Earnings Call: Q3 2020

Oct 29, 2020

Welcome to the Vaca Kimi AG conference call on our Q3 2020 results. Doctor. Rudolf Staudigl, our CEO and Doctor. Tobias Ola, our CFO will take you through our prepared slides in a minute. The presentation is available on our website and the discussion in Investor Relations. Before we begin, allow me to point you to a safe harbor statement, which you will find at the slide deck's beginning. Doctor. Staudigl? Ladies and gentlemen, welcome to our conference call in 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 1,180,000,000, up 10% from Q2 and 7% below last year. EBITDA came in at €191,000,000, 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 years 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. Lecon's gained momentum as the quarter progressed and As a result, almost all our units are now back to full production. During the quarter, we of cost controls, improving shipments, lower CapEx and working capital measures drove net cash flow to EUR296,000,000, 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 incrementally, we strive for bigger progress in our cost base. We initiated our shape to 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. 1,000,000, starting by the end of 2022. We expect to benefit from indirect spend savings to the tune of more than 1,000,000 already this year and expanding to over 1,000,000 next year. We expect 1st savings in personnel costs next year. We will book a mid double digit million provision for our program in the 4th 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. 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 and L. Overall, so a much stronger performance than Q2 and exit rate in most areas where at last year's level or better. When comparing year over year results, please note that last year's numbers included a 100 and EUR 12,500,000 polysilicon insurance payment in the costs of goods sold line. Adjusting for this effect Our operating results show a good underlying improvement year over year. SG and A declined by about 10% as our efforts reduced costs took hold. Depreciation fell to €100,000,000 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 70,000,000 of headwinds. Despite these, we were able to report a 19% year over year increase in operating EBITDA up 1,000,000 to 100 and 1,000,000. 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 1,000,000,000. Pension liabilities stand at 1000000000 when adjusting for our related deferred tax asset of 1000000000. Nevertheless, this increase reflects a growing mismatch between our average cash outs to fund and service the pensions of about €100,000,000 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 548,000,000 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 automotives. Silicones EBITDA in Q3 came in at 1,000,000, trailing last year by 29%, but a third better sequentially. Utilization rates improved well over Q3, but 1st 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 was at about the previous year and the 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 1,000,000 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 disposable polymer powders and no 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 Bio Solutions 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 1,000,000 About half of the previous quarter as Q2 benefited from a EUR4 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 plant expansions and Amsterdam underway. Polysilicon on page 9 saw strong solar volumes and increasing prices over the quarter. Days came in at 1,000,000 almost 40% over Q2. EBITDA improved sequentially to 1,000,000 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 1,000,000 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 100 and 40 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 EUR455 million. E contributors to this strong development where our operational performance which benefited from improving shipments and strict cost control and much lower CapEx. Looking specifically at Q3, we generated EUR296,000,000 in net cash flow, up on the 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 1,000,000 working capital. Included in this figures are 1,000,000 from lower inventories in chemicals and polysilicon, which we achieved despite having short time work in many areas in the early declined to EUR 309,000,000, putting us in a very solid financial position with over 1000000000 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 from 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 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 we expect overall full year lower sales and EBITDA than reported last year, while net cash flow should be much higher. Our full year 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 and 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 Rudigand. Yes, ladies and gentlemen. Allow me to recap the achievements of this last quarter. Polymers come in with a strong V shaped recovery and presented record results in Q3. As the market leader in VIE, 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 to this performance. Silicones So 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 1213, looking at longer terms, 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 Walker 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 0 emissions by 2 1060. Last week, Japan joined and wants to be climate neutral, by 2050. To realize these targets, 1,000,000,000 of dollars will need to be invested in renewable energy emobility, smart construction, and the technologies of the circle for the Circular Economy. Vacker has ideally placed a benefit from a broadening set of climate ambitions with its portfolio of innovative technologies. While Vaca 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 Capital Market Day series. We will explore how silicones and polymers enable carbon dioxide abatement technologies in smart construction, immobility, and the like. Ladies and gentlemen, the coronavirus is still prevalent. As infections rates rise again, we need to remain vigilant. Health safety of our employees while maintaining deliveries to our customers is our highest priority. Lock downs and other disruptions remain a real risk. We have taken an important step towards implementing our so called shape the future efficiency progress. Our new leaner organizational structure will help Vacker provide better services to our customers and will support the company's profitable growth. Our presentation ends here. We will now begin with the Q And A session. Operator? And we will take our first question. Please go ahead, Mr. Heine from MainFirst. Thanks for having the opportunity to ask questions. I have a couple of The first is cash flow. It was indeed very strong. Well, the heavyweight of CapEx is in Q4. Do you think you can keep this, strong cash generation you had in the 1st 9 months to 12th month period related to this, having this very strong balance sheet in mind. There's only 300,000,000 net debt, and liquidity of a 1,000,000,000. How do you think about the dividend policy going forward. Then on CapEx, it was cut a lot this year to 250,000,000, but giving that you are do not intend to invest in heavy upstream investments and that the rubber, the red silicon rubber expansion comes Graham, how, do you see your CapEx budget midterm? And last but not least, Mauricio Moore, on the Amsterdam capacity is that, the investment you're running, they're really an extension. I read that the new reactor will replace the older one. Which looks more than a refurbishment rather than an extension. These are my questions. Andreas may add that to be us 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 not to the extent that we have seen, before. On the CapEx, your question was about the €250,000,000 in this year. And now does it compare to, yeah, CapEx levels mid term. We always had guided that we would get close to €400,000,000, 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 region expansion in South Korea that now gets, yeah, in short time fully loaded, we just announced in, in China, another expansion for polymers. So a good level would be closer to, €400,000,000 on average for the next year 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. Yes. Yes. But 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 supervisor report and to make a a good proposal, to the general assembly, at the right time. And this is exactly how we we deal with this time as well. Again, We will take our next question from Mr. Wigginsworth with Citi. Good afternoon, gentlemen. Thanks for the opportunity to ask a few questions, if I may. Just focusing on the on the performance in silicones, obviously, quite a change in margin through the quarter. Was wondering if you've clearly given us an indication of how the market tightness is, but could you give us a sense of of how the margin performance is exiting 3 q and starting 4 q. That'd be very helpful. And then, secondly, on on polymers, you've you've cited, obviously, a catch up effects on volumes. So could you just help us break down in that 2% sales growth for the, for the third quarter, you know, 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. Thank you. 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, 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 I wouldn't, argue against, a continued strong demand in all the DIY sector with, renovation act activities, running at really high levels in the pandemic and partially caused by the pandemic. So, we consider polymers result into free as really exceptional. For the silicones question, you wanted to go into a very detailed like a monthly run rate also on margin we don't wanna provide this detail. What I can say is that July August, we are still pretty weak months. Sales wise, And, September was the 1st month that came, above prior year's level. When you just look at volumes, But we we are sales wise still below prior year from, lower prices for standard products and for the exchange rate. Okay. That's, that's very helpful. I know it's, I know it's a pretty complicated market at the moment. Thank you, Tobias. Welcome. And we will take our next question from Mr. Swaboda with Society Generale. Please go ahead. Yes. Good afternoon, gentlemen. I have three questions, if I may. Firstly, on on taxes, I mean, you're barely paying any taxes. You're you're actually getting, getting money back That that's great. Don't get me wrong. The question is just, is there a risk that that will bounce back 2021. So should should what what should we expect in the in terms of P and L taxes and cash taxes, please. If you if you could just give a hint, that would be helpful. Secondly, on on the order book visibility, you mentioned it's it's it's low, but, I mean, don't don't take me wrong. We we are in in November how how short is it that that you that you have not not provided a a a guidance That's my second question. And the third question on inventories in polysilicon, I mean, you have you have gone into into the second half of this year with, I think, extremely high inventories, especially in Asia, in polysilicon, Could you 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 a significant drawdown in in q4? Any indication on this would be very helpful. Thank you. Thomas, Tobias here. I'll start with, your third question, on universities in polysilicon. We have had short time work there 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 searches in a very swift way and have it close to our customers. And for that, in Q3, we definitely reduced, inventories significantly. While in fourth quarter, we would expect with all our production plants running up, at full speed again in Germany that we would, have a, a balanced production and, sales volume. On the 4th, on the on the first question on taxes, I think 20 21 is a little bit difficult. 20 is a little bit difficult to understand. 21, I would, calculate with a statutory tax rate of 28%. Alright. And the order order book visibility. Yes. Your your question, on the guidance, of course, we we discussed that, at length, But on the other hand, as you know, the visibility is is not, is not very high. And, you know, with the newly announced lockdowns in in Germany and in France and, in industrial parts of, of Spain, for example, it's it's just, it's uncertain And, and that's the question. So we really only want to give, a guidance when and 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, the level of business improved significantly towards the end of the quarter. Started, with that, into the fourth quarter. And, so we are, 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. Understood. Could you share with us what is your visibility in silicones? How much books, how much visibility on your book do you have? We we don't want to go into too much detail, but, we told you that, there was a significant uptake in September and it continued, into October. So things are good. We hope, things will remain good, but we don't know. That's the problem. That's fair enough. Thank you very much. And we will take our next question from Mr. Mayer with Badile Hailea. Please go ahead. Yes. Thank you. Good afternoon, Chipmen. Again, on on this order book visibility 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 polymath. Do you think that if you're now coming in again in your price discussion with the customers that you can, remain the majority of this much improvement or do you expect margin to come down then sequentially next year? So the first question on, disability, Again, as you said, we had seen an improvement throughout, Q3 and especially on the Silicon Specialty side. Volume are much higher than prior year, and this continues into October And, yeah, to give you the last, piece of information I, at least I have, is that the daily order volume of yesterday was also strong. Okay. And on polymers, the margin in Q3 is definitely exceptional. 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 search with our capacity pensions 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 capacity that we are running really also at a very high level in the quarter. And that also explains part of that. So we are not just looking at polymer powders and conversions, but also at a using our own final SSH honor, the VAM. Okay. Thank you so much. And we will take our next question from Mr. Edition with JP Morgan. Please go ahead. Yeah. Hi. I just had one question. It seemed there was some pause like you said, in polysilicon shipments, it it seems there was like a buyer strike that, you know, they weren't willing to pay the the prices that that exist in ballast liquid market in, September. Have have you seen the price has come down and, hence, the volumes have sort of recovered, or have you been shipping at the same prices as in September in policy record? If you look at, these, the the price tracking companies like PB Insights or or the like, then you can see that, of course, there was a spike upwards when when there was the the supply shortage and, the it's only a slight movement, downwards. And I think, this this more or less, or is is the best indication, what, what happened? Understood. Thank you. And we will take our next question from Mr. Haire with UBS. Please go ahead. Yes. Hi. I was just wondering, if you could potentially sort of help with understanding the the build up you saw in demand for polymers. How much of that was the the better margin came from you've been able to, satisfy customer demand because other competitors weren't able to. And also if you could talk a little bit about you see the key drivers being for polysilicon margins going into 2021? Well, I mean, the, of course, the additional output, we were able to to generate in in polymers because of the demand. Of course, had a special effect on, on the margin. I mean, the, let's say, the the additional, volume always the last, volumes always generate, the highest margins of and, you know, with with all our, expansions in in polymers over the last years and just recently, in Korea, it it had a significant, positive effect. I I would say this is, the main one of the main drivers, for, for this, margin development. The the key drivers for polysilicon, next year, I mean, in in solar, it's certainly this additional installation that, that the market expects, up from around 120 gigawatts this year to probably around 160, or almost 160 gigawatt next year, that's certainly, you know, increases the the demand for a very high quality polysilicon. And of course, there is a counter effect that, the the grant per watt that are needed, is will certainly be less next year because of technological developments, but never nevertheless, I think, the demand, will be very good. And, of course, there is the, the very good development of the whole semiconductor space. And, you know, for for everything in this world, everything that is combined with, electronics, from automobiles all the way to artificial intelligence simply needs silicon. And, and needs extremely high quality, a silicone. And, you know, in all modesty, I think, we are the the best supplier for that. And if I could just follow-up what is your assumption for on the return of some of the outages that you've seen in China for next year? 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 every supplier tries to get their facilities pick up and and running, as fast as possible. But on the other hand, yeah, the demand for a 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? But you assume the market will be balanced? We won't go into an oversupply situation again for next year. Yes. Yes, definitely. And we will take our next question from Mr. Bray with Berenberg. Please go ahead. Good afternoon, and thank you for taking my questions. I would have 3, please. The first is a technical one. The provision that is taken in Q4 Is Van EBITDA effective and is it evenly distributed across the segments, I. E. Is the correct way to forecast Vaca EBITDA for Q3 for just to say, this is my EBITDA, and now I deduct 40 or 50,000,000. My second is on polymers margins, to be more specific to what extent is the precedent of 2016 to 2017 when this declined by about 400, 500 basis points peak relevant for 2021. And thirdly, a quick update on battery chemistry. We've seen REC Group 14 now announce fairly significant CapEx into a new silicone anodes facility, how far away is Vocus products from being commercial? Thank you. Sebastian, Tobias here starting with the first two questions. Provision that we will take, for our if the future efficiency program in Q4 will, as you said, be mid double digit 1,000,000, and you should deduct that in EBITDA, it's EBITDA relevant at personnel costs. And most likely, it will be classified in the other slide, dependent upon the auditors' confirmation, that would be the best way to model it. On the second question, polymers, I think the outlook for next year as we're not there yet. I think we do not want to speculate on demand. We do not want to speculate on, on anything on the for the next year. So, yeah, I don't have any piece that I can give you for for modeling the margin for the polymers for next year. Your question on battery, chemistry. I would say that, you're not we we are not further away from, from marketing, our products, then these, these peers. Thank you, operator. Thank you all for joining us today and for your interest in Baca Kimi. We're looking forward to further discussions with you as the quarter progresses.