Dear ladies and gentlemen. Welcome to the conference call of Wacker Chemie. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Joerg Hoffmann, Head of Investor Relations, who will lead you through this conference. Please go ahead.
Thank you, operator. Welcome to the Wacker Chemie AG Conference Call on our Q3 2019 Results. Dr. Rudolf Staudigl, our CEO, and Dr. Tobias Ohler, our CFO, will take you through a presentation in a minute. The presentation is available on our webpage under www.wacker.com, under the caption Investor Relations. Before we begin, allow me to point you to our safe harbor statement, which you will find at the beginning of the deck. Dr. Staudigl.
Ladies and gentlemen, welcome to our conference call. For the third quarter of this year, we reported group sales of EUR 1.27 billion and an EBITDA of EUR 273 million. This result includes insurance compensation. Last week, we lowered our guidance for the full year, as you have seen. Our expectations have declined primarily because prices for polysilicon remain extremely low. Many market experts anticipated a price recovery for solar-grade polysilicon in the second half-year. Our previous guidance reflected this assumption. The average prices for this material have not improved. Instead, they fell further in the third quarter due to overcapacities created by Chinese competitors. A weaker macroeconomic environment holds back our chemicals businesses somewhat. Siltronic's results, recorded at equity position, are also lower compared to last year.
As a result, we now expect EBITDA to come in about 30% below the previous year, compared to prior guidance of 10% to 20% below last year. Our chemical businesses, Silicones, Polymers, and Biosolutions, are all performing well, but are not immune to trade war and macroeconomic effects. Silicones reported an EBITDA margin of 20%, benefiting from growing specialty sales. Absolute EBITDA is less than last year due to lower prices and challenging market conditions and standards. The steady and consistent focus on our specialties business supports the positive earnings trend over the last couple of years. Polymers reported an EBITDA margin of 15%. We continue to see robust volume growth, especially in China, offsetting some weakness in the European markets. The trend towards higher standards for building materials continues. With our global setup, we are excellently positioned to benefit from this development.
Biosolutions saw a pickup in its biopharmaceutical business ahead of our plans. We completed three major CapEx projects during the quarter. Our HDK or Fumed Silica plant is now up and running in Tennessee. This new plant leverages existing site infrastructure and logistics and provides us with valuable material for both captive use and the merchant market. At our silicon metal site in Norway, we completed the world's largest and most efficient silicon metal smelter. Start-up in October was very smooth. Overall, the site benefits from low-cost hydroelectric power in Norway. The carbon dioxide footprint of our silicon metal is also much lower compared to material from coal-based power in China. This also translates into probably the smallest carbon dioxide footprint of our polysilicon and silicones compared to the rest of the industry. In Korea, we completed our 80,000-tonne spray dryer for VAE dispersible powders.
This dryer is by far the largest of its kind and provides us with substantial economies of scale versus our competition. Looking forward, we are going to spend more of our CapEx on the downstream and intermediate parts of the business. These investments will increase the capacity needed for further growth and, at the same time, improve our value creation. We expect to continue to spend about EUR 400 million per year, mostly on growth. We will grow silicones and enhance the quality and size of the specialties business. Right now, we have enough upstream capacities to support our growth, and new opportunities arise when capacity growth in China continues. In polymers, we will continually invest in supporting industry growth. Construction at our new dispersions reactor in Ulsan, Korea is underway. In Biosolutions, the project pipeline built and the Amsterdam facility will soon be fully loaded.
We are looking already to expand our capacities to be able to serve our customers' growing demand. With a strong business in chemicals supporting us, we are taking every step to improve polysilicon. While this presents challenges, we are working relentlessly to improve the business. Tobias will now walk you through the financials, segment performance, and updated guidance.
Good afternoon. I will begin with our P&L on page three. Sales held up year-over-year, despite much lower prices for polysilicon and silicone standards. Much stronger polysilicon volumes, better volume and mix in chemicals, and some positive FX contributed. Gross profit increased by 24%. The key driver to this improvement was the insurance compensation, which was booked into COGS. IFRS standards require to use the same P&L line which was affected by the incident. The equity income declined year-over-year, as sales at Siltronic declined. Net income during the quarter was EUR 86 million, equating to an EPS of EUR 1.67 versus EUR 1.31 last year. Looking at our balance sheet on page four, reported pension liabilities climbed by EUR 300 million since the end of the second quarter. These are effects from quantitative easing and negative returns on the 10-year bonds.
Under IFRS, we are required to use historically ultra-low discount rates for our pension obligations. As discussed last quarter, we are actively taking steps to reduce working capital. Although our working capital is up over the year, we now released about EUR 80 million during this third quarter. We are working with suppliers and customers to reduce this further. Including typical seasonality, we expect another working capital release in Q4. On page five, we show the effects of the insurance compensation on our accounts. As stated before, it was booked in the COGS line in the P&L. For calculating the effect on net income, you should tax it with the German statutory tax rate. In the balance sheet, the insurance compensation has increased the line of other financial assets, as it has no impact on cash flow yet. We expect the cash inflow from this in the fourth quarter.
Because the insurance compensation reflects earnings from prior years, all our 2019 guidance statements continue to exclude insurance compensation. Our reported figures will include the insurance compensation, but our guidance does not. For major items, we will make this transparent. Looking to page six, Silicones achieved sales of EUR 633 million. This is at the level of last year. Volumes and mix, as well as FX, offset the significant price declines. If you recall, the third quarter of last year was very much affected by the then prevailing tightness in the industry. Since then, standard prices have reverted to levels seen in early 2017. Thus, the lower prices and standards are the primary cause of lower profitability compared to last year. Like Q2, efforts to reduce working capital influenced margins and utilization rates. EBITDA in the third quarter came in at EUR 127 million.
For the full year 2019, we now see Silicones close to last year's sales, despite significantly lower prices for standards. We see somewhat softer markets in industrial applications. We also observed shorter order patterns reflecting the overall economic uncertainty. On a slightly lower sales base, we expect to achieve an EBITDA margin of around 19% for the full year 2019. This is slightly lower than previously forecasted. On page seven, Polymers achieved sales of EUR 335 million. This is at the level of last year, but sequentially lower than in the second quarter. Year-over-year, construction demand was good overall, but we observed some weakening in industrial segments. Positive exchange rate effects did compensate for lower average prices. EBITDA came in at EUR 49 million, about 5% better than last year, but trailing the second quarter.
A factor in Q3 was the force majeure declaration of an ethylene supplier. For the full year 2019, we now see a low single-digit percentage sales growth. Our margin expectations in polymers are unchanged. Biosolutions achieved sales of EUR 61 million with an EBITDA of EUR 7 million. Sales of biopharmaceutical products saw a substantial increase during the quarter as our Amsterdam unit began producing for customers. We have a good pipeline of projects lined up that should lead to full utilization of the facility already next year. Our guidance for Biosolutions remains unchanged. As Rudi said on polysilicon, we did not see the price recovery that many market experts had expected to materialize. Nevertheless, the demand improved considerably with much higher volumes. This led sales to increase by about 20% over the second quarter. EBITDA came in at EUR 85 million, including insurance compensation of EUR 112 million. Operationally, though, results declined sequentially.
In addition to lower average selling prices, inventory effects reduced the results beyond the last quarter. Cost performance was comparable to the second quarter, and we continue our efforts to reduce costs further while not compromising on our industry leadership in quality. Considering the delayed price improvements, we adjusted our segment guidance for the full year. Now we expect a low single-digit decrease in sales compared to last year. EBITDA in the fourth quarter should continue at about the average run rate of the prior three quarters, excluding the effect of the insurance compensation. In others, we expect an EBITDA before Siltronic at levels around last year, which was about EUR -25 million. Moving to the overall group again. Gross cash flow in the quarter was healthy. Good results in chemicals and cash release from working capital drove the improvement.
Net debt was at EUR 829 million, about EUR 160 million lower than at the end of the second quarter. The increase since the end of last year is mostly due to IFRS 16 effects. We changed our group guidance mainly because of polysilicon and as a result of adverse trade and economic effects on our chemicals businesses. Overall, we now expect a decline of about 30% in full-year EBITDA, excluding insurance compensation, versus the EUR 930 million achieved last year. With this, let me hand you back to Rudi.
Thank you, Tobias. Ladies and gentlemen, we are looking at fundamental changes in the way the chemical industry operates. China has emerged as the world's largest chemical market. It is bigger now than Europe and North America combined. Also for our European chemical peers, this poses substantial challenges, mainly due to overcapacities that have been built up. It is no more access to technology and assets that define success. Success today and tomorrow depends on both the fast application of innovations and a comprehensive service offer. Let me give you an example. At the K fair this week, the world's largest plastics fair, we are showcasing, or we have been showcasing a number of innovations in silicones. One particularly exciting development is our ELASTOSIL® LR 5040 series.
This is a high-purity liquid silicone rubber that does not need post-curing to meet strict standards, such as in food, baby care, and medical applications. This avoids costly and lengthy processing after extrusion, thus allowing automated production. Strategy development at Wacker over the last years was aimed to address emerging issues caused by the change of the business environment. We have moved closer to our customers, internationalized our businesses, and have broadened our product range. In all activities, we have also stepped up our efforts to contribute to the success of our customers with technology, specialty products, and development services. Continuous improvement in efficiency and costs is crucial to our success. Cost discipline is a characteristic of our business. Given the strategic direction and the developing competitive environment in the chemical industry, we must adapt and change to stay ahead.
Wacker has always prioritized continuous efficiency improvements and good cost discipline, but the measures already in place will not be enough to weatherproof our earnings and competitiveness medium to long term. That is why we have started to work on a comprehensive program that will prepare Wacker for future challenges. This program will make Wacker more efficient and capable and achieve substantial cost savings. In the coming weeks, we will examine the whole company together with external experts supporting us. We will find out where to become leaner, where to combine functions, reduce tasks, and organize processes even better. It is already clear that small, isolated measures are not the answer. What we need is a comprehensive, holistic approach. We must and will effectively counter the increasingly difficult conditions facing our business. We know that we are supplying the right markets with the right technologies.
Thanks to our core competencies in silicon and polymer chemistry and biotechnology, we offer our customers a wide range of products, both tried and tested and cutting-edge. We contribute to global trends such as sustainability, renewable energy, and digitalization. We also help solving problems arising from urbanization and the world's population growth. Such a strong portfolio secures leading market positions in multiple key industries and is the envy of many of our competitors. We intend to make even better use of this potential and get Wacker on the track for long-term sales and earnings growth. Our presentation ends here. We will now commence with the Q&A session. Operator?
Thank you very much. We will now begin our question and answer session. If you have a question for our speakers, please star zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. We've received the first question. It is from Patrick Rafaisz of UBS. The line is now open. Please go ahead.
Hi, good afternoon, everyone. Three questions, please. The first one is on polysilicon. If we assume current selling prices remain constant, how long do you think will it take you to take out sufficient costs to break even again on EBITDA?
I think it's hard to say precisely but we are working on it very focused. I would say it's probably not too far off, but I'm not committing a certain timeline here. On the other hand, I think we should not be pessimistic, because as we said, we already have seen strong volumes in Q3. The demand has picked up further following the Chinese Golden Week, and typically, strong volume growth precedes price improvements. We need to do both. We need to cut our costs as much as possible and work with quality and the markets in the other direction.
Okay. Thank you. Second question is around CapEx. I remember, it must have been three years ago at the Capital Markets Day, you committed to maintaining CapEx below D&A until 2021, I believe. With your comments today and enough upstream capacities both internally and in China coming up, you think you can extend that commitment beyond 2021?
At this point, we are not forecasting beyond 2021, but you can be assured of extreme capital discipline.
Okay, good. The third question around the last point you made during your presentation around this comprehensive program you're working on over the next few weeks. To what extent does this program also include you looking at strategic options for parts of your businesses, or is that just focused on the operational setup?
This program definitely focuses, I would say, more on the cost than anything else. Anything else is a strategic program that's a constant discussion, and it's constantly on the table.
Patrick, Tobias adding here. The focus of the program will be on overhead and indirect costs and indirect spend as well, we will go through the entire organization.
Okay, good. Understood. Thank you very much, gentlemen.
Okay.
Thank you. The next question is from Chetan Udeshi of JPMorgan. Line is now open. Please go ahead.
Yeah. Hi. Thanks. Just following up on the previous question. Is it fair to say that we should rule out any strategic changes in the way the polysilicon business is structured within Wacker as part of this strategic or whatever review that you guys are doing? That's number one. Number two, in silicones, there was a comment around having flat sales, 19% EBITDA margin. Typically, in the past, you guys have seen quite a big sequential decline in silicones from Q3 to Q4. Is there a reason to believe this time it will be different?
Okay.
May I start with the second question, Chetan? Yeah. Typically, we have some seasonality in Q4 from customers de-stocking, given the macroeconomic uncertainty, which is higher than normal, I think that is pretty difficult to forecast. In addition to that, we also see some softer order intake, especially in industrial applications such as automotive, plastics, textile. Putting all that together, we definitely see some seasonality in Q4.
On your first question, of course, we don't rule out anything. I think we need to really focus on what the true issue is, especially in polysilicon. It's this overcapacity, it's state subsidies in China for competition. That's the nature of this type of competition. On the other hand, let's look into the future. What will happen with the solar industry? The demand for efficiency of the modules will continuously rise. I think it's a very similar process that we have seen in the semiconductor industry. The demands on quality, efficiency, et cetera, will go up. The future certainly is not only mono, the future is to a high degree N-type mono. So far, we are the only supplier for N-type capable polysilicon. As others work themselves into that, they have to upgrade their facilities with substantial costs.
We just turn a switch to make material for that type of quality. I don't agree to the pessimism that is around to a certain degree. I think we have seen the same issues, for example, in 300 millimeter wafers. As long as Siltronic was a division of Wacker, there were some guys who wanted to be by far the world leaders and the best and the greatest and the biggest and they couldn't sustain it either. In the meantime, prices for 300 millimeter wafers are twice as high as they were five years ago. I think the industry will mature. Obviously it takes some time. On the other hand, we do not give up on that business, definitely not.
Understood. I think the reason for pessimism probably comparing to 300 millimeter wafer, at least there, I would say probably the number of competitors were much smaller. In polysilicon, I think it's even difficult to know exactly how many companies are producing in China these days. I got your gist of your response there, Rudi. The other question I had as a follow-up, sort of one of your key-
We know exactly how many producers there are in China. I think we have a very good understanding of their capabilities.
I see. From all our know-how we have, we do not agree to pessimism.
Okay. Understood. Just on polymers, one of your key competitors in that business has been talking about moving some of their upstream volume from VAM into VAE. Do you see that in your sort of competition side of things, or you've probably not seen an impact from that at all?
I think we see that in a very narrow scope. This is capacities in Asia, in Southeast Asia, that we see facing our capacities. We are very proud that we are now in operations with a new powder dryer in Korea, which we put into operations in October. There's a dispersion reactor in the first half of next year, which will come on stream. This will improve our competitiveness. Beyond that, we don't see any big movements from our competition.
According to our competitiveness in that industry, we are not afraid of competition.
Okay. Thank you.
Thank you. we go to the next-
Excuse me. I would just like to add, we have no problems with competition who also has to make money.
Operator?
Okay, we'll go to the next question. It is from Tom Wrigglesworth of Citigroup. Your line is now open. Please go ahead.
Good afternoon, gentlemen. Thanks for the opportunity to ask questions. Focusing on the polysilicon business, can you give us a little bit of color about the developments in China? We're obviously expecting, and you highlight, a pickup in demand. It looks to us that maybe not all the subsidy had been on offer. How do you see the Chinese market developing going forwards into 2020? Where do you think we are on inventories, both in the market and Wacker inventories? Obviously, you built a position there. Is that a position that you're still sustaining? When you talk about high volume sales, is that kind of virgin production that you're selling, or is there an inventory component within that? The third question, sorry, to focus on polysilicon, but the inventory valuation effect negative. Has there been much change in the underlying profitability from 2Q?
Obviously if I back out the insurance compensation, that was deeply negative for the quarter. I'm wondering how those inventory effects have impacted profitability. Thank you.
Maybe on the Chinese market, of course, there was this delay in publication of the new policy in China that certainly has delayed the market development. For 2020, as far as I know, there also have not been new policies published so far. On the other hand, this is what our customers are telling us, that basically their customers and installers are, because of the downward trend in pricing also for modules, that projects have been pushed out at least for a few months because the installers expect lower prices or still lower prices for modules. As soon as this trend is stopped, I think there will be a significant increase in installations and demand. The Chinese market will certainly be at a high level next year. We also see significant growth in demand in all other regions in the world.
Just looking at Europe, the European market can easily double for next year. We will see that. We will be looking at that very carefully. So far, our rough estimate for next year on demand is something between 125 GW and 160 GW It's a wide range so far. There is a lot of optimism for renewable energies in the market. Okay.
On the inventory questions, the second and the third one, Thomas. We are running flat out at our capacity. The pickup in volume, in Q3 versus Q2, also included some volume from our inventories. With respect to the operating EBITDA, if you exclude the insurance compensation, and there's basically two effects. We continue on our cost roadmap in polysilicon, and we are seeing good progress. As we reported, that is not each and every quarter the same progression. The third was pretty much at the same level as the second quarter. The effect on operating EBITDA was mainly from the slightly lower average selling prices still in the market. That has the effect on sales and profitability, but also, in addition to that, on the inventory valuation.
If you put that together, you come up to our EBITDA development.
Sure. I can't say that 90% of the delta was inventory and 10% was the price. I was just trying to get a split between those two factors, the lower price and the inventory valuation negative.
Oh, it's much more balanced, Thomas.
Okay. Understood. Thank you very much.
Thank you. The next question is from Thomas Swoboda of Société Générale . Your line is now open. Please go ahead.
Yes. Good afternoon, gentlemen. I have two questions, both on polysilicon. First is a quick one. In terms of the guidance you have given for Q4 for polysilicon, do you include any inventory valuation changes in this guidance?
This is really difficult because the inventory valuation can go both ways. We are, as Rudy described, there was no price pick-up yet, but we see strong volume growth in Q3. After Golden Week, also the demand was very strong for our products. It's very difficult to bake in any assumptions on inventory valuation effects.
You have made none. This is without inventory changes.
Yes, none to minor.
None to minor. Perfect. Thank you. My second question is a little bit more complicated, and it pushes towards strategy and towards what Mr. Staudigl had said on Siltronic before. Since Siltronic was spun off, the chemicals businesses have really showed a lot of strength. The turbulences in the polysilicon market are just recurring and are distorting the financial market's attention towards polysilicon repeatedly. Mr. Staudigl, you have drawn parallels between polysilicon and Siltronic several times during this call. My question would be, strategically and in the midterm, obviously, does polysilicon need to be 100% controlled by Wacker, or is a solution like the one you have chosen for Siltronic something you could imagine also for polysilicon in the midterm? Is it even feasible at all?
Well, let me first of all say, the fact that the chemical businesses are shining is not a result of the fact that we spun off Siltronic. The chemical businesses are standing on their own and are performing really well. As I said before, I'm not ruling out anything on polysilicon, but on the other hand, it simply would be wrong to focus on the wrong issues. We need to focus on improving the business as it is, because whatever you do strategically, it's most important to have a well-running polysilicon business. As I said, we do not give up on the development of this business and especially the markets. Because we see so many opportunities also for improvement, that we should focus on that.
That's perfectly fine. Thank you.
Thank you. The next question is from Sean McLoughlin of HSBC. Please go ahead. Your line is now open.
Thank you. My first question, just continuing on the strategic review. You've talked about cost disadvantages versus China based on electricity prices. I'm wondering, would the strategic review or how would the review impact this thought process? Ultimately, what optionality do you have today in relocating capacity to lower electricity cost centers?
Well, electricity costs in Tennessee are certainly lower than in Germany. Nobody says that electricity costs in Germany need to rise. We have, especially together with the other partners in the chemical industry, major efforts running in talking to the government and agencies to make them aware that actually lowering electricity prices and generating electricity renewably reduces the carbon dioxide emissions in Germany and in Europe significantly. There is a lot of interest in Germany and in Brussels on ways to reduce the carbon dioxide and thus to reduce electricity prices. I'm also not pessimistic there. We just need to work on the right things and not give up. Not at all.
Understood. Specifically on polysilicon, you now don't expect a price recovery this year. What visibility or confidence do you have of a price recovery into 2020?
Of course, we don't have a visibility there. As we already said, we see strong volume. Unfortunately, in the past, I mentioned that there were slight indications for price increases when it didn't really materialize. We are very cautious to predict anything there. What we can report is a strong demand.
Thank you.
Thank you. The next question is from Sebastian Bray of Berenberg. Is now open. Please go ahead.
Good afternoon. Thank you for taking my questions. I would have three, please. Two brief and one a bit more involved. When I look at the change in pension liability at Wacker, am I right in saying that next year there will be about an additional EUR 10 million to EUR 15 million of pension costs within the EBITDA? That is my first one. My second question is as follows. Commodity siloxane prices are still substantially higher now, and seemingly stable, than when Wacker added siloxane capacity in 2014 and 2015, many of its peers were also doing so. Why step away now from a more capital-intense commitment to a business that seems to have held up reasonably well? My third is a question related to the comments made on potential solar demand of 125 GW to 1 60 GW next year.
On my numbers, this would equate to an incremental increase in polysilicon demand of potentially 80 kilotons plus. What would your supply expectations be from 2020 if your preliminary demand expectations are that there are 80 kilotons plus or so of polysilicon incremental demand next year? Thank you.
As I said, this is a rough estimate. We don't have precise numbers now, obviously. We just try to simulate the markets and come up with a range. I think you know our polysilicon capacities. Overall, it's 80,000 plus, whatever we can do on debottlenecking. With this capacity, we would supply the semiconductor market as well as the highest quality demands for solar.
Sebastian, to the first two questions. On the pension liability, yes, the discount rates that are ultra-low do not only have an effect on the balance sheet, but also on the P&L, because service costs will go up next year. This will very much depend on the discount rate at the end of 2019. It's fair to assume that this will be a double-digit million number in additional personnel costs. To the second question on investment in upstream. As we always said, we will focus, and this is a clear priority, I will say, on specialties. We see plenty of opportunities there to support this. Yes, we did increase our upstream capacity also in the years after 2014. This was a very limited investment, also very efficient debottlenecking. From today's perspective, our clear priority is specialties business.
That's understood. Thank you. Just a quick follow-up. I appreciate if you cannot necessarily give me a number, but on the base case that you set out, or as preliminary case, let's call it that, of 125 to 160 GW of solar demand next year, do you think that the polysilicon market will tighten, remain at the same level of utilization, or fall further into overcapacity?
I do not want to speculate on that yet.
Understood. Thank you.
Thank you. The next question is from Andreas Heine of MainFirst. Line is now open. Please go ahead.
One small question only on polysilicon at the beginning, and then some on the silicones segment. In polysilicon, looking on the CapEx you had spent in the first nine months, I think it was EUR 27 million. I was assuming that this division for running down costs needs an investment of EUR 60 million to EUR 70 million a year. Is that coming down, so it's more, let's say, EUR 40 million, what you might need? That's the first question. Maybe asking the others later.
Yes. I think the run rate indicates that our CapEx for poly is more around EUR 50 million than what you had with the EUR 60 million to EUR 70 million.
Okay. On the silicones. Your silica plant is now up and running, and you use it internally but also externally. Do you see any price impact already on the U.S. market from this capacity? Silica usually stays in the region. For the U.S. market, it is quite a capacity. Is that having any impact on the pricing?
We are about to start it in Q4, it's not having any price impact. It basically replaces imports. As you said, it's a very lightweight material, so there's not much intra-regional efficient transportation of the product.
I was thinking if it substitutes external supply and has some merchant impact, whether that might have then a negative impact on prices on this rather high-margin product.
It allows us, as we are a consumer in our own production of fumed silica that we today need to ship from Europe to America, it allows us to substitute that with local production.
Okay, understood. In silicon, you usually have, well, some years ago, given some indication what the split between specialties and standard product is. With the focus on specialties and lower demand on the standard product, would you be able to share with us what the current split between these two is, standards and specialties?
It really depends on the definition. Using the definition that we had a few years ago, it certainly has increased. We have been successful in growing our specialty rate.
Is it significantly more than 50% now o r is it not that big? I think the last number I was aware of was, I think, 60/40, and the 60 to the standard products rather than to the specialties. I think that was in a presentation from 2016.
I would rather focus on the growth, and it certainly has grown.
The standard products have a significantly lower margin. It's fair to assume that the very vast majority of all the EBITDA is now from specialties, given the low prices you have. I was thinking maybe 85% to 90% on specialties.
No. It's not that simple. As we described in last year, majority of the strong improvement in 2018 was from the price increases that were in the standard business.
Yeah. That has washed away, and now specialties have grown nicely. Is it still on EBITDA level, a significant portion from standard products or less? That's all.
We have done a lot of cost improvements ahead of the tightness in 2017 and 2019. We are very competitive in the standard business still today.
Okay. Good to know.
I could give you this one indication. We certainly have a much lower standards portion than some of the competitors.
Mm-hmm. Thanks.
Thank you. The next question is from Laura Lopez of Baader Bank. Your line is now open. Please go ahead.
Hi, good afternoon. I have three questions. Now that polysilicon prices have reached lower levels than expected, do you see an impairment risk for the plant in Tennessee? Secondly, on polymers, you mentioned that you had a significant or robust volume growth in Asia, but there were some weakness in Europe. How do you see that developing? Also in the U.S., there has been also some signs of weakening in the construction industry. Maybe how do you see that developing or what are the first signs that you're seeing now starting the fourth quarter? Lastly, on Biosolutions, I was surprised to hear that you will achieve already full capacity utilization next year of the plant that you just recently acquired. Does that mean that next year we could potentially see significantly double-digit top-line growth?
If I remember correctly, you doubled your capacities in the biopharmaceutical business with that acquisition last year. That's all. Thanks.
Okay. On Wacker Biosolutions, we certainly expect significant growth there. How much it is, I do not want to speculate. On the polymers, yes, we see very nice growth in demand in Asia, especially in China. We see a weakening, as we said, in Europe, but also in the United State, just with the slower economic development.
With respect to your first question, Laura, the review of asset value is always standard practice, and as you can see, there's nothing in the accounts. As we stated before, we are in that business really for the long term, and we do not run this business just in a single quarter.
Okay. Thank you very much.
Thank you. The next question is from Martin Jungfleisch of Kepler Cheuvreux. Your line is next. Please go ahead.
Yes, hi. Thanks for taking my questions. I have two remaining ones. First one is on polysilicon inventory. Again, can you confirm that you have sold some inventory in the third quarter, so had a net decrease? Also, can you remind me again what the impact is on EBITDA margins when you sell inventory? That's the first one. The second one is on silicones and your acquisition of this British battery specialist. Can you provide some more detail on the strategic reasons of this transaction and how this fits in your silicon anode battery R&D? Also, if you can provide an update here, what your midterm ambitions are in this area and what you think of when this thing can come to the market more in volume terms. Thank you.
I start with the first question on inventory. The simple answer is that yes, we had a confirmation. Yes, we had a slight decrease in inventory. From the volume perspective, a decrease always means a margin compression.
On the acquisition of Nexeon, I think it's just an excellent add-on to our existing activities for battery materials. I think they have been very successful with what they were doing, and we are successful with what we are doing. Sort of combining the strategies, I think it's certainly very valuable. If I think about what a specific automobile company was paying for a competitor of ours and of Nexeon's in the United State, that means the valuation of this company would be around $1 billion. I think if we compare that, we made a significant contribution to the value of our company, by setting up this joint venture, more or less.
Thank you. Can you comment on what kind of sales this company or this silicon anode business contributes?
Not very much at all.
Okay.
It's really minimal at this point in time.
Okay. Thank you.
Thank you. The next question is from Jodi Pender of Millennium. Your line is open. Please go ahead.
Thanks. Two questions. Can you just tell us, on the Tennessee plant, when will this become more or less 100% semi-grade? The second question, sorry, on polysilicon is, when you look at the supply landscape in China today, how much percentage of the low-cost supply is basically benefiting electricity from cheap coal? Which in principle is fundamentally, in the long run, it's a policy question mark, really.
Did I understand that right? What portion of the Chinese production of polysilicon is based on cheap coal?
Indeed.
Okay. I would say, maybe at least 80%.
Okay.
There is some hydropower for some producers. That's Chinese policy, to sort of drive all the businesses with high electricity demand to the West. In the West, there is simply only in the far west, Xinjiang province, and Inner Mongolia, there is basically only coal-based. It's very high carbon dioxide emission business. There's no question about it. Your first question on Tennessee. It certainly takes some time until we can fully load it with semiconductor material. We will always have a portion of also solar material out of Tennessee.
Sorry, just to follow up. We are starting to finally see offshore wind pick up in sort of a meaningful way. Do you feel that there is a kicker effect? You sort of need solar for offshore wind to work in terms of the power distribution. Do you feel that in two years' time, solar gets a fillip because of offshore wind, or that's nonsense?
No. In my opinion, excuse me, but it's nonsense. You need the combination of wind and solar, in order to supply constant energy. Of course, not only wind and solar, but I think you always will need a certain portion of gas-fired power plants to stabilize the grid, to stabilize the supply of electricity, and Yeah, I mean, to have the best renewable energy production and supply.
Okay. Thank you so much.
By the way, we are also producing lots of chemicals that are used for wind power generation.
Great.
There is no wind blade without Fumed Silica, for example.
Thank you.
Thank you. The next question is from Charlie Webb of Morgan Stanley. Your line is open. Please go ahead.
Afternoon, gentlemen, thank you for taking my couple of questions. First off is just around polysilicon. I know you've been depreciating these assets fairly aggressively, as you always do. Is there any impairment risk given the current economic environment or for those assets as we think about into the end of the year? First question. Then just secondly, on silicones, kind of given we're talking about lower cost energy and with, I guess, some capacity additions set to come online in China through end of year and through next year, utilizing some of that lower cost. How are you guys thinking about that cost curve in China? Do you see any kind of further downside to, I guess, standards pricing into 2020 given that, I guess, the cost curve looks like it's flattening? Your views on that would be very interesting. Thank you.
I didn't get the connection with standard silicones and power prices.
I'm saying the new capacity-
I'm sorry. Acoustically, it's really.
Can you hear me now? Is that better?
Yeah, now it's much better.
Okay. Sorry. The question was around, obviously, the capacity additions in the west of China in standard grade or kind of upstream silicones coming online next year, are likely to benefit from cheap energy, similar to what we see in polysilicon. I'm just wondering how you see the cost curve for silicones, for the standard grades, for the commodity grades, next year versus this year, in China, and what effect that could have. That was the question.
Well, now I understood what you mean. Energy supply is not so important for the silicones, for the, let's say, the siloxane production. As far as I understand, the reason why these plants are located in the West is because they produce metallurgical silicon also there, and they want to have direct supply from metallurgical silicon into the siloxane facilities. Although, from our experience, the transportation of metallurgical silicon is not so expensive. It does not add such a tremendous portion of costs for siloxane. I think it's more a convenience issue rather than a transportation cost issue. In other words, if they expand siloxane capacity in the west of China, it's fine with us. We can also use purchased siloxane for our specialty silicones. It's fine with us, I would say.
Charlie, to the first question, as I said before, a review of asset values is always standard practice, there's nothing in the accounts. To confirm again, we always look at the long-term perspective of the business as we discussed extensively also in the call.
Okay. Thank you. Just coming back on the first one a little bit, just a bit more clarity. If we think about the flattening of the cost curve, if there is to be a flattening of the cost curve, given, I guess, I don't know what exact numbers you have but let's say there's 10% additional supply of siloxane for next year, and let's say demand running at five, 6%. How do you see that planning cost curve, that increased supply addition beyond demand? What do you think that's going to do to the silicones market across, I guess, the upstream piece but also perhaps some of the kind of midstream? I understand specialty is being somewhat protected, maybe even benefiting.
I'm just trying to understand your views on upstream silicones profitability, as well as perhaps some of the midstream from the additional capacities and I think, arguably, they are coming at a lower cost position than historically. Just your views on that, as it relates to kind of silicones profitability.
I think it creates more opportunities than threats. If low cost siloxane is available, we can purchase it.
Okay.
Since we have a fairly low volume of standards, it's really not affecting us so much.
Okay. Thank you very much.
Thank you. The next question is from Raghav Bhuyan of Exane BNP Paribas. Your line is now open. Please go ahead.
Hi. Thanks for taking my question. I just have a very quick one on regulation. I know Wacker, along with some of the other U.S.-based polysilicon producers, presented to the House Manufacturing Caucus regarding the need to sort of end Chinese tariffs. Could you give us a sense for what realistic outcomes you see from these efforts and maybe whether regulation could actually change the status quo in the market today?
That would be really speculative. We are following certain Twitter accounts on an hourly basis. In other words, we cannot predict anything there. I think, in my opinion, nobody can predict developments in the trade talks between China and the U.S. Everybody can be surprised by the minute.
Okay, thanks.
Okay, everybody. Thank you for joining us today and for your interest in Wacker Chemie. We are looking forward to further discussions with you as the quarter progresses. We will be back with a conference call on the full year results on March 17th next year. Goodbye.
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