Dear ladies and gentlemen. Welcome to the Q1 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 difficulty hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Mr. Joerg 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 Q1 2019 results. Dr. Rudolf Staudigl, our CEO, and Dr. Tobias Ohler, our CFO, will take you through our presentation in a minute. This presentation is available on our webpage under 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 presentation deck. Dr. Staudigl.
Ladies and gentlemen, again, welcome to our Q1 2019 conference call. Q1 group sales came in as expected at EUR 1.24 billion, 2% over last year, and 4% sequentially with strong volumes overall. Group EBITDA for the quarter was EUR 142 million, benefiting from good results in chemicals and held back by very challenging market conditions in polysilicon. Q1 EBITDA was 18% below the fourth quarter of 2018 and 44% below last year, mainly due to much lower prices for polysilicon. In Q1, Silicones impressively delivered constant sales year-over-year, despite missing volumes in connection to a force majeure that weighed temporarily on profitability during the quarter. Polymers continued to expand strongly, reporting 7% top-line growth with accompanying earnings growth. Biosolutions grows according to plan. Polysilicon, on the other hand, suffered from weak pricing while shipping very high volumes.
Before Tobias gets into more detail on the quarter, let me just focus on Silicones and polysilicon. The Silicones market saw tightness from Q2 2017 through the end of Q3 last year. Since then, the markets relaxed somewhat from the unusual tightness we experienced last year. An overheating market, especially in China, normalized as demand moderated and inventories were cleared. While some industry observers expected a surge in new siloxane capacities, we see the siloxane supply and demand as being more or less balanced. The announced expansions appear in line with expected demand growth. An important event in Q1 was the mechanical failure of a piece of equipment, which caused us to declare a force majeure in heat-curing silicone rubber and consequentially in some specialty materials downstream. This held back Silicones revenue and profitability in the quarter significantly. New product development and marketing in Silicones are progressing well.
Our operations across the board are now so fully loaded that we had no capacities available to make up for the lost production from the force majeure. This resulted in lower volumes and negative mix effects. Our colleagues in silicones worked hard to resolve this outage, and we have since resumed full deliveries. Our strategy in silicones is unchanged. We will continue to focus on mix improvements and direct CapEx accordingly. We continue to invest into downstream assets to address our customers' demand growth. In polysilicon, we continue to see strong growth in solar installations globally. As solar has become the most competitive and scalable form of energy generation today, new market opportunities open up. The shift to higher performance products continues as the market moves from multi to mono and within mono towards the higher performing N-type material.
We see strong demand growth in markets outside China with, for instance, Spain reporting record installations this year. In the world's largest solar market, China, industry consultations on a new renewables policy proceed. China remains committed to be a global leader in renewables, with initial proposals designed to accelerate installations. The current debate focuses a lot, excuse me, a lot on the ability to reach grid parity. We appreciate this approach as it drives technological improvements and unlocks new growth potential for the solar industry worldwide. The trend towards higher efficiencies accelerates. That said, it is uncertain at what time exactly the new policy will be formulated and implemented. In our view, this increases the likelihood of a stronger second half for 2019. Moving on to the larger picture, Brexit and trade disputes are casting shadows.
While experts' overall view on the global economy is still positive, it appears to be slowing down. Chemical industry bodies report subdued business activity, especially in automotive, industrial goods, and exports. Yet at the same time, construction activity in Europe is still expanding at a good pace. Polymers, for instance, saw very strong volume growth in Europe in Q1 for smart construction products. In our businesses, we see some weak spots in areas such as traditional automotive, while other segments, such as electromobility, are rapidly expanding. Given the economic backdrop, our businesses all developed well. We remain confident about good demand for our chemicals products and strong volumes in polysilicon. Looking at the group level, we maintain our full-year guidance, first given just a few weeks ago. We see full-year sales with a mid-single digit percentage increase and EBITDA between 10% and 20% below last year.
As a reminder, our guidance excludes insurance compensation. Tobias will now walk you through the financials and segment performance.
Welcome, everyone. Let me begin with our P&L on page three. Sales at group level improved year-over-year by 2%. WACKER POLYMERS was the key driver during the quarter, benefiting from both higher volumes and prices. Gross profit declined year-over-year by about EUR 94 million to EUR 149 million. The decrease was primarily due to the much lower average selling prices in polysilicon. After positive tax effects during the first quarter, net income came in at minus EUR 6 million, equating to an EPS of minus EUR 0.16 versus EUR 1.52 last year. Moving on to page four, our balance sheet. While not clearly evident on this slide, inventories in absolute terms are up strongly year-over-year, but only slightly up sequentially, because volumes sold in polysilicon followed the higher production volumes.
Accounts payables decreased since the end of 2018 as builds categorized as CapEx last year were paid during the first quarter. Pensions were up as the discount rate declined to 1.67%. The first-time application of the IFRS 16 standard saw financial liabilities increase by around EUR 130 million. Looking at silicones on page five, we achieved last year's sales level of approximately EUR 600 million, despite a force majeure situation during the first quarter of 2019. The missing volumes held back our specialties business and EBITDA declined to EUR 128 million. While the resulting change in product mix was a primary effect, sequentially slightly lower prices for standard silicones also played a role here. Following the sharp decline in prices in China in Q3 and Q4 of last year, prices in Western markets were also sequentially down, but are still similar to the prior year.
As we progress through the first few months of 2019, prices for standard silicone products in China are moving up once again. For 2019, we see silicone sales moving up at a low single-digit percentage. End user demand for silicones remains healthy, but pockets of weakness in various industries are evident. Good volume growth and better pricing in specialties should help achieve an EBITDA margin of around 20% for the full year 2019. In WACKER POLYMERS on page six, sales started strong during a typically seasonally weaker first quarter. During the first quarter of 2019, sales increased by 7% year-over-year to approximately EUR 324 million. Both volumes and prices are up year-over-year. The EBITDA increased to approximately EUR 45 million. Efficiency gains supported the improvement in profitability, but the margin remains below our target margin for chemicals.
Looking for WACKER POLYMERS in the full year 2019, we expect a mid-single-digit percentage sales growth with volume growth, slightly higher prices, and lower average raw material costs. We see the full year EBITDA margin improving to around 14%. WACKER BIOSOLUTIONS improved sales following strong growth in biopharmaceuticals following the acquisition of the new site in Amsterdam. The biopharmaceutical pipeline is developing nicely but will take some time before the plant is fully loaded. Profitability was therefore held back by underutilization at the new sites as they begin to load up. For the full year 2019, we expect a mid-single-digit % of sales growth with an EBITDA of about EUR 30 million. In polysilicon, shown on page eight, sales came in at EUR 211 million, slightly below last year's level. Although we sold significantly more polysilicon, the markedly lower prices offset the much higher volume sold.
We see good demand for our materials as our quality is the industry benchmark, but pricing remains unattractive. The first quarter EBITDA of minus EUR 36 million is disappointing, as further price declines and inventory valuation adjustments weigh on the segment's profitability. As Rudi already discussed the industry trends, I would just like to add that we are taking every step to reduce costs, improve our product mix, and improve customer service. During the quarter, we were able to meet strong demand in the spot market from mono customers with inventory out of our Asian hubs. Without the inventory in those hubs, we would not have been able to respond to the demand as fast. Looking into the full year 2019, we expect sales to grow at a low double-digit % and a neutral result in EBITDA.
Polysilicon prices continued to decline over the quarter. We expect a somewhat stronger second half to reach our guidance for this segment. Moving on to page nine, cash flow. Gross cash flow was held back by reduced profitability and higher levels of working capital following higher business volumes and typical first quarter seasonality. We expect to see a release in working capital as the year progresses. As a reminder, prior year Q1 included the advanced payment of the insurance of $100 million. Net debt increased to EUR 886 million at the end of the first quarter. As said before, first-time application of the IFRS 16 standard resulted in a net debt increasing by about EUR 130 million. Looking at our detailed guidance for 2019 on page 10, our expectations for the full year 2019 are unchanged. With this, let me hand you back to Rudi.
Thank you, Tobias. Ladies and gentlemen, as I said when we spoke the last time, 2019 is going to be a challenging year for us. While we share concerns about a potential economic slowdown, our businesses show only a few weak spots that get compensated by new business. A clear challenge is the pricing situation in polysilicon. Here, we continue our efforts to lower costs. For our chemicals businesses, we continue to introduce new innovative products. At the European Coatings Show, for example, we presented many innovations, such as polymeric binders that are partly made with starch or bio acetic acid and stand out due to their lower carbon dioxide footprint. We also showcased new dispersible polymer powders that can be used to make powder-form interior wall paints. They do not require the addition of biocides and offer additional advantages when it comes to storing and transporting paints.
Among the various new products and application areas for silanes, silicones, and fumed silica, we presented anti-soiling coatings and industrial adhesives with adjusted viscosity. The newly developed highly hydrophobic fumed silica is perfect for use in high-strength industrial adhesives. These are employed in automotive bonding applications and for the bonding of wind turbine rotor blades. As innovation thrives in our businesses, we continue to look for opportunities to improve productivity and efficiency. This has a high urgency in polysilicon. Our chemical businesses are also generating new ideas and opportunities to lower costs and improve processes. Looking into our businesses, I feel overall confident. Yes, we have a tough time in polysilicon, but we are working on all the right things. The overall market is moving in the right direction. Our chemicals businesses are well-positioned and perform very well. We confirm our recent guidance for the full year.
Ladies and gentlemen, this concludes the presentation today. We will now commence with the Q&A session. Operator?
Thank you. Ladies and gentlemen, if you have a question for our speakers, please dial 01 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 02 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. The first question is from Patrick Rafaisz, UBS. Your line is now open.
Thank you. I have three questions, if that's okay. I'll start with the first one. With polysilicon, can you talk a bit about how you see the second quarter starting? Would that be a similar quarter to the first, excluding the inventory write-downs? Do you have any evidence here from customers that would support your more optimistic view into the second half of the year? That's the first question.
The second quarter will certainly not be a very strong quarter, more flattish. We certainly see indications of a higher demand in the second half of the year. Our customers confirm that, but of course, nobody really can look into the future. I think there are reasons to be confident.
Mm-hmm. Okay. The second question on cash flow. Obviously, you're starting the year with a pretty poor number here. The guidance remains for substantially higher net cash flow than last year. Has this term substantially higher in your head as the order of magnitude changed here from what you thought just a short while ago with Q4, or are you still just as confident as after the fourth quarter results?
Patrick, Tobias speaking. The cash flow in the first quarter was disappointing, but there's a lot of seasonality in there, and our guidance doesn't change at all. We see net cash flow clearly substantially above last year, as we said 6 weeks ago. It's also a stronger second half. To be frank, the second quarter is a cash flow quarter, typically challenging because we pay out dividend, we pay out variable compensation. The second half typically releases working capital, and that brings us to the unchanged expectation of cash flow up against prior year. Our CapEx is lower than last year, and we don't expect a working capital increase in inventories in this year. You have to bear in mind that last year was burned very heavily by the inventory increase.
Mm-hmm. Okay, helpful. The last short question, just on the force majeure in silicones. Would it be possible to quantify the volume impact here you had in the first quarter? Has there been, or is there now some sort of pent-up demand that means that the second quarter could be even stronger now for silicones?
I don't want to quantify the impact exactly, but I want to say it has had a meaningful impact on the Q1 results. Without the force majeure, we definitely would have been above prior year in sales, and our EBITDA would have been much closer to prior year. The plant is now up and running again. We are making deliveries. It doesn't have an impact on Q2 anymore, but we cannot catch up the lost sales, because we are running very tight in this unit. The force majeure that hit us for a month is actually lost for the entire year. We couldn't make that up again. We cannot expect uplift in the second quarter just from the lost volume in the first quarter.
Okay, understood. Very helpful. Thanks for the answers.
Welcome.
The next question is from Andreas Heine, MainFirst. Your line is now open.
Yes. Thank you. I'd like to also start with polysilicon. I'd like to know whether your increase in inventories that you have done strategically in China is done or whether you have more to do. Related to these inventories, do you have any visibility how the inventories across the polysilicon producers are? Are they on a high level or lower level? I'm a little bit puzzled about, let's say, second half being better if it comes to installation volume. As far as I know, you deliver as much as you can in polysilicon. If the market does better in the second half, that doesn't mean anything for your volume. Do you expect an immediate impact on the price side here to have a better second half? I leave it at that on polysilicon, I have two questions on silicones as well.
Andreas, I start with the inventory question. We never said the inventory build is done. We always said that the strategic inventory build is important because we want to be flexible and be closer to our customers to shorten delivery times. That's exactly a point where we already benefited in the first quarter in 2019, because we could fulfill customer demand that we could only fulfill with a very short delivery time out of the hub in Asia. For the rest of the year, it needs to be seen how inventories will develop. Most likely we will see also fluctuations from quarter to quarter.
On the volumes side and price side, we certainly expect some recovery in prices in the second quarter due to the installations. You could assume, nobody knows exactly, but you could assume that of the overall installations this year, about 40% are in the first half and 60% in the second half.
Okay. Mm-hmm. Thank you a lot for that. On silicones. I'd like to understand a little bit what the price dynamics. You're saying that during Q1, you have seen some softening in the standard prices in the Western Hemisphere. Is that continuing in the second quarter? Should we build this in our models? How do you see the price trend in the specialties? Is there some spillover effect from softer prices in standard products or not? Maybe lastly, to understand also the seasonality. Usually you have quite some exposure to the construction industry in silicone, so that Q2, Q3 is stronger than Q1 and Q4. Is that something we will see this year as well, or are other trends offsetting the seasonality?
For the price movements, we highlighted that we had Western standard prices also moving down sequentially, I would assume that trend to continue in the second quarter.
The blip in improvements in prices in China has no relevance yet for the second quarter for Western prices. We have to see that regional prices are connected somehow, but they move with a time lag. For most part of our standard business, we see more price pressure, that's what we actually included also in the overall guidance for the full year. 2019, the margin decrease from 25% to 20% is mainly from lower standard prices.
Okay.
The seasonality question is a good one. We typically have a stronger second and third quarter, and first and fourth quarter are slower.
That's also the case this year. Why is the price movement and this stuff offsetting this?
I would expect the second quarter largely on prior year level in silicones, and then have the second half of the year stronger against prior year.
Second quarter.
The seasonality pattern is unchanged. Second and third quarter is always stronger.
When you're saying that the second quarter should be on last year's level, that was extremely strong in the second quarter last year.
Yeah. We are fighting hard. We increased specialty volumes. We have slight increases in prices on the specialty side. Exchange rate is also supporting a bit in the second quarter as it looks today.
Mm-hmm. Okay, thanks a lot. Any further.
The next question is from Charlie Craig , Citi. Your line is now open.
Hi. Yeah, thanks. I just want two questions. First, on polysilicon. Could you talk us through how your cost position in polysilicon is developing? You call out higher energy costs, but given also you're working on your fixed cost base, looking overall, would you say that on a cash cost basis, this year is lower than last year? What's your expectation for how energy costs will develop this year, next year, going forward?
I would say without energy costs, our cash costs certainly are lower. We assume that, or we assume the energy costs are coming down as well. By how much? Hard to say.
We would expect that energy costs year-over-year are higher.
Yeah
in 2019.
Basis, what, roughly flat year-on-year on that basis? Lower fixed costs, higher energy or?
No, energy costs this year could be higher than last year on the average. We could have seen the peak in the first quarter.
In silicones, just to clarify again on the previous question. You saw 27% EBITDA margins in the second quarter. You're saying probably the volume dynamics can be as good as they were in 2018 for Q2 and Q3, you're not going to enjoy margins in that range, given the pricing.
Yes, definitely.
Yeah, sorry.
I was talking just about the seasonality in top line-
Yeah
not in profitability.
Just one final question. Could you give us a rough split, I know you have in the past, between your specialty and standard volumes in silicones? Where are you in that and how that's progressing in terms of the strategy to push further down into specialty?
Well, it's moving in the right direction. That's what we can say.
Okay, thanks.
The next question is from Sean McLoughlin, HSBC. Your line is now open.
Thank you so much. Three questions from my side. Firstly, on polymers, just to understand the lack of margin improvement despite better volumes and pricing in the first quarter. The second question on polysilicon, your efforts to reduce costs, how quickly can you realize these and how significantly are you able to offset pricing pressure? The third question, just coming back to silicones, you've previously mentioned EUR 100 million of non-repeatable EBITDA. Are these EUR 100 million confined to Q2 and Q3 last year? How should we think about these comps from an EBITDA perspective? Thank you.
Sorry. The last question about the EUR 100 million non-repeatable EBITDA, I don't get it.
You guided before that EUR 100 million of the EBITDA last year was due to, let's say, exceptional circumstances that are not again repeating this year. I would like to understand these EUR 100 million, at which point in the year were these actually generated?
Yes. Now I see what you mean. Well, if you equate from our performance of last year, 25% margin versus the guidance for this year, 20% margin, it comes roughly to EUR 100 million. This is largely, as I said before, from lower standard prices that we assume.
Maybe a comment on the cost reductions in polysilicon. Of course, with such a precipitous fall of pricing, nobody can reduce costs at the same speed. As you can see on the results of everybody who really truthfully reports results. On the other hand, everybody's working very hard to reduce costs, and we are moving forward.
Can I just rephrase that question then? You've talked about accelerating cost reductions. Can you give us examples of any easy actions that you can take in order to see concrete reductions in Q2, Q3, Q4?
Nothing's easy in this business anymore. We certainly do not want to disclose special items we're doing.
With respect to the polymers question, your first one, Sean. We had 14% margin in this year and also 14% margin in last year. Please bear in mind that the raw material prices were still at a more moderate level in the first quarter last year, and the increase came through Q2, Q3, Q4. The year-over-year comparison is not that big on raw materials.
Understood. Thank you.
The next question is from Anthony Manning, Berenberg Bank. Your line is now open.
Good afternoon. This is Sebastian Bray of Berenberg Bank speaking. I would have two main questions, please. The first is on polysilicon. Am I right in saying that if prices do not recover, the guidance as it stands for 10%-20% decrease in EBITDA cannot be held? Are there any reasons that you would assume that prices would recover in H2, given that I think further capacity is due on the market at this stage? That's my first question. The second is on insurance. It's now been almost a year and a half since the accident at the U.S. facility at the end of 2017. I'm wondering how certain are you of recovering the full loss, given that there seemed to be some tortuous negotiations that took a bit longer than originally expected? Thank you.
For the insurance, there is no update, but there's also no change in our assumptions. We excluded it from the guidance, and if there was something to report, we would report it.
On the capacities in polysilicon, yes, there are new capacities coming on stream. There are also older capacities being shut down to quite some extent. Of course, demand is increasing in the second quarter. That's certainly the assumption.
Could I just follow up on the insurance question again? Is it fair to say that it's taken longer than you originally expected for this issue to be resolved? Would it be reasonable to assume the payment materializes in Q2? If that isn't the case, then why are you not unable to say at this stage when exactly the payment comes?
We are in the midst of discussions. The plant in Tennessee just ramped in December, for that reason, as we are talking big numbers, we take our time. For that reason, there's no change to what we said before. There's also no different notion in what I'm saying. It's completely unchanged.
Okay. Thank you very much.
The next question is from Martin Jungfleisch, Kepler Cheuvreux. Your line is now open.
Yes, good afternoon. Thanks for taking my questions. I have two on polysilicon, please. The first one is, given the weaker pricing for solar-type polysilicon, you mentioned that you are planning on expanding your exposure to the semi market. Could you possibly provide your exposure in terms of volumes and sales today, and how much you expect this to raise this to in the short and midterm, and do you see any challenges to this, and would this reduce the overall production capacity? The second question is, if you are fully loaded in semiconductor-grade polysilicon in the first quarter, or was volume and demand overall weaker in line with the general industry trends? Of the negative EUR 36 million EBITDA you generated, could you possibly tell us how much of this was driven by inventory write-downs? Thank you.
First of all, if we produce more semiconductor material, it does not substantially reduce the overall capacity at all. Second, we certainly do not disclose the exact amount of semiconductor-grade polysilicon we are producing. We just can see that we are more and more successful in that segment, and we already are the leading supplier of semiconductor material. If the wafer demand is going down, of course, the amount of semiconductor-grade polysilicon needed is also coming down for sure. On the other hand, these are just cyclical events in the semiconductor industry and in the wafer industry, so it's not really of great concern.
Martin, to the inventory write-down, we do not disclose exactly, but we can say that it had a major effect on quarterly results, and I would like to help you equate it. If you take first the PVinsights price movements, average Q4 to Q1 sequentially, that was down roughly EUR 1 or $1 a kg. If you take an assumption on our inventory, you know that we have 80,000 tons capacity. Just take a number that you deem fair as inventory. You easily come to a double-digit million EUR effect in inventory write-downs. This is a significant portion of the minus EUR 36 million in EBITDA performance in the first quarter.
Okay, very helpful. Thank you very much.
The next question is from Marc Grasdadell, Exane BNP Paribas. Your line is now open.
Hi. Just a quick one in polysilicon. I think in prior calls you had mentioned that domestic producers in China haven't been very active in the mono segment of the market yet, I just want to check if you can confirm if this is still the case or how the competitive landscape has changed recently maybe. If I can sneak in a follow-up on polymers, just thinking beyond 2019, are you still looking to push prices in the context of recovering towards that 16% level, or does the lower input cost environment sort of hamper that ambition? Thanks.
Solar wafer customers, of course, are using domestic polysilicon, also for mono applications in China. For very high qualities, our material is definitely significantly superior. I already mentioned in several calls, and it's still the case, that some producers are not really able to assess in detail how much higher quality of a material really benefits them. This is a question of the maturity of the industry. As the industry matures. The processes are becoming more stable, and the methods of analysis are becoming better. More and more realize what benefits they have from high-quality material.
With respect to the polymers question and the outlook for 2020 pricing, it is really early to talk about pricing 2020. Bear in mind that some of our products are also based on formula prices. If we have the trend that raw materials moderate again, we have the negative effect on prices as well from that. In addition, as in last year and as in this year, and it will be same in 2020, it always depends on supply and demand. This is different by region. We have some looser capacity situation in Asia than in the Western markets. That will also then determine the pricing for 2020 in polymers.
Okay. Thanks very much.
The next question is from Oliver Schwarz, Warburg Research. Your line is now open.
Thank you. Some questions from my side. You said that the inventory writedowns affected the EBITDA by probably a double-digit million number. I may be thick here, but why does that affect the EBITDA and not the EBIT? That seems to be an accelerated depreciation, which shouldn't affect the EBITDA. Some clarification on that line would be nice. Consolidation of the polysilicon industry. It seems like no player at the moment is really able to be in black figures given the current prices. Have you seen signs of further consolidation of the market, or is everybody hanging in there and waiting for higher prices in the second half of this year to materialize? A second question on poly.
As you stated that you want to go for higher market share, is that just a recouping of market share that you lost with the accident at Tennessee and the reduced volumes thereafter, or is that something in addition to that, e.g., are you currently doing some additional bottlenecking that would allow you to produce higher volumes that you could push into the markets? Lastly, in silicones, could you quickly elaborate on demand from the automotive industry and their suppliers, please? Thank you.
Maybe on the consolidation of the polysilicon industry. Yes, there are too many hanging in there. That's for sure. Ultimately, there will be consolidation. That's not untypical for development of an industry, unfortunately.
The silicones automotive market is down as end market segment, but it just makes 5% of our total silicone sales. We feel that the car industry is going slower. You also need to differentiate between traditional combustion engine and electric vehicles. We have quite some new business also on the electric vehicle side that goes very nicely. To the accounting question, which was your question number 1, I think I don't like the term depreciation on the inventory. It's not correct. I would neither call it write down. It's more like a revaluation. From that, you also see that this clearly is a revaluation of an asset that then goes into the EBITDA, not below that line.
I'm sorry, I skipped the answer on the growing market share in the semiconductor volume side of polysilicon, if I understood you correctly. This is not recouping lost market share. It's successively improving market share through performance, through reliability, through competitiveness. It's not reducing capacity on the solar side.
Understood. May I sneak in an additional question regarding depreciation, please? Could you quickly elaborate why the depreciation level in Q1 2019 was higher than in Q1 2018, despite your guidance of having or aiming for a lower depreciation level in 2019?
Yeah, this is the IFRS 16 effect as the leases that go out of EBITDA become depreciation and interest. Our depreciation goes up year-over-year by EUR 30 million. Just from the new standard.
Shouldn't that be the case in the full year as well? Because you're guiding at EUR 725, and I guess that's including that effect.
Yes. We are getting close to prior year level with depreciation. It's exactly these EUR 30 million that also show up for the full year.
Okay. Thank you very much.
Welcome.
The next question is from Thomas Swoboda, Societe Generale. Your line is now open.
Yes. Good afternoon, gentlemen. I have one question left, it's on your guidance, especially in polysilicon. I'm still trying to understand it, sorry to make it a little bit longer, but if I understand you correctly, you said that EBITDA in Q2 should be roughly flat quarter-over-quarter, in the second quarter. In order to make your guidance, you would then need to make EUR 140 million of positive EBITDA in the second half of the year. I hope I got this right. My question on this is, can you give us a hint how much of this EBITDA swing you can control? Meaning, how much or what proportion of cost savings, increased volumes, and other things you can control can contribute to this guidance, how much is the hope for the better pricing in H2?
I'm perfectly aware you don't want to show all your cards, don't want to put all your cards on the table. Any hints on this would be very helpful. Thank you.
Thomas, we hinted that we do not see a large improvement in the second quarter. That was our statement. That means that we had EUR 36 million negative. We continue negative, but that does not add up to EUR 140 million in the first half minus. That is the first statement. The second is, with the inventory revaluation effects, these go both ways. We have revaluation negative, but our assumption is clearly that we have a stronger second half end demand-wise and such, also with somewhat higher prices, and that will then also lead to higher inventory valuations. That explains that we see the guidance of neutral EBITDA unchanged.
Are you saying that cost savings and additional volumes do not play a big role in the swing?
For sure they play a big role. We work intensely, as we said, on cost reductions, and they make up a strong element as part of our profitability. Somehow the prices are expected higher in the second half. That is true.
As the costs decrease, the need for price increases is less in order to get to the guidance.
That's fair enough, I think. Thank you.
We have a follow-up question of Andreas Heine. Your line is now open.
Yes. Thanks for taking my question again. On polysilicon and the inventories. You said that you were happy to have these inventories in China to make use of the high demand there. I don't fully understand this, I have to say. Even if I strip out the cost-making. Why does it make sense to be keen to sell down inventories if the demand is high, if you don't earn anything? That's the first question. Working on what you just answered on the question before on the inventories going in both directions. I would assume that you have First-In, First-Out calculation in the inventories.
The new build-up inventories would go on these costs. I would assume that then if you do not have to do any additional inventory reduction, but selling down the already, let's say, revalued inventories at current prices and building up the new inventories at cost base, I would not get to relief of these write-downs you have done already, even if prices go up. Could you explain this to me, please?
I start with the second question. The relief in the revaluation only comes when prices go up. If not, you're absolutely right in your accounting. You sell at the revalued inventory level, and if that price is the same, you don't make margin on that.
On the first, could you explain why it doesn't make sense to sell from the inventories? That you mention this as a positive, having these strategic inventories in China and being part of the higher demand, if you can't earn anything with that?
We had a rush demand of a customer, and we need to, with all our sales volume at a certain period, we need to accept a certain price level. We sell it then still at a better price than market priceAnd we also think strategically in building those customer relationships. Just bear in mind, we had the Tennessee plant not running for almost a year, or not at least running at full capacity, so we lost some business opportunities. In that situation, we are very happy that we could serve from a local hub material.
We are still always selling at higher prices than competition.
Okay. Lastly, as you mentioned this, it's fair to assume that your deliveries in the first quarter were higher than your production capabilities.
No, it's similar to production capabilities.
Similar. Okay. Mm-hmm. Thanks for answering my questions.
Okay.
We have another follow-up question from Sean McLoughlin. Your line is now open.
Thank you. Just another follow-up on the write-down. Given that polysilicon pricing has been in free fall over the past nine months, since June 2018, can I ask about the frequency of the write-down? I don't recall that we've heard of any inventory write-down since the middle of 2018. Could you maybe share with us any polysilicon inventory impairments that you've made over the past three quarters to help us get a better grip of underlying profitability trends in polysilicon?
Sean, the revaluation of inventory is standard procedure in IFRS accounting. You always go and have them in the books at total manufacturing costs. These include depreciation, but if your selling price is below that, you revalue it to that lower selling price. That was the case throughout the year, or I would say, the second half of 2018, when prices dropped. You compare against full manufacturing costs, including depreciation. With depreciation in Tennessee, we have a very high level.
Okay, thank you.
The last question is from Olga Kashafa, Svenska Handelsbanken . Your line is now open.
Thank you. Hello. I have a question regarding the production cuts at the silicon plant. Could you give us, please, more details in this regard? What happened? What exactly happened?
Oh, you mean in this force majeure case?
Yes. Yeah.
Oh, okay. Well, a piece of equipment failed.
Our production capacity was reduced by a fair amount, and then you just cannot produce this specialty material. That's why we have not only lost sales, we have also lost significant profitability. We do not specify detailed production costs.
Okay. It was not an accident, right?
No, it was not an accident. It was an equipment failure.
Okay. A technical issue.
A piece of metal.
Okay.
A piece of metal failed.
Okay, I see. Thank you.
There are no further questions. I would like to hand back to the speakers.
Thank you, operator. Thank you 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'd like to meet with us next time we are in your city, please send us a message directly or register your interest with our corporate access partners. We will be back again with a conference call on the Q2 results on August 1st. Goodbye