Earnings Call: Q2 2019

Aug 1, 2019

Yeah, ladies and gentlemen. Welcome to the conference call of Vaca Kimi At our customers 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 followed by 0 on your telephone keypad for operator assistance. May I now hand you over to York Kaufman, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir. Thank you, operator. Welcome to the Vaca Kimiichi, conference call on our Q2 results. Doctor. Rudolf Staudigl, CEO and Doctor. Tobias Ola, our CFO, will take you through our presentation in a minute. This presentation is available on our webpage under www.com, bugger.com under the caption of Investor Relations. Before we begin, allow me to point you to a safe harbor statement, which you'll find at the beginning of the day. Doctor. Staudigl? Ladies and gentlemen, welcome to our Q2 2019 Conference Call of Vaca Kimi. We reported today Q2 group sales of 1,270,000,000, 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 grades polysilicon. Sales in chemicals, however, continued to grow year over year on higher volumes and some positive foreign exchange effects. Grew Q2 EBITDA of 1,000,000 at a 16.6% margin trailed last year, but was significantly better than in 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 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 week, April, while prices for solar materials slowed their decline over the quarter. As news come, come in from increasing solar installation 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 to 35 gigawatts in the final months of 2019. This takes 2019 global installations well into our expected range of 100 to 130 gigawatts. We believe that this additional demand will lead to price increases in polysilicon Yes, 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 and we further intensify our cost reduction efforts. We remain confident about good demand for our chemicals products and stronger volumes in polysilicon, with a global economy losing momentum in China's solar market yet to revise, we now expect full year EBITDA to be closer to the bottom end of our projected range of 10% to 20% below prior the financials and segment performance. Tobias? Welcome. Starting with the P and L on Page 3. Higher sales and chemicals, we are not able to offset the challenging market conditions in polysilicon. All together, sales at the group level decreased by 5% year over year. Gross profit declined year over year by about 1000000 to 1,000,000. The decrease is largely due to much lower polysilicon prices as well as lower prices sets us up for difficult year over year comparisons in silicones, while both polymers and bio solutions grow earnings. Other operating income benefited from retained prepayments in polysilicon, totaling 1,000,000. The reported tax rate climbed to 27 percent following a lower at equity contribution. Net income during the quarter was 1,000,000 equating to an EPS of 0.68 versus last year. Moving on to the balance sheet on Page 4. 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 and 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 points. As already communicated on the first quarter call, the application of IFRS 16 So our financial liabilities increased by 1,000,000. This as well as new debt facilities led to an increase in financial liabilities. Looking at silicones on Page 5, We achieved last year's sales level of approximately 1,000,000. Soft up prices for standards and volume mix effects were offset by supportive foreign exchange. EBITDA decreased from EUR 177,000,000 last year to EUR 120,000,000 equating to a 18.4% margin. This is clearly lower than Reversing effects of our efforts to optimize output last year, result 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 towards 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 effect way 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 6, sales increased by 3% year over year to 1,000,000. Higher volumes, mainly in Europe and China, as well as solid pricing supported the trend. EBITDA increased to 1,000,000, a 14.9% margin. Adjusting for last year's WAM 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 percentage 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%. Bio Solutions makes good progress with the integration of its acquisitions. Strong growth in biopharmaceutical 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 percentage sales growth with an EBITDA of about 1,000,000. At polysilicon on Page 8, 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 1,000,000, ex the effect of a retained prepayment from a non performing contract, we decreased the loss from a negative EUR 36,000,000 in Q1 to about a negative 1,000,000 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 flat price increases later in this year. Of inventory revaluations seen earlier this year. On page 9, 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 989,000,000 at the end of the quarter. As said before, IFRS 16 resulted in net debt increasing by about EUR 130,000,000. 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. Thank you, Tobias. Ladies and gentlemen, looking at Q2, we see progress in every area of business. Specialty volumes into the accounts are back to full capacities after the first majeure situation held us back in Q1 Innovation is a key factor in keeping our specialties business strong. New and promising compounds will presented at the upcoming K Fair in Dusseldorf. 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 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 demands on polysilicon increased. A significant part of the polysilicon capacities including some newly built facilities, however, to 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 results 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 print in the industry. While I am convinced about the position and strategies of our businesses, I also see clouds in the horizon. We watched recently major chemical competitors adjusting their guidance downward. Concerns about the macro economy 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 hurts 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 product 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. Ladies and gentlemen, we will now begin our Once your name has been you. First question is from Raghav Pada. 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 recovering in 3Q? Or how should we think about the sort of progression for the coming quarters, please? And then 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 pick up on solar? Thanks. 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. So we did that. Our customers did that. And this has an impact on order intake that we have seen in the last two quarters. So in combination with weak to lower utilization and this ways on EBITDA. And, we see that in some regions like China, where we have a lot of price volatility standard price is that, there are first signs that inventory control could be done. So the second half basically then depends on the end market development and, 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, And, and also we are, in this case, we are having longer term contracts So this is definitely the preference. So 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 will be from chetan Udeshi from Morgan. Your line is now open, sir. Yes. Hi. Thanks. You know, just coming back to silicones where the margin was 18.5 percent roughly in second quarter. Usually the second half margin tends to be lower than the second quarter on average. So how should we reconcile that with the guidance still of 20% for full year? So was there some one off, etcetera, which sort of impacted Q2? Or are you expecting some sort of a price rebound in silicones in the standard sites? That's number 1. Number 2 question was on the 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, because the way I look at it polysilicon is at least 1 to 2 months ahead of the sort of chain in terms of lead time to convert it into panel and then install. So I would have thought maybe the polysilicon should have already started seeing some recovery given the sort of set the new regulations have been put in place from 1st July? Well, maybe on the poly question, I mean, the sort of the increased demand for for increased installations, I mean, it's not much. It's really not much. And of course, on our customer side or the module producer side, there is also a significant inventory in place. So 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. Assume a slightly better second half to the first half in our guidance. That stems from, I mean, we had a force majeure in the first quarter. We had the inventory control now in the 2nd quarter with a significant impact But also we have additional capacities in the second half. So, the standards to continue with some volatility in prices, but overall, prices should be sequentially even lower, but we expect specialties of our firm with only some weak industries. So with some slight price declines also on the raw materials side put altogether, we see that we can achieve about 1,000,000 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. And 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? And that's number 1. And then number 2, the special prepayment income Any color as to the customer here? Was it Chinese or non Chinese? And then just A very quick, and third one, on BioSolutions, quarterly EBITDA run rate still below around 1,000,000, I think. So when should we expect to get back to this range or, in fact, higher given recent bolt on? Thanks. I hope you understand that we do not publish a name of the customer of that, repayment effect. On pricing on Semiconductor, polysilicon set definitely longer term than for solar polysilicon. And And so that's about what we can publicly say there. And for the BIOSolution, question, with the 1,000,000 EBITDA in the 2nd quarter and in the first quarter, total guidance is for around 1,000,000. So we definitely see slight improvement in the second half of the year for that. Okay. So not even any guidance in terms of whether the customer a Chinese or non Chinese. Just wondering about sort of Cannot be any guidance from our side. Hope you understand. The next question we received is from Martin Jungfleisch of Kepler Cheuvreux. Yes. Good afternoon. Thanks for taking my question. It's on polysilicon and the improvement in EBITDA compared to Q1. If you look at sales were down 1,000,000 quarter on quarter adjusted EBITDA was up 1,000,000. If we assume that the inventory devaluation effect was something like $15,000,000 less in Q2 compared to Q1, there's still a more than a $5,000,000 delta on absolute level. Is this because you've shipped more into inventory, compared to Q1, which improves margins? Or is this strictly because of actually significantly better cost control. And then also could you comment on if the semi grade volumes were down compared to the first quarter. And that's it from my side. Thank you. Martin, if you take out the prepayment effect in Q2 polysilicon result, you have operating loss of 1,000,000 compared to 1,000,000. So the difference is 1,000,000. And the major reason for that is really the lower inventory valuation adjustments in Q2 compared to Q1. But in addition to that, we also continue to improve our our cost, and we have efficiency gains, but this is not all quarters the same improvement. But the majority of the delta compared to the, the first quarter? Yes, I can firm, 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. So the strategy is to build a stock at market weakness and then have shortened lead time for the customers. And as we have shown in the past, we can quickly sell when the market turns up. Okay, perfect. Thanks very much. And the next question we received from Thomas Bogoda 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 did they already follow on the development in Asia and are on a pre bubble level I may call it, that would be helpful. And secondly, looking into what the year end input costs like them ethylene are coming down. Do you expect pressure from your customers to reduce prices because of raw materials or is it isn't that a question because your margin levels are still relatively this 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. And as we said for this is part of the normalization of the market after the shortage in 2018. China is always more extreme than other regions So we expect there are still price pressure from China to the other regions. Sort of the prices are connected somehow, but they're not the same everywhere. So, 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. And 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 is a number of contracts that are, formula based. And for those, we have, with the raw materials going down, also decreasing selling prices. And 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. So we have definitely to recover from last year's big hit and we are not there yet. So we hold back against any attempts from the customer side for lower prices. Perfect. Clear. Thank you. From Sebastian Bray of Berenberg. Your line is now open, sir. I would have 2 please. First is on polysilicon. This is quite an admirable job of taking out cost of the business. Am I right in that Vaca is placed to exceed the roughly 1 third cost reduction target that it set itself at the Capital Markets Day in 2017? That's my first question. I think the NYXAC number was 30%. Second is a update on insurance. Apologies I've just dialed in, so this may have already been dealt with, but how there been any news on the expected size of payment or its timing with regards to the 10 facility that had an accident towards the end of 2017? On the cost reduction of polysilicon, I mean, 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. And, we don't know what the future will hold. And this is why there is no let up 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. So as we are talking big numbers, we also take our time. So there's no change to report. Thank you. A quick follow-up. Could you talk a bit about the environment for German power price in the moment and if this is a head or is a headwind for the business or broadly neutral? The power prices compared to, the first quarter and end of last year are going down. But, still, you know, they are challenging. So there are several ways to to optimize that first on the purchasing side and then reduction of electricity use for example, per kilogram of polysilicon. And the next question we received is from Laura Lopez from Baader Bank. Your line is now open. Hi, good afternoon. I have one more question regarding the expansions on film silica in Tennessee and the silicon metal expansion. So, is it right to assume that these two things will also to improve the profitability of your polysilicon division. The question more focuses on the silicon metal expansion as prices have also come down significantly. So I don't know how efficient you can run the plant and let's say also has a lower cost curve than the current prices in the market. That will be interesting to know. Well, of course, we made these investments to improve our profitability. And the fumed silica by itself, of course, is a very important product but yes, in Tennessee, it also helps to use up sized products of the polysilicon production. So it's overall a very positive when we start running that plant and that's a maximum, a few weeks away. And similar in Norway, I mean, using our own metallurgical silicon is certainly more efficient than buying it. So that's why we are investing significant capital in the increase of these productions. And the silicon metal ramp up, can you remind me when is that planned for? Ramp up by the end of this year. As 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 Vacker Chemie. We're looking forward to further discussions with you as the quarter progresses. If you would like to meet us next time we are in your city, please send us a message directly or register your interest Tax partner. We will be back on the conference call on the Q3 results on October 24. Goodbye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.