basis?

[Dr. Christian Hartel, CEO]

That was -- I mean it's mostly Germany. I mean, there's not so much gas consumption outside because we operate here in Burghausen [indiscernible] produce steam as we don't have any silicon touch steam production outside of Germany besides our joint venture in China, that 1 terawatt hour is mainly Germany.

[Operator]

The next question is from Geoff Haire of UBS.

[Geoffrey Haire]

I apologize for going back to energy again. Could I just clarify, the €1.5 billion that you're saying energy will cost for and raw materials will cost for 2022, does that include the $200 million to $250 million that you're putting in as a buffer? And then secondly --

[Dr. Christian Hartel, CEO]

No.

[Geoffrey Haire]

No, it doesn't.

[Dr. Christian Hartel, CEO]

The simple answer, no, Geoff. Let's say, as we described, the $200 million to $250 million is a scenario which really goes beyond to what we see today. It means that there would be 20% to 25% actual curtailment to the industry also affecting Wacker. We do not believe that with our position of our cogen plants for the grid stability that it would hit us, but we just made the number in order to -- also give you a hint what magnitude would be expected.

[Geoffrey Haire]

Okay. Fine. And then could I just ask, obviously, the mitigating exercise -- sorry, mitigating points that you'd make if gas was curtailed, do you expect that to increase your cost base as well? And is that captured in the number? As a new cost...

[Dr. Christian Hartel, CEO]

No, it wouldn't increase our costs necessarily. Mitigating measures are mainly running our steam production on other fuels, which is basically oil. And right now oil is even at a lower price than gas, if you take it by a megawatt hour. But it will also move in such a scenario, we could expect also oil prices going up as a substitute fuel. But on the other hand, there's not so much additional demand if you consider the overall oil market that this should have, yes, I mean there's a moderating effect because not everything can go from gas to oil.

[Operator]

The next question is from Andreas Heine of Stifel.

[Andreas Heine, Stifel]

Yes, the first question is on silicon. First place, thanks for the promising guidance for this segment. Usually, you always underestimate this sounds now really promising. Thanks for that. Looking into the silicons and on the sales bridge you have, if I add the volume impact in the first and second quarter on this level, that's just €100 million and the price increase is €1 billion, and that's probably not much different for silicon. So that volume is not the main driver, but prices.

And here, specifically the specialties you mentioned as being a driver for earnings increases. What -- as they have increased that much, is it possible that if you see a softening, then this volume impact, again it was not the driver, that the price effect reverses and that you see a normalization in the specialty margins as well or is that too negative view on this?

And second on polysilicon only on Q3.

If I look on the prices, we can follow every week. And having in mind what the U.S. dollar did being so strong, you will see a quite tremendous increase in polysilicon prices from Q2 to Q3. Is that what you expect as electricity price increase, would you have any hedged really that high that that will all offset of this price and FX increase? Or is that some caution you have put in there for, let's say, in the last months of prices you might not see from today for that perspective. These are my two questions.

[Dr. Tobias Ohler, CFO]

I go first for the silicon. And then I'll start with polysilicon, I thought I add something. We see our special pricing firm into the quarter. And so -- and we will do everything and as we have increased prices successfully just to hold them. And until they're really eased on demand side and also on the import side, I mean we want to, yes, defend that position.

In our guidance, we have assumed two things. First, first half of the year had the benefit of trading raw material effects. These go away in [indiscernible] and so this will not be repeated in the second half. And then second, yes, we have assumed a slower fourth quarter. And although we are 85% specialty, and this is where we focus on, we have a 15% business which might get affected also by lower pricing. So it's a combination of volume and prices. But definitely, we would continue to defend our specialty margins.

For polysilicon, I think similar question. Again, here the trading effect helped in the first half. We now see sequentially higher costs, a little bit on silicon metal, but also on -- even including our hedging. And then we have some open volume, we are not entirely hedged. This will, yes, come in at higher prices. And here also, again, we have assumed some moderation in the fourth quarter.

And yes, depending on the view, I mean, everyone can have a opinion on that. If it goes straight and it even increases further, I mean, it could come to higher numbers. But right now I mean we see a strong supply-demand. We don't see any signs of change. So if you wanted to have that view that it goes in a straight line, feel free to do it.

[Dr. Christian Hartel, CEO]

There's nothing more to add from my side, Andreas. I think if you need -- so this come and get right to your question, do we think it would completely offset? No, we don't see that at the moment and that's the reason why we have the guidance where it should be €700 million to €850 million because of less trading effect in higher raw materials for the second.

[Dr. Tobias Ohler, CFO]

Just take a little bit of a deduction from the fourth quarter than we had in the first half year for the trading effect. And then -- I mean, you are at a similar level in the second half, if you go to the upper end of the guidance, you have the benefit of potentially higher prices, but also you have higher input costs. And I think that's how those numbers make sense.

[Operator]

The next question is from Markus Mayer of Baader.

[Markus Mayer, Baader]

And also two questions on polysilicon and on Biosolutions. On polysilicon, you also mentioned in the press release that the silicate -- polysilicon there have been price increases. I know there are mainly long-term contracts, but was -- for the contracts which have been renewed, was the price increase similar than for the TDE silicon? And also, what should we expect then how this delayed effect of price increases should be? Is this then something that we should expect the polysilicon -- semi-grade polysilicon prices to have the same price level in or has catch up the price level in 2023 compared to solar grade? That was my first question.

And my second question is more a long-term question also on the sili part of polysilicon. I saw a article and basically the research article from the MIT and also University of Houston on [indiscernible] as a competitive product for polysilicon for the sili industry. This is something in which very few long term as the semi part should grow further in the portfolio?

And then my last question would be on Biosolutions. Here, you mentioned that from a customer not servicing their contractual obligations. In this respect, I wanted to ask, have you already received the payment of Kovac or is this still outstanding?

[Dr. Tobias Ohler, CFO]

Markus, I'll start with the first one on your questions around setting pricing for our polysilicon. Fundamentally, this is a different business. This is a specialty business, which we focus on highest quality standards. And that's why we also have in this business, yes, long-term contracts also with firm pricing.

Nevertheless, we see sequentially higher prices because also in this area, we are sharing cost inflation with our customers. And we are also with a new contract that comes in because we are increasing in volume, we just go at a higher price. And for -- if we have very limited additional volume that we can, yes, supply to our customers, we can sell it at higher price.

But it is by far not the same dynamic as the solar market. So for that question, I mean you should not try to mimic the semi business with the solar PV business right now. And we are in that business for very good reasons. Every second chip in the world runs on Wacker polysilicon. We are investing there also to the benefit of our customers, but we are not tracing the solar PV market as the reference for our semi business.

[Dr. Christian Hartel, CEO]

Okay. Then, Markus, I would go for the second question you asked for, it was competing technologies for semiconductor, right?

[Markus Mayer, Baader]

Yes, exactly.

[Dr. Christian Hartel, CEO]

Actually, the answer is pretty similar as we would have asked for PV. I mean, yes, we definitely look at these technologies and what they bring to the market. But I think both PV solar and semiconductor is relying today so much on the technology based on silicon -- hyperpure silicon that all new applications, whatever it will be in the TV, we talked I think last time also about thin film, these will be niche applications. And they will not replace the main technology, which is based on silicon. And I think we heard about this technology. What you're referring to, which might lead to some benefits e.g. in the automotive sector, I think.

But for me, it will only be an addition. And also keep in mind how much capacities there are already there in the market for these existing capacities. I mean there are billions and billions of assets in these capacities, and you cannot just only switch them, and they have very efficient production processes and supply chains. So for us, silicon will be the industry workhorse for the next decade or maybe even more than a decade essentially to come.

Your third question was on Biosolutions, with the customer not playing with the rules and not paying the contracts. As you know, we don't disclose name of customers or suppliers unless we both sides agree on publishing something on that. So I cannot disclose the name here. But I can tell you it was a substantial contract that is involved here.

[Markus Mayer, Baader]

Okay. And the last question, and this customer is not yet in [indiscernible] any kind of situation where you would then expect not to get finally the money you deserve, is this correct?

[Dr. Christian Hartel, CEO]

So we don't expect to get money this year, but we are working hard on also the process of arbitration, and we think that might be settled then in the beginning of next year or mid of next year.

[Operator]

The next question is from Charlie Webb of Morgan Stanley.

[Charlie Webb, Morgan Stanley]

Maybe just two quick ones. So the first one is on polymers. You obviously noted some sign of the weakening demand in Europe and in China some destocking from customers. Can you just kind of provide a little bit of kind of where you're seeing that? And what -- is there any pressure on pricing if you put through lots of surcharges and done a fantastic job recovering very sharp raw material inflation.

Just wondering if there's any kind of reversal of that as your customers look to destock or do you still see a sort of pretty supportive environment even with a bit of destocking? And then just second, on silicon metal. Obviously, kind of going into Q3, we saw kind of very tight situation in China with kind of power availability issues for the Chinese producers.

And I know we've obviously had capacity closures also here in Europe that's given where the cost in Spain and some of falling, I think, in France as well. So any kind of sense on whether there's a risk that you get a similar situation in silicon metal kind of heading into the winter period in China and how we should think about that for possible further inflation and availability of silicon metal into the end of the year, start of next year?

[Dr. Tobias Ohler, CFO]

Charlie, on Polymers, as we mentioned, we see a slowdown in order entry from some customers, especially in Europe and China. And as this business is linked to construction, I think it's obvious that there's a bit of uncertainty in construction right now but there's also overstocking from our customers.

Apparently, they try to correct and it is construction in the coatings industry. But there is no pricing discussion. We are successful in rolling the input inflation to our customers, and we are firm on that.

[Dr. Christian Hartel, CEO]

Charlie, on the second question on the silicon metals, we see a shortage going at the end of the year. I think -- I mean, in general it's based on the most abundant or second most abundant element on the planet. So I don't think on that perspective, there should be a shortage. The main driver is more electricity, but you also measure this. We don't see signs currently that there should be a shortage of power, and I think you specifically referred to China. So from that perspective, we do not see running into a shortage of silicon metal at the end of the year.

[Charlie Webb, Morgan Stanley]

No. I guess more of the question is last year, we saw kind of extreme moves in the silicon metal price.

[Dr. Christian Hartel, CEO]

Yes.

[Charlie Webb, Morgan Stanley]

We have some concern around availability or procurement into Q4 can end up materializing, right? It is fine -- capacity being ramped up a bit more. And I know they obviously see to targets and other things on a local basis that kind of led to some of that. But I'm just trying to sense, is there any sense that we get a similar kind of a replay again this year? And I guess the only difference this time around is maybe some of the other capacities are out or most of all in the West, and that could lead to a more tricky situation. But that was more the kind of direction of the question.

[Dr. Christian Hartel, CEO]

Yes. Of course, very good question. Would the same thing repeat again, this year, so far we do not see any signs of that. And keep in mind, I think that the power of volatility last year in China was mainly driven by regulatory acts of some provincial governments, and we have no sign that this will repeat this year. But of course, I cannot speak for the Chinese provinces, but we don't see that at the moment.

[Operator]

The next question is from Jaideep Pandya of On Field Research.

[Jaideep Pandya, On Field Research]

It's really on polysilicon. And it's a bit of a philosophical question really. But I mean you guys have ADKD capacity or rather 65 in solar in the Western world. And your biggest customer is China, which you're shipping around 50 kt annually. If Europe and U.S. actually become serious on reshoring and you're encouraged to keep these capacities in the Western world, how concerned are your Chinese customers that anti, which is the next-generation product, which you Tom Lee and Daquar, probably the only ones that can manufacture right now they are difficult to sort of get hands on for the next three years. And in the same light, how much incoming are you getting from your big wafer customers to actually think about expansions and talk about good old days of prepayments. So just because there's a lot of news flow around this team in Asia right now. So I just wanted to check your views on this.

[Dr. Tobias Ohler, CFO]

Well, I mean, you're talking on the -- what you started our talk on REPower Europe and also solar initiatives in the U.S. and the topic of reshoring. And my statement was that I think we will see something on that. We believe this could also be a positive opportunity for us.

Our message always has been -- we are on the ground already with the capacities with what you just mentioned. Do we need to expand our capacities? Well, I think we have also been very clear that we will consider expanding our capacities if there is a good business case behind it. And that means there are attractive conditions, especially on power and on raw material and also attractive on a contractual basis so that we would be able to have a good margin and cover our costs going forward. And that's also what we tell our customers all over the world.

[Jaideep Pandya, On Field Research]

So should I understand or should we understand that from the customer side, there is a lot of demand because even likes of OTI, which are smaller players and on the upper end of the cost curve are increasing capacity, whereas you guys are on a overall basis not. So should we understand that from the customer side, you have a lot of demand, but you really are waiting for support from getting attractive power price to actually make that decision to invest more in polysilicon?

[Dr. Tobias Ohler, CFO]

It's both. It's both. It's the customer pool and the right frame conditions that we would need. And that could also, as you mentioned, include some prepayments. And I can tell you that we have really weekly calls to people that want to buy material from us. But again, we are there. We are happy to talk about contracts. We wait for the good combination of having a good contract and a good frame conditions for even considering expansion of our capacities.

[Jaideep Pandya, On Field Research]

And just one small final follow-up. In Q2, there was a lot of logistics issues with regards to shipments from Germany to China on polysilicon imports were down. Do you expect a rebound in Q3 and Q4? Or actually you did not see what the silicon association in China was sort of suggesting where imports actually on of a country level were down?

[Dr. Tobias Ohler, CFO]

So if we had challenges in logistics and our teams have here done to make everything possible, and there's a little bit of a rush over that the month end. But I think I would not imply any impact on the import statistics from our side. So we are sold out, our inventory is at zero, and we ship everything with all the challenges to our customers.

[Operator]

As there are no further questions, I hand back for the conclusion.

[Joerg Hoffmann, Head, IR]

Thank you for joining us today for news on Wacker Chemie. Our next quarterly conference call is scheduled for October 28, so in three months. So do not hesitate to contact AR department if you have any further questions. Thank you.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.