Wacker Chemie AG

XETRA:WCH

Earnings Call Transcript 2020-Q3

[Operator]

Good day, and welcome to the Q3 2020 Wacker Chemie Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Hoffmann. Please go ahead, sir.

[Jörg Hoffmann, Head of Investor Relations]

Thank you, operator. Welcome to the Wacker Chemie conference call on our Q3 2020 results. Dr. Rudolf Staudigl, our CEO; and Dr. Tobias Ohler, our CFO, who will take you through our prepared slides in a minute. The presentation is available on our web page under the caption, Investor Relations.Before we begin, allow me to point you to our safe harbor statement, which you will find at the slide deck's beginning. Dr. Staudigl?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Ladies and gentlemen, welcome to our conference call on the third quarter 2020 results. We saw business conditions improving during the quarter despite the pandemic's global effects. Volumes reached or surpassed the prior year towards the end of Q3.Group sales reached EUR 1.18 billion, up 10% from Q2 and 7% below last year. EBITDA came in at EUR 191 million, up over 80% versus Q2 and 30% down year-over-year. But if you take out last year's polysilicon insurance payment, EBITDA climbed by 19% compared to the previous year.The main driver to this improvement was polysilicon returning to profitability after posting an operating loss last year. Impressively, the chemicals EBITDA was on par with the previous year's despite challenging market conditions with lower sales. Overall, the organization delivered a very solid performance.In the third quarter, we saw a strong and growing demand for polymers and polysilicon. Silicones gained momentum as the quarter progressed. And as a result, almost all our units are now back to full production.During the quarter, we saw a very strong performance in cash flow generation. The combined effect of cost controls, improving shipments, lower CapEx and working capital measures drove net cash flow to EUR 296 million in Q3.Our results across all our businesses have something in common. They were all supported by a good cost performance. While these improvements show that we can successfully reduce costs incrementally, we strive for bigger progress in our cost base.We initiated our Shape the Future program last year. In mid-October, we reached an important milestone by signing the framework agreements with the employee representatives and can now go ahead with the planned organizational changes. We confirm our ambitious target of achieving annual cost savings of EUR 250 million, starting by the end of 2022.We expect to benefit from indirect spend savings to the tune of more than EUR 50 million already this year and expanding to over EUR 100 million next year. We expect first savings in personnel costs next year. We will book a mid-double digit million euro provision for our program in the fourth quarter. As the program unfolds, we will update you on our expectations for additional costs and benefits from the program next year. While our markets enjoyed some rebound in Q3, uncertainty has increased again over the last weeks. The pandemic is far from contained and localized lockdowns, much like what we saw earlier this year, may weigh on consumer confidence and global demand patterns.While we don't have clear visibility into the next 2 months, we can say that we have enjoyed good trading conditions through October. Order intake has been so far clearly higher than what we would normally expect as we progress towards year-end, with its typical seasonality in our chemicals business.Nevertheless, due to potential disruptions from the pandemic, we remain cautious and refrain from providing detailed full year guidance. As such, we continue to expect full year sales and EBITDA margin in 2020 lower than last year. On the other hand, we expect cash flow to come in much higher than last year.With this, I hand over to you, Tobias.

[Tobias Ohler, CFO & Member of the Executive Board]

Thank you, Rudi. Welcome. I will now take you through the presentation on our Q3 and provide you with a current trading update for each segment.Let me begin on Page 4 with our quarterly P&L. Overall, Q3 saw a much stronger performance than Q2, and exit rates in most areas were at last year's level or better. When comparing year-over-year results, please note that last year's numbers included a EUR 112.5 million polysilicon insurance payment in the cost of goods sold line. Adjusting for this effect, our operating results show a good underlying improvement year-over-year.SG&A declined by about 10% as our efforts to reduce costs took hold. Depreciation fell to EUR 100 million in the quarter following the polysilicon impairment last year.Looking at our sales bridge, you can see adverse price and currency effects accounted for over EUR 70 million of headwinds. Despite these, we were able to report a 19% year-over-year increase in operating EBITDA, up EUR 30 million to EUR 191 million.On Page 5. Our balance sheet shows our focus on cash generation and cost savings drove up liquidity and reduced net financial debt. On the other hand, historically low discount rates drove our pension liability up to over EUR 2.6 billion. Pension liabilities stand at EUR 2 billion, when adjusting for our related deferred tax asset of EUR 0.6 billion.Nevertheless, this increase reflects a growing mismatch between our average cash outs to fund and service the pensions of about EUR 100 million per year and the net present value of these obligations as mandated by IFRS. We believe a more appropriate valuation of our pension liabilities would involve discounted cash flows of current and future annual cash outs with our weighted average cost of capital.Silicones on Page 6. Recorded sales of EUR 548 million, as sales picked up towards the end of the quarter. While specialty prices remained resilient, lower shipments, lower prices for standards and currency effects reduced Q3 sales by 14% compared to last year. All markets saw sequential improvements with particularly strong growth in construction, release coatings, packaging applications and automotive.Silicones EBITDA in Q3 came in at EUR 91 million, trailing last year by 29% but 1/3 better sequentially. Utilization rates improved well over Q3, but first reached prior year levels only towards the end of the quarter.Regarding current trading in silicones, we are presently enjoying strong demand and high loading in most areas. In certain segments, we assume customers are rebuilding inventories. This higher-than-normal activity may offset some of the typical year-end seasonality, but it is difficult to say for sure given the short range of order patterns.Globally, the development is uneven. China currently operates at a higher level than last year, Europe at about the previous year and the U.S. is significantly below the previous year.On Page 7, polymers benefited from a rebound in smart construction demand, including catch-up effects. In addition, hygiene products continued to perform well in Q3, significantly higher volumes offset negative currency effects and lower average prices.Polymers recorded an EBITDA of EUR 85 million, following good cost structure, high plant utilization rates and improved captive upstream capacities. Our new capacities in South Korea supported the strong shipments. EBITDA increased by 45% over Q2 and by 75% over last year.Looking at current trading in polymers, we see continued good demand for our dispersible polymer powders and nonwoven products in construction and hygiene applications, respectively. While CapEx is lower than last year, it will pick up again as we continuously expand our regional capacities to support our customer's growth.Biosolutions on Page 8 recorded high loading in its biopharma business. Sales, however, declined over last year due to a substantial drop in demand for solid resins for gum base. EBITDA came in at EUR 8 million, about half of the previous quarter, as Q2 benefited from a EUR 4 million special income.Current trading in Biosolutions sees continued high utilization in biopharma, but a slow recovery in true income base. Looking ahead, our CDMO business is set for further growth with planned expansions in Amsterdam underway.Polysilicon on Page 9 saw strong solar volumes and increasing prices over the quarter. Sales came in at EUR 211 million, almost 40% over Q2. EBITDA improved sequentially to EUR 8 million and benefited from good cost performance, increased plant utilization since August and some positive inventory valuation effects. Year-over-year, the operational EBITDA, excluding the insurance payment, increased by EUR 35 million on good cost performance.Looking at current trading at polysilicon, demand is back to normal after the Chinese holidays. The outlook for solar installation continues to improve, while new supply remains limited. After outages in Q2 and Q3, competitors have not fully restarted yet. Without subsidies, solar is now competitive over other power generation technologies. And new renewable energy targets in Europe and China drive global market growth. Next year, we now expect to see solar installations between 140 and 170 gigawatts, up from a range of 110 to 130 gigawatts this year.Moving now on to cash flow on Page 10. Net cash flow year-to-date increased to EUR 455 million. Key contributors to this strong development were our operational performance, which benefited from improving shipments and strict cost control and much lower CapEx.Looking specifically at Q3, we generated EUR 296 million in net cash flow, up almost 70% from a year ago. Very early in the pandemic, we intensified our working capital management. And in Q3, this really paid off as we released some EUR 140 million working capital. Included in these figures are EUR 110 million from lower inventories in chemicals and polysilicon, which we achieved despite having short time work in many areas in the early part of the quarter. As a result, net financial debt declined to EUR 309 million, putting us in a very solid financial position with over EUR 1 billion in liquidity.All our segments report a better overall outlook than at the end of last quarter. Polysilicon sees good demand from semiconductors, while the demand for solar improves considerably. Biosolutions performs on biopharma. At silicones and polymers, shipments remain at high levels, and order intake is encouraging. However, with atypically short lead times, we believe that this reflects caution on the side of our customers.Looking into the last 2 months of the year, the pandemic may cause new disruptions. Therefore, we remain cautious and continue to place the highest priority on safety and health measures while maintaining deliveries to our customers. Unchanged, we expect overall full year lower sales and EBITDA than reported last year, while net cash flow should be much higher.Our full year CapEx is expected to be less than EUR 250 million, covering maintenance and our most promising projects. We will continue our tight cost controls and are well on our way to benefit from early gains of our Shape the Future programs. As our savings and restructuring project unfolds, we will update you with more data on expected costs and benefits as we guide next year's result.Now I hand you back to Rudi again.

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Yes, ladies and gentlemen, allow me to recap the achievements of this last quarter.Polymers came in with a strong V-shaped recovery and presented record results in Q3. As the market leader in VAE, we were able to ship when the industry saw a bigger-than-expected rebound in demand. Very high plant availability and our recent capacity additions enabled this performance.Silicones saw a delayed recovery through the quarter with volumes picking up meaningfully in September. Currently, we are enjoying high loading in most areas as orders are now at or above last year's level.At Biosolutions, we continue to make good progress in biopharma with high utilization of our assets.Volumes in polysilicon dropped in September as solar customers worked off inventories ahead of the Chinese holidays and postponed new purchases. Demand has since recovered, and we are back to high orders.On Pages 12 and 13, looking at longer-term trends and issues, climate change is certainly one of the biggest challenges societies face today. The chemical industry plays an important role in addressing the risk of climate change by reducing emissions, helping customers to reduce theirs and driving advanced research to find new low-emission technologies for the future. We, at Wacker, make significant contributions to this effort.Across the globe, we are witnessing governments looking for ways to support and incentivize the necessary changes to supply chains. The European Union presented its green deal. And now China targets net zero emissions by 2060. Last week, Japan joined and wants to be climate neutral by 2050.To realize these targets, trillions of dollars will need to be invested in renewable energy, e-mobility, smart construction and the technologies of the -- for the circular economy. Wacker is ideally placed to benefit from a broadening set of climate ambitions with its portfolio of innovative technologies.While Wacker is often solely associated with solar, unfortunately, this is only one area where we have leading technologies available and under development. In the upcoming December installment of our Capital Market Day series, we will explore how silicones and polymers enable carbon dioxide abatement technologies in smart construction, e-mobility and the like.Ladies and gentlemen, the coronavirus is still prevalent. As infection rates rise again, we need to remain vigilant. Health and safety of our employees, while maintaining deliveries to our customers, is our highest priority. Lockdowns and other disruptions remain a real risk. We have taken an important step towards implementing our so-called Shape the Future efficiency program. Our new leaner organizational structure will help Wacker provide better services to our customers and will support the company's profitable growth.Thank you.

[Jörg Hoffmann, Head of Investor Relations]

Our presentation ends here. We will now begin with the Q&A session. Operator?

[Operator]

[Operator Instructions] And we will take our first question. Please go ahead, Mr. Heine from MainFirst.

[Andreas Heine, Managing Director]

I have a couple of ones. The first is cash flow. It was indeed very strong. While the heavyweight of CapEx is in Q4, do you think you can keep this strong cash generation you had in the first 9 months to the 12-month period?Related to this, having this very strong balance sheet in mind with only EUR 300 million net debt and liquidity of $1 billion, how do you think about the dividend policy going forward?Then on CapEx, it was cut a lot this year to EUR 250 million. But given that you are -- do not intend to invest in heavy upstream investments and that the rubber -- the real silicon rubber expansion comes to end, how do you see your CapEx budget midterm?And last but not least, very small one on the Amsterdam capacity, is that -- the investment you're running there really an expansion? I read that the new reactor will replace the older one, which looks more than a refurbishment rather than an expansion. These are my questions.

[Tobias Ohler, CFO & Member of the Executive Board]

Andreas, may I start, Tobias here, on cash flow. I would say we had an extraordinary cash flow in Q3 with the strong emphasis on working capital reduction. So my hint towards the full year would be into the fourth quarter, we definitely expect another positive cash flow in Q4, but not to the extent that we have seen before.On the CapEx, your question was about EUR 250 million in this year, and how does it compare to, yes, CapEx levels midterm? We always have guided that we would get close to EUR 400 million, even excluding large upstream expansion. I think we have plenty of opportunities to grow our specialty business in silicones. And as we also invested in polymers with regional expansion in South Korea, that now gets -- yes, in short time, fully loaded. We just announced in China another expansion for polymers. So a good level would be closer to EUR 400 million on average for the next years to come.And the last question on Amsterdam. I think it's a combination of both. It's some refurbishment and some capacity expansion. I think that's the way you should think about that investment.

[Andreas Heine, Managing Director]

[ What about ] dividend?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Yes, yes. There is no change in dividend policy. And to be honest, this is not the right time to really consider that. I mean, normally, what we do is, we think about what we do once the year is closed. And as you know, the procedure is to discuss it in the supervisory board and to make a good proposal to the general assembly at the right time, and this is exactly how we deal with this, this time as well.

[Operator]

[Operator Instructions] We will take our next question from Mr. Wrigglesworth with Citi.

[Thomas P. Wrigglesworth, Director and Chemicals & Basic Materials Analyst]

I'll ask 2 questions, if I may. Just focusing on the performance in silicones, obviously, quite a change in margin through the quarter. I was wondering if -- you've clearly given us an indication of how the market tightness is, but could you give us a sense of how the margin performance is exiting 3Q and starting 4Q? That would be very helpful.And then secondly, on polymers. You've cited, obviously, catch-up effects on volumes. Could you just help us break down in that 2% sales growth for the third quarter? What the volume run rate is year-over-year in polymers to give us a sense of how that could progress into the fourth quarter?

[Tobias Ohler, CFO & Member of the Executive Board]

Thomas, this is Tobias. I'll start with your second question and then move back to the first one.On polymers, I think an indication for the catch-up effect is maybe the September volume. If you look at the details, you see that in polymer powders, our volume is up 30% over prior year. And I believe this is not -- cannot be fundamental demand. And that's why I see that some effects must have something to do with pull-ins. So it's difficult to continue from that level and just talk about run rates into Q4.Please bear in mind that we have some typical weather-driven seasonality in construction always. But on the other hand, I wouldn't argue against a continued strong demand in all the DIY sector with renovation activities running at really high levels in the pandemic and partly caused by the pandemic. So we consider polymers' result in Q3 as really exceptional.For the silicones question, you wanted to go into a very detail like a monthly run rate also on margins. We don't want to provide this detail. What I can say is that July and August, we are still pretty weak months sales-wise. And September was the first month that came above prior year's level when we just look at volumes, but we're, sales-wise, still below prior year from lower prices for standard products and for the exchange rate.

[Operator]

We will take our next question from Mr. Swoboda with Societe Generale.

[Thomas Swoboda, Research Analyst]

I have 3 questions, if I may. Firstly, on taxes, I mean you're barely paying any taxes. You're actually getting money back. That's great. Don't get me wrong. The question is just, is there a risk that, that will bounce back at 2021? Should -- what should we expect in terms of P&L taxes and cash taxes, please? If you could just give a hint, that will be helpful.Secondly, on the order book visibility, you mentioned it is low. But -- I mean don't take me wrong, we are in November. So how short is it that you have not provided a guidance? That's my second question.And the third question on inventories in polysilicon. I mean you have gone into the second half of this year with, I think, extremely high inventories, especially in Asia, in polysilicon. Could you just give us a feel how that has developed and what do you expect for the year-end? Have they decreased significantly already? Do you expect a significant drawdown in Q4? Any indication on this would be very helpful.

[Tobias Ohler, CFO & Member of the Executive Board]

Thomas, Tobias here. I'd start with your third question on inventories in polysilicon.We have had short time work here at the beginning of Q3 when that demand surge happened. And we always said that we want to have strategic inventory to react on those demand surges in a very swift way and have it close to our customers. And for that, in Q3, we definitely reduced inventories significantly, while in the fourth quarter, we would expect, with all our production plants running up at full speed again in Germany, that we would have a balanced production and sales volume.On the fourth -- on the first question on taxes, I think 2021 is a little bit difficult -- '20 is a little bit difficult to understand, '21, I would calculate with a statutory tax rate of 28%.

[Thomas Swoboda, Research Analyst]

And the order book visibility? Yes.

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Your question on the guidance. Of course, we discussed that at length. But on the other hand, as you know, the visibility is not very high. And with the newly announced lockdowns in Germany and in France and in industrial parts of Spain, for example, it's just -- it's uncertain. And that's the question.So we really only want to give a guidance when we can be pretty precise. And at this point in time, we cannot be precise. But I think we told you that the -- let's say, the level of business improved significantly towards the end of the quarter. We started with that into the fourth quarter. And so we are not pessimistic about the fourth quarter. But on the other hand, we simply don't know what the effects of these lockdowns will be. That's the issue.

[Thomas Swoboda, Research Analyst]

Understood. Could you share with us what is your visibility in silicones? How much books -- how much visibility on your book do you have?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

We don't want to go into too much detail, but we told you that there was a significant uptick in September and it continued into October. So things are good. We hope things will remain good. We don't know, that's the problem.

[Operator]

And we will take our next question from Mr. Mayer with Baader-Helvea.

[Markus Mayer, Lead Analyst of Chemicals]

Again, on this order book visibility, is that improved? Can you maybe help us how much the order intake developed in the third quarter? That will be my first question. Maybe a kind of a ballpark number?And the second question would be on the margin at polymers. Do you think that if you're now coming again in your price discussion with your customers, that you can remain the majority of this margin improvement? Or do you expect margin to come down then sequentially next year?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

To the first question on visibility, again, as we said, we had seen an improvement throughout Q3. And especially on the silicone specialty side, volumes are much higher than prior year, and this continues into October. And yes, to give you the last piece of information, at least I have, is that the daily order volume of yesterday was also strong.On polymers, the margin in Q3 is definitely an exception. But if you consider our pricing tactics and pricing strategy, we definitely want to keep the price level as long as possible, while, for sure, customers look at our expansion. But what we can put into the negotiation is that we were able to deliver this demand surge with our capacity expansions that we have put in place. So we were able to deliver on a V-shaped recovery and that is something of value to our customers.And in addition to that, the margin expansion also comes from our backwards integration. I mean we have upstream capacities that we're running really also at a very high level in the third quarter and that also explains part of that. So we are not just looking at polymer powders and dispersions, but also at producing our own vinyl acetate monomer or the VAM.

[Operator]

And we will take our next question from Mr. Udeshi with JPMorgan.

[Chetan Udeshi, Research Analyst]

I just had one question. It seemed there was some pause, like you said, in polysilicon shipments. It seemed there was like a buyer strike that they weren't willing to pay the prices that exist in polysilicon market in September. Have you seen the prices come down and, hence, the volumes have sort of recovered? Or have you been shipping at the same prices as in September in polysilicon?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

If you look at the price tracking companies like PVinsights or the like, then you can see that, of course, there was a spike upwards when there was the supply shortage. And there is only a slight movement downwards. And I think this is more or less -- or is the best indication of what happened.

[Operator]

And we will take our next question from Mr. Rafaisz with UBS.

[Patrick Rafaisz, Director and Chemical Research Analyst]

I was just wondering if you could potentially sort of help with understanding the buildup you saw in demand for polymers. How much of that was the better margin came from, you've been able to satisfy customer demand because other competitors weren't able to? Also if you could talk a little bit about what you see the key drivers being for polysilicon margins going into 2021?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Well, I mean, the -- of course, the additional output we were able to generate in polymers because of the demand, of course, had a special effect on the margin. I mean the -- let's say, the additional volume, always -- the last volumes always generate the highest margins, obviously. And with all our expansions in polymers over the last years, and just recently, in Korea, it had a significant positive effect. I would say this is the main -- one of the main drivers for this margin development.The key drivers for polysilicon next year. I mean in solar, certainly this additional installation that the market expects, up from around 120 gigawatts this year to probably around 160 or almost 160 gigawatts next year. That certainly increases the demand for very high-quality polysilicon. And of course, there is a countereffect that the gram per watts that are needed will certainly be less next year because of technological developments, but nevertheless, I think the demand will be very good.And of course, there is the very good development of the whole semiconductor space. And for everything in this world, everything that is combined with electronics, from automobiles all the way to artificial intelligence, simply needs silicon and needs extremely high-quality silicon. And in all modesty, I think we are the best supplier for that.

[Patrick Rafaisz, Director and Chemical Research Analyst]

And if I could just follow-up, what is your assumption for the return of some of the outages that you've seen in China for next year?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Well, I mean there is almost nothing published about that, and this is why we don't have any official information. But on the other hand, I mean every supplier tries to get their facilities back up and running as fast as possible. But on the other hand, yes, demand for high-quality polysilicon will increase next year. So additional capacities will be needed. This is why I'm not worried about -- I'm sorry. Can you repeat that?

[Patrick Rafaisz, Director and Chemical Research Analyst]

But you assume the market will be balanced. We won't go into an oversupply situation again in the next year?

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Yes. Yes. Yes, definitely.

[Operator]

And we will take our next question from Mr. Bray with Berenberg.

[Sebastian Christian Bray, Analyst]

I would have 3, please. The first is a technical one. The provision that is taken in Q4, is that EBITDA effective and is it evenly distributed across the segments? That is, is the correct way to forecast Wacker EBITDA for Q4 just to say, this is my EBITDA, and now I deduct EUR 40 million or EUR 50 million?My second is on polymers margins, to be more specific, to what extent is the precedent of 2016 to '17 when this declined by about 400, 500 basis points from peak relevant for 2021?And thirdly, a quick update on battery chemistry. We've seen REC, Group14 now announce fairly significant CapEx into a new silicon anode facility. How far away is Wacker's product from being commercial?

[Tobias Ohler, CFO & Member of the Executive Board]

Sebastian, Tobias here, starting with the first 2 questions. The provision that we will take for our -- the future efficiency program in Q4 will, as you said, be mid-double-digit million. And you should deduct that in EBITDA. It's EBITDA relevant at personnel costs. And most likely, it will be classified in the others line, dependent upon the auditor's confirmation, that would be the best way to model it.On the second question, polymers, I think the outlook for next year is we are not there yet. I think we don't want to speculate on demand. We do not want to speculate on anything on the -- for the next year. So yes, I don't have any piece that I can give you for modeling the margin for polymers for next year.

[Rudolf Staudigl, CEO, President & Member of Executive Board]

Your question on battery chemistry, I would say that you're not -- we are not further away from marketing our products than these peers.

[Operator]

[Operator Instructions] And Mr. Hoffmann, there are no further questions at this time.

[Jörg Hoffmann, Head of Investor Relations]

Thank you, operator. Thank you all for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses.