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 * key followed by zero on your telephone keypad for operator assistance. May I now hand you over to Jörg Hoffmann, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.
Thank you, operator. Welcome to the Wacker Chemie AG conference call on our Q2 results. Dr. Rudolf Staudigl, CEO, and Dr. Tobias Ohler, our CFO, will take you through our presentation in a minute. This 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'll find at the beginning of the deck. Dr. Staudigl.
Ladies and gentlemen, welcome to our Q2 2019 conference call of Wacker Chemie. We reported today Q2 group sales of EUR 1.27 billion, lower than last year but higher than in the first quarter. The prime reason for the year-over-year sales decline was lower prices for our solar-grade polysilicon. Sales in chemicals, however, continued to grow year-over-year on higher volumes and some positive foreign exchange effects. Group Q2 EBITDA of EUR 211 million at a 16.6% margin trailed last year, but was significantly better than in the first quarter. This development is underpinned by a solid performance in chemicals, but a still challenging situation in polysilicon. Polymers performed well, seeing both sales and earnings grow year-over-year, benefiting from higher volumes and good cost performance. The tightness in Silicones last year makes for difficult comparisons year-over-year as the industry returns to a more normal operating environment.
We focused our own production on outputs during the tightness last year and are now optimizing working capital. Customers are also controlling their inventory much stronger. Demand for silicones overall is good, with particular strength in electronics, home and personal care products. On the other side, we see some softness in auto, plastics, and textiles. Volumes at polysilicon started to climb again after a weak April, while prices for solar materials slowed their decline over the quarter. As news come in from increasing solar installations around the world, the market awaits an end of the year rally in the Chinese market. Following the implementation of a new solar policy, analysts expect China to install 30-35 gigawatts in the final months of 2019. This takes 2019 global installations well into our expected range of 100-130 gigawatts.
We believe that this additional demand will lead to price increases in polysilicon. Yet, let me state this, our overall results in polysilicon are unsatisfactory at this time. Current price levels are too low and do not appear to be sustainable. As you know, this is due to subsidized overcapacities in China. In this challenging environment, we are not passively waiting for higher prices. We actively address what we can control. We increase our shipments into the semiconductor industry. We focus on the fast-growing mono markets with higher quality requirements that others struggle to realize. We further intensify our cost reduction efforts. We remain confident about good demand for our chemicals products and stronger volumes in polysilicon.
With the global economy losing momentum and China's solar market yet to revive, we now expect full-year EBITDA to be closer to the bottom end of our projected range of 10%-20% below prior year. On balance, though, the statements made in our 2018 annual report regarding our expectations for the year did not change in the reporting period. Tobias will now walk you through the financials and segment performance. Tobias.
Welcome. Starting with the P&L on page three. Higher sales in chemicals were not able to offset the challenging market conditions in polysilicon. Altogether, sales at the group level decreased by 5% year-over-year. Gross profit declined year-over-year by about EUR 62 million to EUR 189 million. The decrease is largely due to much lower polysilicon prices as well as lower prices for standards in silicones. Last year's tightness sets us up for difficult year-over-year comparisons in silicones, while both polymers and biosolutions grow earnings. Other operating income benefited from retained prepayments in polysilicon totaling EUR 19 million. The reported tax rate climbed to 27%, following a lower at equity contribution. Net income during the quarter was EUR 37 million, equating to an EPS of EUR 0.68 versus EUR 1.59 last year. Moving on to the balance sheet on page four. Receivables grew in line with higher volumes in chemicals as well as seasonal effects.
Inventories are largely unchanged since the start of the year. Steps are underway to reduce stock in Silicones, while at the same time, we maintain polysilicon stocks in our Asian hubs to better service our customers. All told, working capital is up. As we move through the second half of this year, we look to see some capital being released from here. On the liability side, our equity position decreased as the pension liabilities climbed on an all-time low discount rate of just 1.3%. These are effects from quantitative easing and negative returns on the 10-year Bunds. As already communicated on the first quarter call, the application of IFRS 16, saw financial liabilities increased by €133 million. This, as well as new debt facilities, led to an increase in financial liabilities. Looking at Silicones on page five, we achieved last year's sales level of approximately €650 million.
Softer prices for standards and volume mix effects were offset by supportive foreign exchange. EBITDA decreased from EUR 177 million last year to EUR 120 million, equating to a 18.4% margin. This is clearly lower than last year and follows the industry normalization that Rudi discussed. Reversing effects of our efforts to optimize output last year reside now in intensified inventory control. In addition, we observed in the last two quarters, similar inventory control actions at our customers, which lowered order intake below their own end market demand. These actions throughout the value chain negatively affect mix and utilization rates of our production units and thus reduce EBITDA. CapEx is focused on expanding our down and midstream capacities to strengthen our position in specialties. For 2019, we continue to see sales moving up at a low single-digit percentage.
Overall end user demand for silicones remains healthy, but pockets of weakness in various industries are evident. Industry normalization, but also trade war-related spillover effects weigh on pricing in standards. We believe that good volume growth and better pricing in specialties should help us to achieve an EBITDA margin of around 20% for the full year in 2019. In Polymers shown on page six, sales increased by 3% year over year to €353 million. Higher volumes mainly in Europe and China, as well as solid pricing supported the trend. EBITDA increased to €53 million, a 14.9% margin. Adjusting for last year's VAM turnaround, earnings growth outpaced sales on efficiency gains and lower raw material costs. CapEx is directed towards our new capacities in Asia to support the solid growth in the region. For the full year 2019, we see a strong performance ahead.
We expect a mid-single digit % sales growth with volume growth and lower average raw material costs year-over-year. We see the full year EBITDA margin improving to around 14%. biosolutions makes good progress with the integration of its acquisitions. Strong growth in biopharmaceuticals supported a 6% year-over-year sales increase. The order book in biopharmaceuticals is filling nicely, promising good utilization of our Amsterdam site next year. Pharma and agro saw again a solid performance during the quarter. For the full year 2019, we expect a mid-single digit % sales growth with an EBITDA of about €30 million. At polysilicon on page eight, significant price decreases and softer volumes at the beginning of Q2 resulted in sales declines year-over-year and compared to the first quarter.
EBITDA in the segment improved to about EUR 6 million, excluding the effect of a retained prepayment from a non-performing contract, we decreased the loss from a negative EUR 36 million in Q1 to about a negative EUR 13 million in the second quarter. We are structurally improving our polysilicon business with higher volumes for semiconductors, a leading offering for the fast-growing mono market, and further cost reductions leveraging our operational performance. Our guidance for the full year assumes demand-led price increases later in this year. These would be then amplified by the reversal of inventory revaluations seen earlier this year. Moving forwards to the overall group financials again. On page nine, gross cash flow was held back by reduced profitability and higher levels of working capital following higher business volumes and typical second quarter seasonality. Net debt increased to EUR 989 million at the end of the quarter.
As said before, IFRS 16 resulted in net debt increasing by about EUR 130 million. Looking at our detailed guidance for 2019 on page 10, our expectation for the full year 2019 are unchanged, except for updates on the somewhat higher depreciation and tax rates. With this, let me hand you back to Rudi.
Thank you, Tobias. Ladies and gentlemen, looking at Q2, we see progress in every area of business. Specialty volumes in silicones are back to full capacities after the first force majeure held us back in Q1. Innovation is a key factor in keeping our specialties business strong. New and promising compounds will be presented at the upcoming K Fair in Düsseldorf. One interesting innovation are electroactive silicone laminates functioning as actuators that create movement as soon as electrical voltage is applied. In addition, they can also be used as sensors by measuring deformations electrically. At that fair, we will show a tablet display creating vibrations and haptic feedback, which simulate the shape of keys or control panels that can be operated blindly by touch. Polymers keep moving on, benefiting from their strategic position and a deep understanding of binder technologies.
We are looking to further leverage our position in VAE with the new mega-sized powder dryer in Ulsan, Korea. In Biosolutions, our biopharmaceutical order book is filling, resulting in higher volumes and improving sales. Pricing in polysilicon is currently challenging. Facing the emerging success of higher conversion technologies, the demands on polysilicon increase. A significant part of the polysilicon capacities, including some newly built facilities, however, do not meet the rising quality expectations as the rapid transition to mono continues. As a result, pricing is under pressure as significant amounts of capacity from competitors need to be discounted to be sellable. This puts pressure on the entire value chain. Only recently, China changed the rules for grid access for solar projects in a technology-neutral way. The new rules essentially require solar projects to be competitive with power from coal. This will further amplify demand for high conversion efficiency.
That means monocrystalline silicon-based products. Lower performing technologies will essentially lose share. Our contributions to our customers is our strong support for higher efficiency technologies, namely in monocrystalline P and N-type applications. While our current result in polysilicon is unsatisfactory, our continued cost reductions show that we are on the right path. We work hard to further lower our costs, despite a significant disadvantage in personnel and energy costs. We already run the most efficient operations with a leading energy usage per kilogram, resulting in by far the best carbon dioxide footprint in the industry. While I am convinced about the position and strategies of our businesses, I also see clouds on the horizon. We watched recently major chemical competitors adjusting their guidance downward. Concerns about the macroeconomy persist as Brexit uncertainties and the effects of trade wars create global imbalances that can affect our businesses as well.
The release of the new Chinese grid rules for solar took longer than anticipated. This now results in a later than expected recovery of Chinese installations towards the end of the year. This effectively delays the anticipated pickup in polysilicon demand, which we expect to support pricing. Following these delays, we now guide for more towards the lower end of our range. The second quarter showed a solid performance in chemicals and operational improvements in polysilicon. Looking at our business in total, I see us well-positioned. Our efforts in cost reductions and our customer focus continuously increase our competitive edge. We work hard on supplying the right products into the right markets today. A constant stream of innovations help us to drive future growth and specialty content. All of this supports my confidence in our path ahead.
This concludes the presentation today. We will now commence with the Q&A session. Operator.
Thank you. Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 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's your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please, for the first question. First question is from [Raghav Dada]. Your line is now open, sir.
Could you just clarify on this inventory control issue, if this was a one-off, or do you see margins sort of recovering in 3Q? How should we think about the progression for the coming quarters, please? On polysilicon, maybe just a quick question on the sort of mix within semiconductors. Could I please ask for some color on how the impact of semiconductor versus solar was in 2Q and how that may change into 3Q if you see the sort of anticipated demand pickup on solar? Thanks.
Raghav, your question on inventory control. What we see is that after tightness in the year 2018, the industry now comes back to normalization, and that means that everybody tries to lower inventories again. We did that, our customers did that. This has an impact on order intake that we have seen the last two quarters. In combination, this leads to lower utilization and this weighs on EBITDA. We see that in some regions like China, where we have a lot of price volatility in standard prices, that there are first signs that inventory control could be done. The second half basically then depends on the end market development and it really depends also whether that view that we have on China applies to other regions as well.
On your question on semiconductor versus solar polysilicon. Of course, the semiconductor polysilicon, always is our preference, because it's the highest margin business, of course. Also, in this case, we are having longer term contracts. This is definitely the preference. In other words, if demand for solar would pick up, this would not reduce the amount of semiconductor polysilicon that we sell.
Got it. Thanks.
The next question we received is from Chetan Udeshi from JPMorgan. Your line is now open, sir.
Hi, thanks. Just coming back to silicones, where the margin was 18.5% roughly in second quarter. Usually the second half margin tends to be lower than the second quarter on average. How should we reconcile that with the guidance still of 20% for full year? Was there some one-off, et cetera, which sort of impacted Q2, or are you expecting some sort of a price rebound in silicones in the standard side? That's number one. Number two question was on polysilicon pricing environment. It feels like the end demand in China probably has already started picking up, just from some anecdotal evidence. What do you think is holding the inflection in the polysilicon pricing? The way I look at it, polysilicon is at least one to two months ahead of the chain in terms of lead time to convert it into panel and then install.
I would have thought, maybe, the polysilicon should have already started seeing some recovery given the new regulations have been put in place from first of July.
Maybe on the poly question. The increased demand for increased installations. It's not much. It's really not much. Of course, on our customer side or the module producer side, there is also significant inventory in place. That needs to be clear first, and this is why we don't see a significant movement of pricing in polysilicon yet.
With respect to the silicones question. Yes, you're right. We assume a slightly better second half to the first half in our guidance. We had a force majeure in the first quarter. We had the inventory control now in the second quarter with a significant impact. We also have additional capacities in the second half. We expect the standards to continue with some volatility in prices. Overall, prices should be sequentially even lower. We expect specialties overall firm with only some weak industries. With some slight price declines also on the raw material side. Put all together, we see that we can achieve about EUR 500 million EBITDA in silicones, which is the 20% margin that we talked about.
Understood. Thank you.
The next question received is from Ben Carmen from UBS. Your line is now open, sir.
Hi, guys. Just two quick ones from me. In terms of the impact on pricing in semiconductor polysilicon, can you just give an idea of the sensitivity of that if we do start to see pricing recovering in the solar side? That's number one. Number 2, the special prepayment income. Any color as to the customer here, was it Chinese or non-Chinese? Just a very quick third one. On biosolutions, quarterly EBITDA run rate still below around EUR 10 million, I think. When should we expect to get back to this range or in fact higher given recent bolt-ons? Thanks.
I hope you understand that we do not publish the name of the customer with that prepayment effect. On pricing on semiconductor polysilicon is set definitely longer term than for solar polysilicon. That's about what we can publicly say there.
For the biosolutions question, with the EUR 7 million EBITDA in the second quarter and EUR 6 million in the first quarter, total guidance is for around EUR 30 million. We definitely see a slight improvement in the second half of the year for that.
Okay, thanks. Not even any guidance in terms of whether the customer, was it Chinese or non-Chinese?
That's correct. There is cannot be any guidance from our side. Hope you understand.
Yeah, no worries. Okay. Thank you very much.
The next question received is from Martin Jungfleisch of Kepler Cheuvreux. Is now open, sir.
Yes. Good afternoon, and thanks for taking my question. It is on polysilicon, the improvement in EBITDA compared to Q1. If you look at sales were down EUR 40 million quarter-over-quarter, adjusted EBITDA was up EUR 22 million. If we assume that the inventory devaluation effect was something like EUR 15 million less in Q2 compared to Q1, there is still a more than EUR 5 million delta on absolute level. Is this because you have shipped more into inventory, compared to Q1, which improves margins? Is this strictly because of actually significantly better cost control? Also could you comment on if the semiconductor-grade volumes were down compared to the first quarter? That is it from my side. Thank you.
Martin, if you take out the prepayment effect in Q2 polysilicon result, you have operating loss of EUR 30 million compared to EUR 36 million. The difference is EUR 23 million. The major reason for that is really the lower inventory valuation adjustments in Q2 compared to Q1. In addition to that, we also continue to improve our cost, and we have efficiency gains. This is not all quarters the same improvement. The majority of the delta is from the inventory adjustments.
Okay, thanks. Can you confirm that if you shipped more into inventory in the second quarter compared to the first quarter?
Yes, I can confirm. We continue to run all three plants at maximum possible capacity, and we still don't have enough inventory close to our customers in Asia. The strategy is to build stock at market weakness and then have a shortened lead time for the customers. As we have shown in the past, we can quickly sell when the market turns up.
Okay, perfect. Thanks very much.
The next question we received is from Thomas Swoboda of Societe Generale. Your line is now open, sir.
Yes, good afternoon. I have two questions left. First, on silicones. If you could comment, please, on the standard prices outside of China. Did they already follow on the development in Asia and are on a pre-bubble level, if I may call it? That would be helpful. Secondly, looking toward the year-end, input costs like VAM, ethylene are coming down. Do you expect pressure from your customers to reduce prices because of raw materials? Isn't that a question, because your margin levels are still relatively modest in this product group? Thank you.
Thomas, on the standard prices in silicones, they are down significantly year-over-year, but also quarter-over-quarter. As we said before, this is part of the normalization of the market after the shortage in 2018. China is always more extreme than other regions. We expect there is still price pressure from China to the other regions. The prices are connected somehow, but they're not the same everywhere. For that reason, the recent increase in DMC prices in China, which are really very volatile, they most likely won't have an effect on Q3 prices in the Western Hemisphere. For that reason, our assumption is that we have to plan for lower overall standard prices sequentially.
The question on input costs in polymers, as we always said, there's a number of contracts that are formula-based. For those, we have, with the raw materials going down, also decreasing selling prices. For the other portion of our contract portfolio, I think I would definitely defend our pricing as we have it today, because as you rightly said, we still have a margin, which is not at our target level. We have definitely to recover from last year's big hit, and we are not there yet. We hold back against any attempts from the customer side for lower prices.
It's perfectly clear. Thank you.
The next question received is from Sebastian Bray of Berenberg. Your line is now open, sir.
Good afternoon, and thank you for taking my questions. I would have two, please. The first is on polysilicon. This is quite an admirable job of taking out cost of the business. Am I right in saying that Wacker is placed to exceed the roughly one-third cost reduction target that it set itself at the Capital Markets Day, in 2017? That's my first question. I think the exact number was 30%. The second is a update on insurance. Apologies, I've just dialed in, so this may have already been dealt with. Has there been any news on the expected size of payment or its timing with regards to the Tennessee facility that had an accident towards the end of 2017? Thank you.
On the cost reduction of polysilicon, you can be very sure that we strive to reduce our costs further than the 30%, because the results right now, as I said, are not satisfactory at all. We don't know what the future will hold. This is why there is no letup. Well, actually, it's the opposite. There is more and more push to reduce costs even further.
With respect to the question on the insurance, there's really no change at all to our assumptions. We always said that insurance is not included in our guidance. We are in the midst of the discussions right now. The insurance should make us whole. That's the principle of the contract. As we are talking big numbers, we also take our time. There's no change to report.
Thank you. Quick follow-up. Could you talk a bit about the environment for German power prices at the moment, and if this is a head wind for the business or broadly neutral?
The power prices compared to the first quarter and end of last year are going down. Still, they are challenging. There are several ways to optimize that. First, on the purchasing side, and then the reduction of electricity use, for example, per kilogram of polysilicon.
Thank you very much.
The next question received is from Laura Lopez from Baader Bank. Your l ine is now open, madam.
Hi, good afternoon. I have one more question regarding the expansions on fumed silica in Tennessee and the silicon metal expansion. Is it right to assume that these two things will also help to improve the profitability of your polysilicon division? The question more focuses on the silicon metal expansion, as prices have also come down significantly. I don't know how efficient you can run the plant and, let's say, if that also has a lower cost curve than the current prices in the market. That would be interesting to know.
Well, of course, we made these investments to improve our profitability. Fumed silica by itself, of course, is a very important product. Yes, in Tennessee, it also helps to use up side products of the polysilicon production. It's overall very positive when we start running that plant, and that's maximum a few weeks away. Similar in Norway, using our own metallurgical-grade silicon is certainly more efficient than buying it. That's why we are investing significant capital in the increase of these productions.
The silicon metal ramp-up, can you remind me when is that planned for?
Ramp up by the end of this year.
Okay. Thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press zero one on your telephone keypad now. If there are no further questions, I hand back to the speakers.
Thank you, operator. Thank you all for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses. If you would like to meet us next time we're in your city, please send us a message directly or register your interest with our corporate access partner. We will be back for a conference call on the Q3 results on October 24th. Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.