Wacker Chemie AG

XETRA:WCH

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Wacker Chemie AG Conference Call Q3 2022. [Operator Instructions]

Now I hand over to Joerg Hoffmann, Head of Investor Relations. Please go ahead.

[Jörg Hoffmann, executive]

Thank you, operator. Welcome to the Wacker Chemie AG conference call on our third quarter 2022 results. Dr. Christian Hartel, our CEO; and Dr. Tobias Ohler, our CFO, will take you through our prepared slides in a minute. The presentation is available on our webpage under the caption Investor Relations.

Please note that management's comments during this call will include forward-looking statements that involve risks and uncertainties. We encourage you to review the safe harbor statement in today's press release and in the presentation as well as in our last Annual Report regarding risk factors. All documents mentioned are available on our website. Chris?

[Christian Hartel, executive]

Hi. Welcome, everyone. Wacker continued to deliver strong results in a challenging business environment. We reported EUR 2.13 billion in Q3 sales, which is up 29% year-over-year. Despite massive raw material and energy inflation and turnaround-related costs, EBITDA was higher than last year at EUR 457 million. This strong performance is clear evidence of our competitiveness. It speaks to the resilience of our business model even under more challenging conditions. And this success highlights the strength of our specialties business and the effectiveness of our pricing management.

As expected, our EBITDA margin was lower than last year and below the preceding quarters. We flagged earlier that the first half of this year, performance was exceptional, particularly in SILICONES, where we benefited from very strong global supplier demand and some trailing raw material effects. Net cash flow at nearly EUR 300 million showed another strong cash conversion in the third quarter. In chemicals, our pricing management supported EBITDA solidly over the last year despite strong headwinds from raw materials and energy.

Now looking to the order entry, we've been registering a decline in incoming orders in some sectors, particularly in construction since the summer. I believe that this development will most likely continue in the fourth quarter and into the following year. Should this trend continue to manifest itself and Germany and Europe slip it to recession, we will not be completely isolated from these effects.

Now despite near-term recessionary risks, we see our long-term prospects intact and strengthened. We remain committed to our modular growth strategy, which we detailed at our Capital Markets Day with '23 targets earlier this year.

Our BIOSOLUTIONS expansion project in Halle for mRNA capacity for the German Pandemic Preparedness Plan continues at a fast pace. We continue to pursue our SILICONES specialty expansion plans in the U.S. In POLYSILICON, semiconductor wafer customers are expanding their capacities and they'll get higher volumes from us in the future. In POLYMERS, we expect higher fossil fuel prices to drive further demand for our smart construction materials. This is especially the case with POLYMERS used in external insulation systems to drive energy savings.

Reducing energy consumption and improving the efficiency of our own operations has always been a priority. In light of the current energy crisis, it has become imperative. We introduced a new budget this year with new sustainability-specific KPIs. So far, we have approved 17 projects amounting to EUR 60 million, which will reduce the energy intensity of our operations and cut CO2 emissions by more than 100,000 tonnes per annum. This project continues steps towards reaching net-zero by 2045. Sustainability is a key strategic focus for Wacker, and we see it as a clear differentiating factor among our competitors.

Looking on the next slide on energy pricing in Europe. Over the last 2 quarters, the shifting dynamics of the German natural gas market kept us pretty busy. Gas prices kept soaring with major pipelines out of service and amid a political imperative to fill gas storage before the winter. When we last spoke, a gas surcharge to soften the impact for importers and gas curtailments were options on the menu. Our last guidance reflected all these uncertainties with a provisional EUR 200 million to EUR 250 million charge against our full year expectations. However, these measures did not come to pass, and we actually no longer see gas curtailment as probable in 2022. The new LNG terminals are seeing good progress and storage levels are over 95% here in Germany.

Policy driven and price indiscriminate buying for storage drove up the cost of natural gas in Q3. Although hedged to a high degree, the open portion of our gas and power portfolio increased so much in price that it impacted profitability in our segments. Overall, the third quarter saw more than EUR 300 million higher costs than last year for raw materials, energy, and logistics. Today, the natural gas market, as a result the power market, continue to reflect the ongoing uncertainty over future supplies and risks stemming from the ongoing war in Ukraine. Yet, what we see is that the rush to fill the gas storage has now slowed and prices in Q4 are sequentially lower than in Q3.

Due to the lower-than-expected energy and raw material prices in Q4, we now see 2022 full-year raw materials, energy, and logistics costs rising over last year by EUR 1.3 billion to EUR 1.4 billion and you'll remember in the last call where we mentioned the EUR 1.5 billion flagged earlier. Looking to the next year, forward contracts are still at a record high with some declining during the last weeks. The German government is currently formulating plans for a potential power and gas price cap, but at the moment, it is difficult and it's only to speculate on this until we have final details available.

Now Page 4, looking onto our guidance. Group guidance for 2022 continues to look for EUR 8 billion to EUR 8.5 billion in sales, and we also confirm our EBITDA outlook for the full year at the upper half of the range previously communicated. We expect our full year EBITDA to come between EUR 2.1 billion and EUR 2.3 billion. Despite weakening order intakes, our guidance reflects our ongoing good operational performance, improved pricing in POLYSILICON, and lower than initially expected energy costs in Q4.

Now before I hand over to Tobias, let me touch on the biannual K fair in Dusseldorf, the world's largest plastics and rubber fair that came to an end yesterday. We have been there for many, many decades. And this time, we showcased silicone rubber compounds produced with nonfossil methanol, thus significantly conserving resources. And the further spotlight was on self-adhesive liquid silicone rubber grades for polycarbonate parts and also novel silicone resins for manufacturing motor parts that remained stable at high temperature in electrical applications. A lot of fascinating applications and true innovations for our customers. And here again, you can see the huge potential that lies in the field of silicones.

In the appendix, you will find slides detailing numerous applications presented at the fair, showing, for example, the opportunity that electric vehicles present to Wacker. Tobias?

[Tobias Ohler, executive]

Thank you, Chris. Welcome. I will walk you through the Q3 performance and provide an updated outlook for the full year. Let's begin with the P&L on Page 5. Q3 sales with the group came in at EUR 2.13 billion, supported mainly by price. Gross profit came in at EUR 488 million. The decrease in the gross profit margin from 29% to 23% year-over-year reflects the effect of the top line inflation, inflation in energy and raw materials, and some volume declines as well as the planned turnaround in POLYMERS. These effects find their way through the entire P&L. EBIT came in at EUR 351 million, only EUR 8 million lower than last year. And Q3 EBITDA was EUR 457 million, slightly ahead of last year, despite significant headwinds in raw materials and energy costs. Net income for the period was EUR 259 million. Earnings per share amounted to EUR 5.08.

Moving on to Page 6, the balance sheet. Our balance sheet came in with a higher equity ratio of over 50%. Shareholders' equity is now nearly EUR 5 billion, up from EUR 3.1 billion at the end of last year. The improvement in equity was primarily due to higher earnings and a significantly lower pension deficit following a higher discount rate. Our pension liabilities are now at EUR 690 million and roughly EUR 1.1 billion lower than at the end of 2021. Although discount rates climbed sequentially, the pension liabilities shown in our balance sheet have slightly increased since the end of Q2. We have reached an asset ceiling in the funded part of our pension liabilities. [indiscernible] assets now exceeds the pension benefit obligation at current discount rates. However, the remaining unfunded pension liabilities on our balance sheet increased slightly due to the adjusted pension increase assumptions from inflation.

Working capital increased by some EUR 560 million to EUR 1.8 billion over the year due to high sales figures and raw materials. SILICONES delivered a strong performance. Q3 sales were EUR 890 million, 31% higher than last year. Over the year, sales benefited from higher prices and an improved product mix, reflecting a higher share of specialties. Sales growth was strongest in health and care, industrial, and adhesives. Segment SILICONES also benefited from a stronger dollar. SILICONES EBITDA in Q3 was EUR 198 million. Earnings were up 23% year-over-year. The result was supported by positive price effects.

As Chris mentioned, SILICONES benefited in the first half of the year from a very strong global supply and demand and some trailing raw material effects. In Q3, though, global supply and demand for silicones tilted towards oversupply. As a result, prices for standard products fell considerably. At the same time, inventory effects and rising costs for energy and raw materials weighed on profitability. With a 22% margin, our SILICONES business performed well despite the headwinds. We continue to pursue our growth options, focus on specialties, drive specialty content, and meet customer demand in new markets. Looking into Q4, we see stable pricing in specialties with slightly lower volumes and seasonality. For the full year, we see sales at EUR 3.5 billion and EBITDA reaching EUR 900 million, confirming the lower end of our previous guidance range.

POLYMERS achieved Q3 sales of EUR 504 million, up 8% over last year, primarily due to higher prices and positive currency effects. Sales declined due to lower volumes in construction-related applications and the impact of our turnaround in Q3. Q3 EBITDA came in at EUR 60 million, about 29% lower than last year. Lower volumes, significantly higher raw material and energy costs, and the planned turnaround contributed to the decline. Taking all this into account, we updated our POLYMERS outlook for 2022. Towards year-end, we expect to see seasonality and slower destocking. We now see about EUR 2 billion in sales, about EUR 100 million lower than our previous outlook. Our EBITDA margin outlook is unchanged. We expect it to be at last year's level.

BIOSOLUTIONS reported nearly EUR 90 million in sales with growth in bio-ingredients. Our business with cysteine performed exceptionally well. One of our BIOSOLUTIONS research teams won the Alexander Wacker Innovation Award in July. They found a way to boost the productivity of our fermentation process. This development will support our BIOSOLUTIONS growth part.

We're also progressing at our CDMO business in microbial and advanced pharma like mRNA and pDNA. The construction of our biotechnology center in Munich and our mRNA competence center in Halle are on schedule. The Halle site is part of the German Pandemic Preparedness Plan, and we will be Good for Order here already in 2024. Our growth initiatives require continued investments and higher upfront costs related to new business development and integration costs. These effects weighed on profitability in the third quarter with EBITDA coming in at EUR 4 million. For the full year, our BIOSOLUTIONS forecasts are unchanged. We see a low double-digit percentage sales growth and EBITDA significantly below the prior year.

POLYSILICON continued to see high demand. Q3 sales came in at EUR 619 million, 51% higher than last year. Improved pricing for solar materials was a key driver with some ongoing positive mix effect due to growing semi volumes. Inventories remained at very low levels. Q3 EBITDA at POLYSILICON came in at EUR 191 million. Results declined versus the previous quarter following substantially higher energy and silicone [ metal ] costs. Solar pricing is firmer for longer than we initially expected. With continued strong demand for solar and semiconductor products, we updated our forecast for POLYSILICON. We now expect sales to be about EUR 100 million more than before at about EUR 2.2 billion for the full year. We now see EBITDA at the top end of our previous range, plus around EUR 850 million.

Looking at the net financial position on Page 11. We recorded net financial asset of nearly EUR 400 million at the end of September, up from EUR 120 million at the end of June. Gross cash flow was sequentially much higher due to a release in working capital, reaching EUR 912 million at the end of September. Cash flow from long-term investing activities reduced our cash balance by about EUR 500 million, reflecting our strategy of investing in growth and mix improvements. The year-to-date position also includes the acquisition of the majority of Sico Performance Materials. And as a reminder, M&A always comes on top of our full year CapEx guidance.

On Page 12, our updated group guidance for 2022. Let me repeat what Chris said about our guidance. We see full year sales between EUR 8.0 billion and EUR 8.5 billion. Following a strong operational performance, we expect our full year EBITDA to be between EUR 2.1 billion and EUR 2.3 billion. We no longer include the EUR 200 million to EUR 250 million provisional charge against our full year expectation introduced last quarter. For the full year CapEx, we now expect to be at the lower end of our previously communicated range.

We understand your desire for 2023 guidance. From today's perspective, the next year will have its own challenges. Uncertainty and inflation surrounding energy costs as well as emerging signs of recessions in some regions limits our visibility. Discussions with our customers show concern about volumes in the next year, but also confidence about resurgent growth beyond 2023. As you are aware, the German government is formulating new regulations to cap the price of gas and also potentially of electricity. Until we know the details, it's not possible to forecast what benefits that might have.

Looking at our forecast and plans for 2023, I believe that given the many moving factors we should stick to our usual approach to guidance. We'll wait for the first month to play out before we communicate our guidance as we publish our full year 2022 results in March next year.

With this, I give back to Chris.

[Christian Hartel, executive]

Thank you, Tobias. And ladies and gentlemen, before we get into the Q&A, let me just say a few words following Tobias's presentation. You will certainly remember the core messages from our Capital Market Day this year earlier in March, focusing on growth, pivoting more towards specialties while improving our resilience. And looking back into the last years, we have delivered on that promise. We have actively implemented measures to improve our resilience. And I would like to remind you on our Shape the Future restructuring program that we already started in 2019, and that covered about a thousand different initiatives delivering this year EUR 200 million gross savings versus our 2019 cost base.

So we stand on a very strong financial footing with a very strong balance sheet. We now show a cash pile of close to EUR 2 billion and [ has ] a negative net debt. Our balance sheet also benefited from a massive reduction in pension liabilities. Today over EUR 1 billion less than at the end of last year, resulting not only from interest rate changes, but also from repeated contributions above and beyond IFRS requirements. Our portfolio now focuses on higher value-add specialty products, supplying services beyond materials in all our major businesses. We now have less exposure to volatile commodity markets than in previous economic downturns. We optimized our hedging program, and we prepared for fuel alternatives. Our ongoing initiatives, efficiency programs, and many other smaller day-to-day initiatives make us stronger. And as I keep telling our employees, we want to be the architect of our success with our entrepreneurial spirit. All of this positions us well as we face a period of higher uncertainty and potential economic turbulence. Joerg?

[Jörg Hoffmann, executive]

Thank you. Operator, we're now ready to begin with the Q&A.

[Operator]

[Operator Instructions] And our first question is from the line of Charlie Webb from Morgan Stanley.

[Charles Webb, analyst]

Maybe just first on SILICONES. As you think about, obviously, standards seeing some price weakness given maybe some oversupply in China and some weaker demand, how do you think about that relative to, obviously, still very favorable specialty pricing? Is it normal that those should converge over time? And are you seeing any kind of, I guess, certain customer groups pushing for some lower prices on the specialty side? That's the first question.

And then second, I know you said obviously not to guide for next year. But just trying to think about BIOSOLUTIONS. You obviously set out a EUR 250 million number over the medium and longer term. If we think about the ongoing restructuring charges, ramp-up costs, et cetera, that business [ has based ] pretty much ever since 2016-'17. The earnings haven't really gone anywhere. And we've obviously talked about scale and other factors that have played into that. But just any sense you can give us in terms of some of the moving parts as we look ahead as to why we -- and how we're going to see that EUR 250 million start to emerge? I know it's not linear. I know it can be a bit lumpy. But just trying to understand what's going on in that business that's held it back so much over the last 5 years that we find ourselves with EBITDA lower than it was in '17.

[Christian Hartel, executive]

Okay, Charlie. This is Chris. I would start with the first question -- your question on SILICONES and the decrease in pricing, which we see there, especially in China. And I think we had that question also in the last sessions. You [ referred to ] the relation between standard and specialty pricing. And well, there is definitely not a one-to-one relation between standard and specialty pricing. And the main reason for that is that these specialties are typically tailor-made products for our customers. They are typically less replaceable, and they typically also have a much higher value contribution to our customers.

So from that perspective, there is no direct correlation of standard pricing. Of course, some customers use it as an argument in the negotiations on the pricing. And typically, that might have an impact. But again, the key message here, we don't see a one-to-one relationship between standard pricing and specialty pricing, and that's also the reason why we focus our strategy on the silicone specialties.

Second question on the BIOSOLUTIONS. Well, BIOSOLUTIONS is at a much earlier stage in the development compared to our chemical business, POLYMERS or SILICONES, which means we have to invest more, both in capacities also in capabilities. And that means, at the moment, we are in a phase where we invest more, we have higher costs, and we mentioned that, for example, on the aspect of digitalization for our processes, we do some significant investments. We just acquired the business in the U.S. for the pDNA. We are working, we are investing on the Halle site for mRNA for the German Preparedness Plan. So all these projects, they pay in that growth strategy. And well, it just takes a little bit more time, but we are definitely absolutely on track, and there's nothing which is holding us back.

[Charles Webb, analyst]

Just following up on the latter point. You've been investing in this business quite a lot; I would argue since 2016. And we haven't really seen, at least in terms of earnings, we haven't seen that real ramp-up. I understand, obviously, we have seen some sales growth. But how can we bridge to that EUR 250 million number? At what point will we really start to see these investments come through? Are we talking in 5 years' time? Is that -- is it a 10-year investment cycle before you see it? Or again, it's quite hard to see the road ahead for this one after what's been another tough year.

[Christian Hartel, executive]

No, I think, Charlie, we made a clear statement also on the CMD that the growth will come gradually. It will definitely not be backloaded, so to speak. And most of these businesses are in the pharma world. And the pharma world is not a business which you have from one day to another. You have to build up. You have to work on these projects. And I can tell you, we have a pretty filled pipeline of very interesting and promising projects, and they will come to fruition in the next quarters. It's a gradual growth.

[Tobias Ohler, executive]

Charlie, Tobias here. So to add to what Chris said. With our acquisitions, we typically have the experience that as we buy rather at moderate prices where we can add with our technology, with our customer access, we expect it normally to be after 2 years that we really see a trajectory of additional sales that we create. That's number one.

And to illustrate that a bit also, take our Pandemic Preparedness Project in Halle. This is a fast-track project, and we'll see a Good for Order, as I said in my speech part, already in 2024. So as Chris said, it's gradual. It won't be backloaded. But yes, it takes some time.

[Operator]

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

[Jaideep Pandya, analyst]

The first question is really around the burning topic. Chris, you obviously are very important for the European renewable industry. And Europe is talking about a 30-gigawatt market right now, which at least on paper will be difficult to do without Wacker. So how are your discussions going with regards to getting an industrial power price? And how far are we or have we come to a point where you are willing to go back to the drawing board and say, "We want to invest in polysilicon because we are getting good prepayments. There is customer interest, and the authorities and the governments are willing to give us support on the power price." Are we closer to that, or is this still a farfetched dream from your point of view? That's my first question.

The second question is really around the energy bill that you guys have. Now I know you're 2/3 hedged as of today. Could you give us some color if spot prices were to prevail, what delta are you looking at with regards to the energy bill for '23 versus '22?

And then just a final question. I know you're not going to like this one, but if I just take your guidance for Q4 and multiply it times 4 like a dumb analyst, I'm significantly above consensus for 2023. [Technical Difficulty] those cautionary things that are not even in the Q4 of '22, which we should be thinking of for '23.

[Christian Hartel, executive]

Okay. Jaideep, this is Chris. I would start with the first topic on what you call the burning topic. And well, rest assured, we do a lot on that matter. And we just recently joined forces with other players in the European solar space and addressed very openly and very frankly to the EU Commission that they should speed up the whole process. And I think they got a pretty good understanding on that, especially as the U.S. is moving so fast with their IRA program. And Europe faces the risk of falling behind. And in that argumentation, we are very clear that in order to make the REPower Europe a success, first, I agree with your statement, we would need Wacker for that. I don't think there will be REPower Europe on solar side without Wacker.

And the second point, which we make very clear is, whereas you need on the -- let's say, on the module and the wafer side, the addition of investment money might be attractive, on the earlier stages of the value chain, like the POLYSILICON, what we do, the OpEx, so the attractive or competitive power pricing is imperative. And I think these messages we convey very clearly to the politicians. And I think they are also taken up very clearly. How far are we away from getting that power pricing? Very difficult to judge. But I can tell you that we do everything which is in our power, joining forces with other people that it will get implemented soon.

[Tobias Ohler, executive]

Jaideep, Tobias here on your question around energy, I'll take it broader around 2023 house energy and raw materials [ demand ], as a cost of developing, I think as we communicated, we are already hedged for about 2/3, but '23 hedging rate is -- or hedging ratio is lower than today. So we would expect a further increase in energy cost, obviously. But when I look at today's futures, that increase would be slower in absolute terms than in 2022. And on the raw material side, normally, what you see in a recessionary environment, you would see a decline. But I would say we are all living in a very dynamic environment. So let's discuss in March when we give our full year guidance. And I would also stick to that when you asked question #3 on the consensus, I think let's look at that when we have the visibility.

[Operator]

Next question is from the line of Samuel Perry from Credit Suisse.

[Samuel Perry, analyst]

Firstly, on POLYSILICON, can you give us some color on what you're seeing on the ground in terms of capacity additions? There's obviously a lot of announcements, but in terms of them being delayed or ability to secure energy. Any color you could give on that would be great.

And then also on POLYMERS, in terms of the contracts, I believe that during this inflationary period, you reduced the contract terms across a lot of products. If we start to see raw materials come off, is there a chance that the margins, and I guess sales in that division could fall quicker than in previous cycles?

[Christian Hartel, executive]

Okay, Sam. So I would start with the first question on the POLYSILICON and the competitive landscape. Well, first of all, let me start by saying that we are seeing a very strong demand for solar panels globally. And you will know that we will be at the top end installation expectations for 2022 with about 250 gigawatts. So very exciting and a very strong growth momentum. And when we talk about the poly capacities, you also need to talk about the wafer capacities and installations. And for 2023, wafer capacities are actually expected to reach 700 gigawatts. So that means there's a lot of momentum.

And in the last call, we also said that the EIA, the International Energy Agency, is also talking about, we need at least 500 gigawatts per year. So from that perspective, we would need some more polysilicon investments. Commenting on these Chinese capacities that are announced, I can only repeat myself saying, a lot of announcements, typically these announcements are much too aggressive, both on timing and both on capacities. So they're building new capacities, and we will need more capacities. But if you ask for how actually these companies will succeed, you have to ask them. I cannot give you a clear answer on this. But what we will see is a further very strong demand for the solar industry, and that makes me positive.

[Tobias Ohler, executive]

Sam, Tobias here. So your question on polymers, we've stated that our prices have moved up with the VAM cost moving up and that we had some formulas for that also in place. So we committed also to our customers when VAM prices and costs come down, that it would benefit. But obviously, we have other cost items also going up, when we discussed largely energy, we discussed logistics. So we try to really, yes, bring this also into the discussions to our customers as we want to keep our profitability also to be ready for investing in more capacities as this is a growth market.

So I would not see any margin impact if VAM comes down because we have, yes, our pricing strategy in place. But I'm not guiding for next year, but obviously, there's a good approach to our customers really that we offer the value and we must also cover the additional cost, but we let them also benefit if some of the costs go away over time.

[Operator]

The next question comes from the line of Mubasher Chaudhry from Citi.

[Mubasher Chaudhry, analyst]

To start, the updated guidance of EUR 1.3 billion to EUR 1.4 billion in terms of energy and raw material headwind in 2022, how much of that has been achieved in the first 9 months, please? And then secondly, how much of the energy purchases for the fourth quarter are still open? You say you're substantially hedged. I just wanted to [ see ] if you go to a number around how much is open.

And finally, around the German gas cap. Any comments around whether you're eligible for it? And if you would be, would you want to take that help given that there is a chatter around being -- or inability to pay dividends if someone was to go for the state aid. Just some comments around that would be helpful.

[Tobias Ohler, executive]

Mubasher, Tobias here. Starting with the first 2 questions on our raw material, energy, logistics headwind. As we stated before, headwind in the first half of the year was more than EUR 600 million and more than EUR 300 million now for the third quarter and just take those numbers not literally, but if you add a similar number to Q4 -- for Q4 to the full year numbers, you get into the range of EUR 1.3 billion to EUR 1.4 billion in total headwind for raw materials, for energy, and logistics.

To your question on the hedging for Q4, we normally don't give that detail on such a short time period. But we always said that we are largely hedged, but we are not fully hedged. That means that we have some open also demand that we are currently buying at lower prices in the spot market. But I can't give you the detailed numbers for this.

[Christian Hartel, executive]

Okay. And Mubasher, this is Chris. On the topics of gas cap or potential electricity cap, well, twofold answer. first of all, I think at the moment, it is too early really to judge or to calculate anything specifically also for us because it's not yet clear. There are different ideas and concepts in place. I would like to give a general statement to these concepts. I think these concepts, both in Germany and in Europe, helped to soothe a little bit the markets. The nervousness in the markets got a little bit away from that. I think that is definitely positive. And I also think it is pretty helpful not only to support individuals, but also companies. But let me say, as I'm also Head of the Bavarian Chemical Association, and we have 60,000 people in Bavaria working for the chemicals, 450 companies, and many of these companies are really small or midcap companies with less than 100 people, which obviously don't have an energy procurement group like we have. So they are much more exposed to these energy markets and have a huge burden and risk. And I think it's a good idea to help these companies.

Talking about us and how does it affect us, well, as I said, it's not yet clear what will actually come into place. But my statement from the beginning, we want to be the architect of our success. So we don't want to rely on others, and that's the reason why we work very diligently on all these countermeasures for saving energy, but also for introducing fuel switch measures, which are now ready to go, and we have a very inspiring and great team with a lot of entrepreneurial spirit that is working on that.

And as we also said, we are 2/3 hedged for next year. So from that perspective, again, it is too early to judge what it would mean for us. You mentioned the topic of these government tariffs, if you want to call them, might be linked with some sort of influence on your dividend policy. Again, here, we want to be the architect of our own success, and I'm a little bit concerned if somebody else than the company itself and the shareholders talk about dividends. So I'm reluctant on that topic.

[Operator]

The next question is from the line of Chetan Udeshi from JPMorgan.

[Chetan Udeshi, analyst]

I'm a bit puzzled by your guidance on energy costs because, on one hand, you kept saying that the 2022 is largely hedged, and yet we've seen the number for energy and raw material cost guidance being cut by I think EUR 150 million. So can you explain what is driving that? Is it the raw material prices which are coming off, or is it energy, which is driving that reduction in the energy cost? And what have you actually assumed in Q4? So, let's say, if the energy prices were to go from EUR 100 per megawatt hour to EUR 150 or EUR 200 again, what does that mean for numbers in Q4? That was the first question.

The second question was more around the SILICONES. Can you talk about what you see now in terms of the order momentum? You talked about weaker book-to-bill in Q3. Is that still continuing as we speak? Because if I back out what is implied in the guidance for Q4, it seems you are assuming more or less a seasonal decline from Q3, nothing worse than seasonal when, frankly, some of the other companies are talking about really worse than seasonal trends.

[Tobias Ohler, executive]

Chetan, Tobias here. I'll start with the first question on the energy and raw materials. As we said before, the unhedged portion saw significant inflation in Q3 as the markets were really going crazy in some weeks. And we -- with that view, also looking at those numbers daily, we were very cautious about the Q4. And now we see that markets are still at a high level, if you look into next year, into first quarter, but they have, yes, moderated for the spot portion that we could still buy with our hedging not being at 100%. And that is the effect that we have now also considered.

In addition, you are right, raw materials have -- in some areas we talked about VAM before have declined. And if you put that all together, we have reduced our assumption for raw materials, energy, and logistics from the order of magnitude of EUR 1.5 billion to something between EUR 1.3 billion and EUR 1.4 billion.

[Christian Hartel, executive]

Yes, Chetan, on the SILICONE, since you asked for the order momentum, where we do saw some decline in the order pattern, especially in the Q3 or the beginning of Q4. But it looks like these destocking effects, which were prominent in Q3, are less pronounced now in the Q4. And, well, I cannot talk obviously for other companies, but as we said also in the beginning, we do have a high share of specialty business. And here, we see a firm order pattern going forward. And that makes us confident that our guidance for Q4 is pretty intact.

[Operator]

The next question is from the line of Geoff Haire from UBS.

[Geoffery Haire, analyst]

I just had one. Clearly, you're sitting with net cash on the balance sheet. The pension deficit is obviously coming -- well, has come down over the last year. Just wondering what your thoughts are around capital allocation and use of that capacity you have on the balance sheet to either return money to shareholders or what are the plans for it.

[Christian Hartel, executive]

Yes, Geoff, on the -- if I understand your question correctly, that is on the dividend policy. Well, we do have a dividend policy in place. We always look, of course, at the overall economic situation. And typically, that's what we're doing in the first quarter of every year. So it's too early to actually talk about dividends. And, yes, on the share buybacks, I think that's something we've been also very clear on that. It's not something which we can do.

[Operator]

The next question is from the line of Rikin Patel from BNP Paribas Exane.

[Rikin Patel, analyst]

Just one on volumes. On the group level, I think you reported a 3% decline. I just wondered if you could maybe quantify the headwinds in polymers and commodity silicones. And then secondly, on CapEx, you're guiding to the lower end of the range now. Just wondering if you could give us a sense of why you've now lowered that amount and whether we should be shifting that EUR 50 million or so into 2023.

[Tobias Ohler, executive]

Rikin, it's Tobias. On the volumes, we don't split that exactly by segment. But I can tell you that volumes in SILICONES and POLYMERS were below prior year. I think we talked about that destocking journey over the third quarter. And in POLYSILICON, we are running at full capacity. And if there's any deviation in sales volume between 2023 and -- 2022 and '21, sorry, it's only about inventory effect. But right now, we are, yes, close to empty in inventory in POLYSILICON. So everything that is produced is sold.

And for the CapEx guidance, yes, look at the number that we had last year. So we, yes, increased our CapEx program along the lines of our strategy of accelerating growth. But in some projects, there were smaller delays. It's not that we are not willing to go forward. It's just by the massiveness of the increase that we are not -- year-to-date, we are not at a CapEx number that we believe that we can still reach the upper end of the CapEx guidance, so we lowered it to the EUR 550 million number for '22.

[Christian Hartel, executive]

And Rikin, if I may add this, also, we see the -- especially in the beginning of the year, there were some shortages of equipment deliveries actually and also of qualified personnel that we [ phased ] with these increased budget, so that's also the reason why it's lower. And yes, as we didn't stop any projects, it is fair to say that these amounts will be seen in the next year.

[Operator]

Next question is from the line of Sebastian Bray from Berenberg.

[Sebastian Bray, analyst]

I have 2. The first is on CapEx for 2023. It follows a little on from Rikin's question. But if Wacker is spending EUR 700 million to EUR 800 million a year or maybe a little bit less than that, but around that, that's quite a lot. And I'd just like to understand which growth projects in particular this is going to. I read a press release 2 or 3 months ago about the expansion of Halle, which I don't know is yet approved, but I think is due online in 2025. I'm referring to the silicone metal furnace. How big is this investment and what other big investments for the next 2 or 3 years?

The question related to that is, is the Dow JV for Siloxane at Zhangjiagang in China going to be expanded at some stage? Are you in discussions on that, or is it off the table?

And third question finally on dividends. You referred to the dividend policy of 50% of EPS. I'm wondering, are you going to adhere rigidly to this, or are you thinking about being more or less daring potentially, even implied by the 50%?

[Christian Hartel, executive]

Okay. Maybe Sebastian, it's Chris. I'll start with the first question, same answer as I gave before. There is a definite policy in place. And we look at the overall economic situation, and that's something which we do together with the shareholders in the first quarter, and that's the time to talk about it.

Second question was on the Dow Siloxane expansion. Yes, we have the joint venture in China. The majority is with Dow, so probably the best information you would get from Dow, if they want to expand. We are always interested in business cases that make sense, and it's a world-class client. So from that perspective, we are always looking for good opportunities.

[Tobias Ohler, executive]

And with respect to the CapEx question for 2023, the biggest project that we pursue right now is silicone specialties, the semiconductor capacity for POLYSILICON, and then the biopharma activity in Halle, the Pandemic Preparedness Plan that we talked about where we want to achieve a Good for Order in 2024. You asked a question about the Halle project. This is not approved yet. And for that reason, I can also not give you any number on the investment.

[Christian Hartel, executive]

And in the -- this is Chris. As we published this project, we are in a pretty early stage, and we have to look at it, and that's the reason why it's not yet approved because it's not yet in the stages of being approved, but it's definitely one of our high-priority projects going forward.

[Operator]

The next question is from the line of Markus Mayer from Baader Bank.

[Markus Mayer, analyst]

Two questions from my side. Firstly, a modeling question, this plant turnaround you had in POLYMERS, could you quantify the effect that you see? What the underlying earnings have been? And the second question is again on the POLYSILICON division. It looks like that's becoming more positive on the sustainability of the current POLYSILICON price level. Besides the pretty strong demand, was there any other change which has driven this changed view? That's the 2 questions I have.

[Tobias Ohler, executive]

Markus, Tobias here. On the POLYMERS turnaround question, I can explain that the 2 effects that weighed on our P&L were both technical spending and the additional external spend for procuring the VAM that we would have produced on our own. And if you take that together and if you compare EBITDA of Q2 to Q3, it's about similar magnitude that is just created from that plant turnaround in that quarter.

And on POLYSILICON, our change in guidance comes from 2 elements. We see that strong prices hold very firm for longer. So we had baked in some moderation before. And the second is we see now, yes, a lower energy burden than initially feared, I would say. That's the point that we had discussed before. But apart from that, we are running full, so we have no stock. So there can't be -- there's no other moving factor I can use.

[Markus Mayer, analyst]

Okay. But just what you said on POLYSILICON [indiscernible] for Q4, that's nothing -- not a effect we would also then repeat for 2023 or beginning of 2023.

[Christian Hartel, executive]

But, again, as we said, Markus, we see a very strong demand on the solar side. I mentioned this 700 gigawatts for the wafer capacity is being installed, which would equate to 2 million tons of POLYSILICON. So we see a very strong demand in Q4 and going also into the next year.

[Operator]

The next question is from the line of Thomas Swoboda from Societe Generale.

[Thomas Swoboda, analyst]

I have 2 questions left. Firstly, on POLYSILICON. I must admit I remain puzzled by the phasing of the earnings in this segment. So maybe you can help me with was there any nonrecurring events in this segment in the quarter? I'm specifically thinking, did you reduce the production rates in Europe or even stop production during the quarter because of the very high energy costs? That's my first question.

And the second question is on your guidance regarding raw material, energy and the logistics headwinds. Could you give us at least a rough split what do you expect for each of those drivers? I'm especially interested in energy.

[Tobias Ohler, executive]

Thomas, Tobias here. I'll start with the second one. As we mentioned before, our energy cost is doubling from '21 to '22 or a bit more, so that portion is – EUR 450 million was a number in '21. So you can make an estimate what comes from energy. So majority of the headwind is still from raw materials.

To your first question, the phasing of the POLYSILICON result, I can definitely confirm there's no change in production rates due to high energy costs, no way. And you look at it sequentially, from Q2 to Q3, we see higher energy and raw material costs. Energy market really spiked in that quarter. These were more or less compensated by higher sequential selling prices. And there was a tiny special effect that was helping us a bit in Q2, but it is not of the magnitude that we would report it, but that explains the last difference to that.

[Thomas Swoboda, analyst]

That's really helpful. Maybe if I can sneak in a follow-up. Again, on POLYSILICON, I'm still trying to get my head around it. Your energy hedging, is there a possibility that your hedges or the degree of the hedging you have differs from quarter-to-quarter. So in other words, you were less hedged on Q3 than you were, for example, in the first half of the year. And again, your hedging rate is higher for Q4. Is this something to think of, or is it completely off limits, something like that?

[Tobias Ohler, executive]

I think it goes too much into details. I think it's -- typically, the winter quarters are slightly higher in hedging ratios, but that is mainly applying for gas. But also our demand is different, and so we consume more in winter than summer. I would leave it there. I think it's not something that's really driving any quarterly movement between -- quarterly movement in the POLYSILICON division.

[Operator]

We have a follow-up question from Jaideep Pandya.

[Jaideep Pandya, analyst]

Yes. The first question really is around your guidance -- sorry to ask you this -- between EUR 2.1 billion and EUR 2.3 billion. So what gets you to EUR 2.3 million? Because when I add up all your bottom-up guidances, I come to EUR 2.1 million. So just wondering what gets the EUR 2.3 million number going.

[Tobias Ohler, executive]

Okay, Jaideep, Tobias here. On the guidance, I think I wouldn't agree entirely that you end up at the bottom end of the range. So if you take our segment guide, and you don't take them literally, it all adds up, that you end up within the range. Here, I would agree rather in the lower half of the range. But as I said before, don't take it literally. So I think I would also confirm that the midpoint of the guidance is, from today's perspective, more likely than any extremes. So more likely than the low end and more likely than the high end. And yes, we have 2 months to go, and we see how we come out in 2022.

The year will be financially very successful. We will have a records [ updates ], we will have a record EBITDA, and we will have another strong cash flow after 2 years of strong cash flow. If you add up all the cash flow over 2020, '21 and '23, I think you come to a number of around EUR 2 billion. So yes, we will end with a strong balance sheet, as we discussed, and we will discuss guidance for next year when we are in the period of talking about full year results in March.

[Jaideep Pandya, analyst]

And just one more follow-up really around your balance sheet and around the original question Charlie actually asked on BIOSOLUTIONS. Chris, are you saying that even on a 12- to 18-month view, you don't want to spend big ticket money on BIOSOLUTIONS to beef up this division to at least jumpstart towards the EUR 100 million range, given the fact that your balance sheet is so strong, and you already have fairly large investments earmarked and still you're generating so much cash? So what is stopping you from signing a big check?

[Tobias Ohler, executive]

Well, Jaideep, I think we pointed out that we have a very clear strategy here in place. We look for the right opportunities. And regardless of how stable or strong our balance sheet is, we will not overpay for opportunities. And that has always been our strategy, and we will continue with this. And we do have projects in the pipeline, rest assured. And if the time is right, we will communicate on them. We do see BIOSOLUTIONS definitely as a big growth opportunity for this company. We're looking at the opportunities, and you will see more coming up. And let me finish. It's a great company. Wacker is a great company with a great future, and we want to be the architect of our success.

[Jaideep Pandya, analyst]

Great. So quickly get that industrial power price.

[Tobias Ohler, executive]

Yes. Sure.

[Operator]

This concludes our Q&A session, and I hand back to Joerg Hoffmann for closing comments.

[Jörg Hoffmann, executive]

Thank you, operator. Thank you, all, for joining us today and for your interest in Wacker Chemie. Our full year conference call is scheduled for March 14 next year. In the meantime, please don't hesitate to contact the IR department if you have further questions. Thank you.

[Operator]

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