Wacker Chemie AG

XETRA:WCH

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen. This conference is now being recorded. Welcome to Wacker Chemie AG Conference Call Q2 2023. [Operator Instructions]

It is my pleasure and I would now like to turn the conference over to Joerg Hoffmann, Head of Investor Relations. Please go ahead, sir.

[Joerg Hoffmann, Head of Investor Relations]

Thank you, operator. Welcome to the Wacker Chemie AG conference call on our Q2 2023 results. Dr. Christian Hartel, our CEO; and Dr. Tobias Ohler, our CFO, will take you through our prepared slides in a moment. The half year report, Q2 presentation and detailed financial tables are available on our web page under the caption Investor Relations.

Please note that management comments during this call include forward-looking statements involving risks and uncertainties. We encourage you to review the safe harbor statement in today's press release, the presentation and our recent annual report regarding risk factors. All documents mentioned are available on our website.

Chris?

[Christian Hartel, Chief Executive Officer]

Welcome, everyone. You saw us pre-releasing our Q2 results and updating our full year guidance a week ago. We see the same challenges as our peers. Weak markets are holding back the chemical industry as the pandemic-driven supply shortages turn, global economy softens, rising interest rates, muted growth in interest-sensitive sectors such as construction and international political risks increase. We always see this is global economic growth lower than the average growth rate in the decade before the pandemic. As a result, the chemical industry sees overcapacities and production curtailments in some areas. While Wacker has consistently improved its resilience, we are not immune to these general trends.

In Germany, the chemical industry continues to be held back by very high energy costs. Given that energy prices declined from their peak values last year, energy costs in Germany are still significantly higher than in other regions like the U.S. or China. The government is clearly aware of this and is actively discussing possible solutions to ensure that Germany remains attractive for future investments. While the solutions being discussed may be complex, they are not impossible and we believe it provides an attractive business case for Germany and Europe. Despite these headwinds, Wacker reported a good overall second quarter performance. Our diversified setup provides us with a resilient and solid foundation.

Group sales reached €1.75 billion, essentially at the preceding quarter's level. EBITDA was €256 million, somewhat lower sequentially and clearly lower than last year. While we expected softer results following the exceptional performance last year, the gradual recovery we expected that bespoke last time and did not materialize during the second quarter. The absence of an economic recovery, particularly hit silicones. On the other hand, polymers and polysilicon showed a better performance sequentially. In silicones, we faced weak demand for specialties, resulting in adverse mix effects as we kept the utilization at economic levels. These factors help the segment results back noticeably. In polymers, we benefited from some seasonal recovery in volumes but saw lower prices against the backdrop of declining raw materials. Overall, we expanded the EBITDA compared to the first quarter as we work to defend our margins.

In BioSolutions, we are investing in our foundation to support growth in biopharma and BioIngredients. As expected, cost to the upcoming mRNA facility in Halle and digitalization held back earnings. In Polysilicon, we saw higher solar grade volumes but lower average selling prices than in the preceding quarter. Semi remained resilient. The strong operating performance for Poly, higher volumes and lower energy costs in the second quarter helped us drive a substantial quarter-on-quarter increase in earnings.

Wacker's long-term success depends on providing our customers with innovative solutions and best-in-class chemical processes. This year, for the Wacker innovation price, we awarded a new smart reactor process in polysilicon for advanced process control. Real-time large data processing allows us to further optimize the polysilicon deposition. It increases efficiency, reduces costs and overall improves process stability. Furthermore, it makes an important contribution towards our CO2 reduction targets. With this really super intelligent technology, we have strengthened our leading position in the production of hyperpure polysilicon for semi and high-efficiency solar systems.

Looking to the next page, our updated guidance. As you will recall, the first quarter of this year showed some improvements versus the fourth quarter of last year. When we last spoke, we expected this growth trend to continue. As the second quarter progressed, more and more customers started to question the expected recovery. So today, our customers remain cautious. Order intake is not showing improvements and patterns remain short. This order pattern provides limited visibility to the year's third and fourth quarters.

To reflect this ongoing demand uncertainty, we have updated our guidance. We now expect full year sales of €6.5 billion to €6.8 billion. We see EBITDA coming in between €800 million and €1 billion. Besides ROCE, the other main KPIs are unchanged. Cutting the guidance is unfortunate but we cannot change the economic environment. In light of this, we focus on what is within our control, primarily efficiency and cost discipline. We do everything in our power here to leverage our potential systematically. Even though we currently face considerable headwinds, I'm confident that we will successfully tackle the challenges ahead. We have an excellent team at Wacker that sets itself apart due to each individual's commitment, dedication and reserve formats. What's more, we are well placed strategically. Our Strategy 2030 provides us with goals faster growth, high profitability and better resilience in light of constant change.

Investment in our future growth is vital to achieving these objectives. And despite the cost discipline that the current situation requires, we continue to drive our business sustainable development forward. We further increased our investment spending in the first half of 2023. We allocated most of our capital expenditures to our silicones and polymers division. To meet customer needs locally and continue to grow the coming years, we are expanding our capacities worldwide, as you see with new dispersions and power capacities in China. We are also investing in our polysilicon business. We are building a whole new production line, our Burghausen site for world's best and highest purity electronic grade polysilicon. Here, we are increasing our downstream hedging capacities by 50% through 2025. And the only European producer of hyperpure polysilicon, we are proud to be making an important contribution to strengthening Europe's microelectronics value chain through this project.

In May, we acquired ADL BioPharma, a contract manufacturing organization for the food, pharmaceuticals and consumer goods industries based in Leon, Northern Spain. Moving on to the next slide, let me show you more details on this milestone deal for us. Development and ADL has been quite good in recent years and their sales have grown considerably. The tripling of our fermentation capacities provides us the foundation for growth to sustainably produce dietary and food ingredients. This acquisition will take us one decisive step closer to meeting the growth objectives of our life science businesses which we expect to generate €1 billion in sales in 2030.

Before I hand over to Tobias, let me say in closing, 2023 will be a challenging year for Wacker. 2024 will likely to be one too. Nonetheless, we have the right team and strategy to tackle these challenges, embodying spirit, speed and confidence. And that's how we will do it.

Now to Tobias for further details on the Q2 results.

[Tobias Ohler, Chief Financial Officer]

Thank you, Chris. Welcome, everybody.

For the second quarter, we reported sales of €1.75 billion, down by 19% over last year. We continue to see weak end market conditions, low demand and customer destocking weigh on utilization rates, particularly in chemicals. Polysilicon still faces high energy prices and sees lower average selling prices. These effects work their way through the P&L from top to bottom. The gross profit margin was 19%, down from almost 30% last year. EBITDA contracted to €256 million. Earnings per share came in at €2.38. Our efforts to improve resilience support us today in these challenging market conditions. Constant process innovation drives efficiency in chemical production. So we are not looking at discrete and limited efforts, we do self-help activities daily.

Back in 2019, we initiated our restructuring program, Shape the Future, targeting overhead costs and indirect spend. The program is on track, provides savings of €250 million and enables us with a more responsive organizational setup. We stay focused on controlling costs and completing maintenance. I'm convinced that these ongoing improvement activities will allow us to be better prepared to service our customers once demand recovers. But in a slow business environment, we must consider options to adapt our capacity flexibly. To reflect limited visibility, we update our group guidance and the outlook for each segment. I will address these shortly after looking at the balance sheet.

Our balance sheet showed strong financials with about €1.3 billion in liquidity and about €4.6 billion in shareholder equity. Since we last reported the most significant change occurred from the nearly €600 million dividend payment following our AGM in May. Our net working capital position has been unchanged since the year start reductions in inventory are largely offset by lower accounts payable. We invested a lot in working capital over the last 2 years. We expect this to unwind going forward, supporting future cash flows.

Moving on to silicones. Sales decreased to €700 million, down 8% sequentially, mainly due to lower specialty volumes and significantly lower prices in standards. The expected demand recovery did not materialize in the second quarter. Silicon EBITDA decreased from around €96 million in the first quarter to €52 million in the second quarter. Low output and high silicon metal costs held back earnings. With low demand in specialties, our product mix adversely moved towards a higher share of standards. We have updated our silicon outlook. We now expect sales between €2.7 billion and €2.9 billion with an EBITDA margin of about 10%. While destocking appears to be slowing, order entry doesn't show a stronger demand yet. From today's perspective, we do not see signs of demand recovery in the second half.

Polymers reported a sequential improvement in the second quarter. Sales came in at €417 million, benefiting from seasonally higher volumes but held back by lower prices. Despite demand remaining particularly weak in Europe, the EBITDA improved since the end of last year. In the second quarter, EBITDA was €76 million with an 18% margin. For the full year, we have updated our Polymers outlook. We now expect sales between €1.6 billion and €1.7 billion with EBITDA margin of around 17%. This guidance implies that our absolute full year EBITDA will be comparable to last year's record results despite considerably lower volumes. In a difficult environment, this is a solid achievement. As with silicones, there are no signs today which would point to a demand recovery in the second half of 2023.

In BioSolutions, sales increased to €91 million, reflecting strong Biopharma growth and ADL's first consolidation. While Biopharma grew nicely, we see weaker demand for some of the established products. As in our chemical businesses, there is ongoing inventory management of our customers. EBITDA in the quarter was slightly negative. The result continues to be burdened by upfront costs related to the German pandemic preparedness plan and digitalization. We have hired some 100 additional employees for our new mRNA facility in Halle. So we carry substantial costs already today and we will not see any revenue until mid-next year, when we are good for order at the new site in Halle. Given the weakness in some established products and the ongoing upfront costs; we reduced the outlook for the full year in BioSolutions. We now expect a high-single percentage sales growth driven by continued growth in biopharma and the ADL acquisition, we see full year EBITDA below the prior year.

In Polysilicon, we reported second quarter sales of €513 million, up sequentially 16% on higher volumes. EBITDA in the second quarter was €156 million. The polysilicon performance was markedly higher sequentially from higher volumes and lower factor costs despite the lower average selling prices. The solar market is increasingly differentiating product by region and quality. This trend supports our pricing strategy and improves the resilience of the business. We have updated our Polysilicon outlook. We see a slightly lower sales range of €1.6 billion to €1.7 billion and an EBITDA between €300 million and €400 million, reflecting lower solar prices in the second half. Our assumption for the second half is that we will achieve lower average selling prices for solar-grade polysilicon than in the first half. However, we expect to achieve prices higher than the China domestic prices.

Looking at our net financial debt. Through the first 6 months of 2023, we generated €352 million from cash flow from operations. Our cash conversion improved markedly compared to last year, where inflationary pressures resulted in significant investments in working capital. We are just beginning to see these unwind with raw material prices declining. As I just mentioned, this should support future cash flow. After cash flow from investing activities in total €400 million, including the ADL acquisition and the dividend payment of €596 million in May, we ended the first half with a net debt of €270 million. Although the second quarter was another complicated quarter, we still delivered over €537 million in EBITDA during the first half of 2023.

So to wrap it up before we start the Q&A, we continue to see challenging markets. The anticipated H2 recovery has been delayed and our visibility remains low. While we have done a lot to improve our resilience, we are not immune to the larger economy. With our diversified portfolio, we have a strong foundation. We have the right strategy in place to capitalize on strategic opportunities in all our operating segments.

[Joerg Hoffmann, Head of Investor Relations]

Operator, we are ready to take questions now. Begin the Q&A.

[Operator]

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

[Matthew Yates, Bank of America.]

I wanted to ask a question around sort of your midterm CapEx strategy. When you look at the current environment and the collapse in demand that we're seeing, does that make you revisit any aspects of the sort of midterm CapEx plan and the amount of capacity you're looking to bring online across the portfolio? I know it's not really a question around affordability given the status of the balance sheet but just curious if there's any specific projects that potentially are getting deemphasized now?

[Christian Hartel, Chief Executive Officer]

Okay, Matthew. I will take your question. This is Chris. Well, first of all, let me reiterate that we absolutely believe that our Strategy 2030 with the targets in there on profitability and sales absolutely valid and we see a lot of opportunities in the market. And that's the reason why we have the underlying CapEx strategy which we also pointed out at our Capital Markets Day 2 years ago. Now obviously, we always evaluate how the markets develop. And you're absolutely right that especially the outlook on Europe today is lower than it was 2 years ago. And that will be taken into account into our investment strategies. And that might lead, I would say, maybe more to a regional shift on the investments. And it could lead that investments in Europe will come a little slower than we originally anticipated. On the other hand, there might be more opportunities in other regions.

You asked for is there a specific project which might be prolonged or change in timing. As we have quite a substantial amount of projects to diversify also the risk, I mean we talk about 40 specific projects, we do have flexibility on how we time them and how we delay maybe a few of them. So the answer is, there is no specific project which is really -- which we could talk about which is affected by the situation. And again, I would say it's more a regional shift in capacities which we might see from today's perspective.

[Matthew Yates, Bank of America.]

Okay. And if I can ask a sort of second question, just on the BioSolutions division, it's a fairly sizable downgrade to the profit guidance this year listed in percentage terms, if not absolute. But are you able to disaggregate how much of the issues of what I would call your legacy business and whether any of the downgrade comes from new business wins, new orders that you were expecting to come through that and ultimately haven't?

[Christian Hartel, Chief Executive Officer]

Well, Matthew, well, first of all, I mean I think the current performance of BioSolutions doesn't really show really the potential what's behind the division. But we mentioned it also in the last calls that there are some specific upfront cost which is the investment in Halle. And also Tobias pointed out, we are hiring people there. So a lot of upfront cost there and also on the IT systems which we do need to interact with the large pharmaceutical companies. Our Biopharma business is progressing quite well and we have a good and strong pipeline of projects. But yes, we have to say that some customers also face funding issues. So that might delay also a little bit the developments here. But furthermore, as you said, on the existing business which is both chemical products but also on the BioIngredient side, we see a similar pattern like we see in silicones and polymers which is just a weak demand. And this overall leads to the cap in guidance which we did.

[Operator]

The next question comes from Thomas Swoboda from Societe Generale.

[Thomas Swoboda, Societe Generale]

Yes. I have two questions, please. Firstly, on silicones. If I understand you correctly, you had a big maintenance shutdown in the second quarter. So I'm just wondering what -- how should we think about Q3? Should Q3 benefit sequentially from the absence of the maintenance shutdown? Or do you expect further deterioration in the underlying business in Q3?

And my second question is a follow-up on BioSolutions. I mean you have been putting comparably big amounts of money into this business. And I understand that the legacy businesses has been the main driver for the reduction of your guidance. Still, could you help us understand how well are you progressing on your plans in the midterm, if you could give us an indication how profitability should develop beyond 2023 as this segment hasn't been showing the results we were all hoping for so far?

[Tobias Ohler, Chief Financial Officer]

Thomas, Tobias here. I'll start with your first question on the maintenance. Actually the maintenance, in fact, it accounts -- if you put together the numbers, maintenance spend and lag in volume, it was not that material. What really find the quarter -- the second quarter was both a reduction in specialty volumes where we ran lower utilization and the decline in standard prices. So from the maintenance, you should not expect a further deterioration of the business towards the third quarter. I mean in general, we would see the third quarter, no big impact from the demand side, unfortunately, similar to the second quarter on the silicon.

[Thomas Swoboda, Societe Generale]

Okay. Can I follow up quickly? I mean such a maintenance is usually some €20 million, €30 million, maybe even €40 million. So should we be thinking about the sequential improvement in EBITDA in this dimension in Q3?

[Tobias Ohler, Chief Financial Officer]

No, you should not. That is not the magnitude of that maintenance. And we see performance in the third quarter similar to the second quarter. The maintenance is much smaller than you just assumed.

[Christian Hartel, Chief Executive Officer]

Okay. Thomas, for the second part of the question, you asked about the BioSolutions outlook or targets. I mean we definitely see BioSolutions is a be a growth opportunity for us. And we do believe in the potential of the business. And as I said before, clearly, the numbers we see today are not reflecting the potential, the big potential we see in this division. The target is still there. It is €1 billion from Bio by 2030. We believe in that there is a significant pipeline, especially on the biopharma side but also on the BioIgedients. Now including the really important milestone of the acquisition in ADL which tripled our capacity. And holding back is now really the upfront payments, the upfront costs which we have investing into the business. So therefore, we believe that the midterm, long-term perspective is absolutely intact.

[Thomas Swoboda, Societe Generale]

Can we expect a more meaningful contribution over the next year? I mean, no offense but the investments in this business started already a few years ago. So the upfront payments, I mean they are accumulating. So is -- when are we going to see a more meaningful return on those investments?

[Tobias Ohler, Chief Financial Officer]

Thomas, Tobias here. Yes, we expect an improvement in next year because those upfront investments do then turn into sales and profit. So we have a large contract starting once we have completed our Halle facility and we are good for order in the second quarter of next year.

[Operator]

Our next question is from Jaideep Pandya On Field Research.

[Jaideep Pandya, On Field Research]

I've got a few questions. So firstly, on polysilicon. Could you give us some idea of how is the progress on the renegotiation of contracts away from the Chinese local prices towards international prices? And how much progress have you made? And just sort of as a vague indication, how much volume are you today selling outside China? And how much are you selling sort of in China for China? That's my first question. The second question is really around the outlook for polysilicon. So the midpoint suggests a €50 million per quarter EBITDA which, if I'm not wrong, would suggest that the solar business is going to really break even. So I mean, is it because you're expecting prices to pretty much go to the Chinese reference price and electricity cost to remain very high? Or are you just being conservative on volumes? Or what is driving this? Because obviously, your semi business should be profitable.

And then the last question really is on silicon metal inventory. I'm sorry if I missed it but in the current context of demand in silicones, when do you expect to clear out your silicon metal inventory and sort of refresh your material basket for 2024? Is it going to be end of '23? Or is it going to go into 2024?

[Christian Hartel, Chief Executive Officer]

Okay, Jaideep. This is Chris. I'll take the first questions on the polysilicon side. Your first question was on the kind of, let's call it, decoupling right, of the pricing. And as we said, we did some significant achievements in the first half of the years of negotiating contracts, renegotiating contracts with customers. And as you know, I mean, the contract structure we have is quite diverse. We have contracts which go over several years. We have contracts which are shorter term. There are different banking models. This is a continuous process. This is nothing which is done just within a few weeks. So for the second half of the year, it's fair to say that there is still a significant exposure also to the Chinese market, the true Chinese index. You used the phrase in China for China which I would not be so happy with because we sell our high-quality product to customers in the world. So it is not -- we cannot -- we don't sell Chinese material to Chinese customers. We sell high-quality material to all customers in the world and Chinese customers do play an important role. And our aim is more and more to go to the outside China price as our materials just made out of China.

You asked a little bit on the pricing expectation and how the guidance is taking that into account. I would like to -- so I mean you can see from the guidance, obviously, if you make the calculation that the Chinese domestic pricing still plays a role in their pricing, if you would take the pricing which we see currently in the market for the Chinese material in China and for the non-Chinese material outside of China and if you would take that into -- as an assumption for the remainder of the year, you would end up in the midpoint of our guidance. And that's the way how we calculate our guidance segment.

[Tobias Ohler, Chief Financial Officer]

Tobias here. On the silicones inventory question; as you remember, the silicon metal market was super tight last year. And in that situation, we also built some safety stocks just for security of supply. Since then the market prices for metal has declined, as we all know and we are working through that extra inventory now. But it takes some time, to be honest, as the overall volumes are down in the segment. So from today's perspective, in Q3, we will still be working through our high cost inventory. And that means that we do not expect a material cost relief yet.

In Q4, however, the effect from the high point inventory will gradually decline for the quarter that could calculate into a decline in raw material costs which should then also brought by sequential improvement in earnings of silicones. And yes, when prices go up, you benefit from low-cost inventory. When prices go down, you still carry longer with the burden. I think we had the flip side of that in the first half of last year in '22. You might remember meaningful effects that benefited us I think, in the first half of this year. And as I said just now, even in the third quarter, we still have the burden from high-cost inventory. So we are part of the same game as our customers. So we are working for too high inventories and we are slowing down our new order intake; that's how supply chains are running today.

[Jaideep Pandya, On Field Research]

Can I just ask a follow-up to Chris, the politician, not Chris the CEO? I mean what are your discussions around local content in Germany and preferential power price and also around the U.S. with regards to investments? Because obviously, a lot of your customers are putting average plans for U.S. investments. So Chris, the CEO -- sorry, Chris, the politician, what is he saying to German government when does it go to the U.S. to invest?

[Christian Hartel, Chief Executive Officer]

Jaideep, essentially, I mean, our narrative remains the same, especially on the side of the German government saying we have capacity already in Europe. We have significant capacity already in Europe which could be used in later years for building up a solar supply chain. We do have ideas in the drawer to expand capacities but it is always a combination. It needs to have an attractive power pricing in Europe. Second, it needs to have customer contracts which makes -- which by the material. And thirdly, there needs to be a support on the investment side. And if all these come together that make a good business case for us, then we would be willing to invest.

And that story is essentially the same also in the U.S. given that we don't focus so much on the power price in the U.S. but more on the investment side. I think the message is understood. I think everybody knows our position. Luckily, I'm not a politician because I think I would get crazy with the time of decision -- the decision time they need for getting it implemented. So that's really now on their side of the game to take decisions. And I hope that we do see something in the second half of this year and defer into winter, hopefully. But it's not spending on us, so to speak.

[Operator]

Our next question is from Chetan Udeshi from JPMorgan.

[Chetan Udeshi, JPMorgan]

The first question was on silicones. If I heard you correctly, you said Q3 broadly same as Q1 -- sorry, Q2 in terms of earnings which then leaves Q4 at something like €85 million in terms of EBITDA versus €55 million in Q3. I mean typically, your silicones business is actually down in Q4. So can you talk about what will drive that sharp rebound in Q4 earnings in silicones in Q4? That was the first question.

The second question, again, on silicones is if I look at the history of Wacker since the IPO, I don't think you've ever done 10% EBITDA margin in silicones even in 20 -- sorry, 2009, you did low double-digit EBITDA margin. I think the crux of the question is, is there a structural disadvantage that Wacker now faces more and more in silicones business because of the high exposure to Europe in terms of upstream production? And is there a way you can optimize your upstream production network to maybe source more from other parts of the world, especially given the overcapacity that you have in siloxane?

And the last question is on polysilicon. If I hear you correctly, I think you laid out your conditions now for a few quarters on building capacity. Those conditions haven't changed. But I'm just curious, has the market dynamics changed at all in the last 9 months? Or are we still talking about conditions but those are still the conditions that you don't see any evidence that those conditions will materialize into any investment decision from your side? Or you at least -- or at least you see some activity which is moving in the right direction? Because it feels like those conditions have existed. We've heard you talk about those conditions for a few quarters but it just feels like nothing else happens beyond those conditions.

[Tobias Ohler, Chief Financial Officer]

On your two on questions, Tobias here. You have picked it correctly that Q3 similar to Q2 and then Q4 up, I mean, what possibly imply a pickup in demand but that's not the case. As I mentioned it, this is just about the tailwind from the lower silicon metal price that then comes to the P&L which is not yet visible in the third quarter. So it's that trailing effect from lower silicon prices finally hitting our EBITDA.

On the second question, if you compare this environment to other very low demand environment, I think it's similar to what experience our competitors; I think that the unique situation today is that we really don't see a volume demand in specialty products. I think broadly, that hugely diversified customer base, everyone seems to be winding down inventories and see low demand. And this is a situation, this is unique to our utilization in silicones, in silicon specialties is much lower and we are still -- as I mentioned, we are still working with higher raw material costs. And on the standard side, we have low pricing. But the true difference is that really unnaturally low demand, especially silicones. But I'm absolutely sure this will not last forever. Once those inventories have been worked through, we will see a true pickup in end product demand, again, that would also support utilization.

[Christian Hartel, Chief Executive Officer]

Okay. Chetan, on the question on the polysilicon, if I understand you correctly, your question was on the market conditions or did something change in the last quarters. Well, I think definitely there is a change in the -- especially in the political discussion and you can see the politicians like Habeck yesterday on the target payment that was more on the green steel side but very active on promoting transformational technologies and being supported by the government. And I can also tell you that, of course, we get a lot of questions from potential customers in the solar value chain trying to talk about new contracts with us. So yes, there is definitely the dynamic in the market but it is not yet something to really report on and it's not kind of written in stone finals, it's still an ongoing process. But we remain optimistic on that.

[Operator]

Our next question is from Geoff Haire from UBS.

[Geoff Haire, UBS]

This is Geoff Haire from UBS. I just had one question. Chris, in your introductory remarks, you made a comment that you saw 2024 being a challenging year for Wacker as well as 2023. I just wonder, are there specific challenges that you see that we're not seeing at the moment? Or is this just you being cautious about -- well, the next 18 months?

[Christian Hartel, Chief Executive Officer]

Absolutely. I mean, Geoff, absolutely with you, it's more -- it's not that we know something specifically more than the rest of the market. It is just being cautious. And I mean we talked in the beginning of the year a lot about recovery seen from many, many customers which just didn't materialize for the whole industry. And from that perspective, I'm just cautious that I think we won't see much change this year and that could well be part of the first half of 2024. And that was kind of how I made that statement.

[Operator]

The next question is from Rikin Patel BNPP.

[Rikin Patel, BNP Paribas Exane]

Firstly, just on silicones. So you mentioned the deterioration in specialty volumes and also standard pricing. I'm just curious with that weaker volume environment, should we be expecting headwinds to pricing in specialties in H2? And how have you catered for that in the new guidance? And secondly, on polysilicon, you mentioned the resilient pricing in semi in Q2. Just curious if you could give some comments around the outlook there for pricing in phase 3 as well.

[Tobias Ohler, Chief Financial Officer]

Rikin, on the silicon specialty pricing question. I would say largely, especially pricing has held up well but there are over different shapes of specialties. It's not black and white. So we see some erosion in some segments of the market. And for sure, the longer the slow demand continues and inventories at customers are worked down, I think there's also pressure but it's a completely different game to the standard pricing development.

[Christian Hartel, Chief Executive Officer]

Okay. Looking on your second question on the semi poly pricing in the second half. But I mean, typically, the semi poly pricing is more longer-term oriented and it's typically more on an annual basis. So from that perspective, I wouldn't expect significant changes for the second half of the year. And that's what we meant us with a pretty resilient and good market for us.

[Operator]

The next question is from Sebastian Satz from Barclays.

[Sebastian Satz, Barclays]

A couple of follow-ups for me. First, on the Germany situation, the industry power price, probably quite unclear whether or not it's going to come, Ministry of Finance, opposing it. Should it not come? Are there any potential other support mechanisms or schemes that are currently being discussed for Wacker to get OpEx support? If I'm not mistaken, the expression of interest for the rebuild of the solar chain is predominantly on CapEx. So just trying to gauge what the likelihood is that Wacker would get some cheaper electricity costs in Germany? And then on the U.S., do you already know for certain, if you will be eligible for the $3 per kilogram production credit in poly even if you were to produce semi material on that plant? And if so, when do you think you would get that and if that's already factored into your second half guidance? And then, a quick follow-up on silicones. If you look at the €200 million or so year-on-year EBITDA decline, how much of that roughly is coming from lower volumes, lower commodity prices and mix, respectively?

[Christian Hartel, Chief Executive Officer]

Okay, Sebastian. On your first question on the support schemes and support mechanisms. Well, you're absolutely right. I mean the current focus, both in Germany and in Europe is primarily on CapEx. And also with this new initiative from the BMWK for its interest in the solar supply chain, it is primarily driven by CapEx. And typically, the answer you get from German politicians is that the OpEx thing is getting complicated with Europe. Nevertheless, we keep arguing on that, that OpEx for us is the more important part. And we do appreciate CapEx support but without having a somehow competitive landscape on the power pricing, we won't be investing into new capacities.

The industrial power price is one of these options which is probably the most prominent. I think what's also discussed now is are there other options? I don't see them from the European perspective. Therefore, for me, it would be more like who's being part of the industrial power price. That might be a big political issue. Our argument always was it should be there for the leading transformational industries. So industries which produce products which are important for transformation of the industrial sites in Germany. And I truly believe it would be a good business case for the country. And that's our main argument also with the Ministry of Finance, who, as you mentioned, has a very distinct meaning on that or distinct opinion which I don't think is correct. But obviously, it needs some more time for convincing in.

[Tobias Ohler, Chief Financial Officer]

Sebastian, on the IIA and we have possible or potential eligibility for the $3 per kg. Unfortunately, U.S. wording is still not clear. And for that reason, we have not factored it into our guidance and we could not account for it so far. And then on the second -- or the third question on the silicones, we -- and I hope for your understanding, we don't disclose that level of detail. And so I can't distinguish the performance drivers in the EBITDA. But I can tell you the biggest effect on earnings is definitely the reduction in our profitability in specialties and that has an effect of much lower volumes and also somewhat lower prices.

[Operator]

The next question is from Sebastian Bray from Berenberg.

[Sebastian Bray, Berenberg]

I have two, please, both on Biopharma. If I look at the statutory accounts of the company that was bought ADL, it looks like it was making about €40 million of sales with a statutory loss of around €7 million at a net income level in 2021. Why was it loss-making? And my second question is who was the company bought from?

[Christian Hartel, Chief Executive Officer]

Okay, Sebastian. So your question was on the performance of ADL. And I think a good number to talk about the sales of about €50 million. I think that was something which they published for last year for 2022 being profitable. And why is it not -- I mean, why is it not profitable in the past? I mean obviously, it didn't maybe they didn't do the best job. I think they improved and we do see much more potential for improvement. And the major driver was probably the underutilization of these assets. They did some improvements in the last years. We see more opportunities for us because of our own innovation pipeline but also expanding the CDMO business at the site with our global reach and our customer contract.

[Tobias Ohler, Chief Financial Officer]

And the seller, Kartesia, a private equity fund that was holding it for some years.

[Sebastian Bray, Berenberg]

Sorry, what was the name? I didn't quite catch that.

[Tobias Ohler, Chief Financial Officer]

Kartesia, with a K

[Operator]

The next question is from Andreas Heine from Stifel.

[Andreas Heine, Stifel]

I have two, one on polymers and one on silicones. In Polymers, the margin guidance was increased due to lower raw materials. Is that only temporary? Or is that something which you can keep going into 2024? That's first question. And the second one, in silicones, actually, I put it in two. You mentioned that sequentially Q3 to Q4 will be €30 million better because of the lower silicon metal input costs. If you transfer this in 2024 with not having three quarters of high silicon metal, does that mean like-for-like, it would be already €90 million higher? That's the first part of the question.

And the second is really about the capacity utilization you have in the upstream business. You said you have a more adverse mix that you produce more of standard products to keep the assets utilized. I can't believe that the market is better absorbing the standard products and the specialties and the specialty -- the standard prices are so low that you might not earn anything on the EBITDA level. Could you outline a little bit more how you manage these upstream utilization, please?

[Tobias Ohler, Chief Financial Officer]

Andreas, to the polymers question and the margin up in our guidance. First of all, we do have our target margin which is 20%. And we always said that we are working towards that also improving our product mix and we had years -- when we were closer to the 20%, we had years where we still have some way to go. I think what we see in this year is that keeping absolute EBITDA is a very solid performance in that low volume environment. And you do the math, it equates with a calculation EBITDA divided by sales into a higher margin. Going forward, I'm not in a position today to give you guidance for '24. We definitely -- we focus on absolute EBITDA. And that also leads to higher margin. I'm absolutely fine with that. But it's just too early to think beyond this year.

The next question was on silicones fourth quarter, €30 million higher. No, I think you should not annualize that. I think it's also too early to see what other -- I mean you can always take one effect and annualize it but there are so many moving parts and they are not visible to us, especially the demand outlook into '24 and further developments in pricing. So I would be cautious on that. But for sure, we see that finally, also lower raw materials support our profitability and we will revisit that once we have more visibility going forward.

Your next question on the upstream utilization and how to manage our product mix, our focus of the strategy is to sell specialty products. But if there's no demand, we can still juggle volumes between specialties and standard markets, we don't like that too much but we can do it and there's access in that market and that allows you to earn some contribution margin. But as I said also to Sebastian before, I think the biggest impact on profitability is that we have unnaturally low utilization for our specialty prices. You should keep in mind that we were running at the limit for more than 2 years, where customers were put on allocation. And I think this sentiment also describe that customers were buying as much as they could get. And this apparently that far too high inventory levels. And these need to be worked down again and then we would see fundamental demand again in a lot of promising markets that we serve and the utilization and contribution margin from specialty assets would go up again.

[Andreas Heine, Stifel]

Fair point. May I squeeze in one more. Do you have any visibility whether what you see in low demand is really run down inventories or just soft underlying trends?

[Tobias Ohler, Chief Financial Officer]

It is really very little visibility. I mean we see some times daily order entry fluctuate which might be a sign that you could have customers that are really very low at inventory and suddenly ordering again. But then if you look at order pattern overall, it remains very slow. I mean there's no positive development from Q2 into Q3.

[Operator]

We have a follow-up from Jaideep Pandya.

[Jaideep Pandya, On Field Research]

The question really is on semi grade. The question is on semi-grade poly actually. One of your key competitors in Korea is in the middle of a very big investment that is coming in 2025. So what do you think about polysilicon investments? I mean, I appreciate all the solar talk that you're having. But don't you want to invest in semi for the next sort of 5-plus years? And if you do so, then what will really happen to your solar capacity? So do you sort of want to keep the 80KT base and just go more and more and more into semi if you get no policy support from the government? Do you actually think that current environment warrants for brownfield expansion in semi which will increase your nameplate from 80 to maybe 100?

[Christian Hartel, Chief Executive Officer]

Okay. Jaideep, this is Chris. I will take your questions. Well, I mean, -- in essence, our strategy for polysilicon which we presented 2 years ago, is exactly that what you mentioned. It is going to the semiconductor market where we today have a strong position in that market. And of course, we want to keep and grow this position. And therefore, we are actually investing. And we just recently published that there is a big investment going on here in our site in Burghausen for hyperpure best quality edge material and that's a significant investment that will also absolutely strengthen our position in that market. And yes, we hear that competitors are also announcing something but we are absolutely not fearful about these investments from competition because we have a leading position in the semiconductor market.

You talked about what it would mean for solar. And well, part of our strategy today, if there is no attractive business case for solar, we would use capacities for solar and convert it into a semiconductor. And I think we mentioned that a few calls ago already, I think we are really in a unique position that we can use our capacities both for solar and for semi. And therefore, this gives us a lot of flexibility with the investment in Burghausen, we are able to produce more and more of the best quality semiconductor material which is in high demand in the market.

[Operator]

There are no further questions and I hand back to Joerg Hoffmann for closing comments.

[Joerg Hoffmann, Head of Investor Relations]

Thank you very much for your interest. We will be back on for Q3 on October 26. If you have additional questions, please feel free to contact the Invest Relations. Thank you.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.