Dear ladies and gentlemen. Welcome to the Wacker Chemie conference call. 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 2018 results. Dr. Rudolf Staudigl, our CEO, and Dr. Tobias Ohler, our CFO, are with us who will take you through our presentation in a minute. The presentation is available on our webpage on our wacker.com under the caption Investor Relations. Before we begin, allow me to point you to a safe harbor statement, which you'll find at the beginning of the presentation deck. Dr. Staudigl.
Ladies and gentlemen, welcome to our Q3 2018 conference call. Our chemicals businesses performed well again. Silicones saw very strong results. The recovery is underway in Polymers. On the other hand, Polysilicon currently faces a challenging market environment. At EUR 1.24 billion, group sales were 5% lower than last year and 7% below Q2. Q3 EBITDA was at EUR 242 million, down 19% year-over-year and 7% quarter-over-quarter. Just looking at chemicals, though, EBITDA was up 5% over Q2 and 16% over last year. Silicones generated strong results with sales up 14% year-over-year with an EBITDA margin of 27%. This margin was supported by prices and a strong performance in specialties. Fundamentally, we expect the market to remain short as demand stays high above GDP growth. As previously communicated, we are looking to invest to enable further growth in line with market demand.
Polymers saw solid volume growth year-over-year and high utilization rates in our plants. In addition, the absence of VAM turnaround costs helped earnings improve quarter-over-quarter. Raw materials are elevated with VAM prices continuing to be a headwind. Visibility in Polysilicon today is less than usual as the market continues to adjust to recent policy changes in China. When we last spoke, we alluded to first signs of a recovery in Q3. A short pickup at the end of July, however, did not materialize into a market recovery. We continue to produce at full capacity and ship into hubs close to our customers. This helps us to fundamentally improve our customer service. Our cost initiatives continue, and we are well on track to deliver our expected cost reductions.
Looking to our group forecast for the full year 2018, we expect a strong performance in chemicals with the usual seasonality in Q4. In Polysilicon, we expect in Q4 a similar market environment as in Q3 with only a late potential uptake. Based on this and the expected insurance compensation, we confirm our guidance for the group. For the full year 2018, we continue to see a low single-digit % increase in sales and a mid-single-digit % increase in EBITDA. Tobias will now walk you through the financials and segment performance.
Thank you. Welcome to our Q3 2018 call, ladies and gentlemen. Let me take you through our financials and present the outlook for each segment. Looking at our P&L on page three, we see sales down year-on-year by about 5%. Weaker volumes and prices in Polysilicon had a negative effect on group sales growth. Gross profit came in 19% below last year, mainly due to the sales effect, ramp costs at the site in Tennessee, and higher raw materials. SG&A was slightly up on wage inflation and group initiatives for digitization and efficiency. Siltronic and our joint ventures contributed about €29 million to the group EBIT after purchase price allocation effects. EBIT was down 31% year-over-year to €107 million. We show a tax rate of 23%, reflecting the relatively higher share of after-tax components in profit before taxes.
Earnings per share from continuing operations declined by 36% year-over-year to €1.31 per share. Our balance sheet on page four remains largely unchanged except for the higher inventory level. Business growth in Silicones and stock building in Polysilicon are the main drivers for this increase. Having strategic Polysilicon inventories closer to our customers will provide us with the necessary flexibility when the market recovers. Silicones on page five, kept its Q2 record margin at 27% in Q3. Sales were up 14% compared to last year, driven both by mix and price. The markets continue to be tight in specialties, with some softening towards the end of the quarter in standards in China. We see some supply chain effects ongoing and some uncertainty from trade conflicts. Nevertheless, we improved our last guidance and now expect an EBITDA of slightly over €600 million. This is up from about €600 million before.
We continue to expect a typical seasonally weaker Q4. On page six, volume and price performance helped Polymers. EBITDA improved to €47 million quarter-over-quarter, despite still high raw material prices. For the full year, we confirm our last guidance. We see full year EBITDA at about €150 million. On page seven, Biosolutions saw strong business in pharma-related products. Integration costs from recent M&A held back our performance. Our full year EBITDA guidance is unchanged at about €25 million. Q3 was very challenging in Polysilicon on page eight. Low prices and volumes, as well as the ongoing Tennessee ramp without the respective insurance compensation, weighed on our earnings. Considering these developments, we reduced our full year guidance on Polysilicon. We now expect sales and EBITDA to be about 25% lower than last year.
While the solar PV market faced uncertainty, the market situation in polysilicon for semiconductors looks decidedly different. In this market segment, demand is strong, and we are growing faster than the market. Guidance on others is unchanged. We continue to see a low double-digit negative EBITDA for the full year before adjusting for the Siltronic earnings effect. Gross cash flow in the quarter improved sequentially to just over EUR 100 million, despite the build-up in inventories. Cash flow from investing activities year to date was up about 35% to EUR 280 million. At the end of Q3, our net financial debt at EUR 637 million is at the level of the prior quarter. For the full year, our guidance on net financial debt remains unchanged at about EUR 500 million. With this, let me hand you back to Rudi.
Thank you, Tobias. Ladies and gentlemen, as you can see in our report, CapEx in our chemical segments is up over 50%. Our chemical businesses have strong market positions and technological leadership. We plan to expand these businesses, and that's where our investments are focused. In Silicones, we are working on options to increase our upstream capacities while supporting specialties growth with targeted investments. With their versatility, Silicones address a broad range of markets, essentially diversifying growth over regions, industries, and applications. As a result, we continue to expect to grow faster than GDP in this segment. In polymers, we follow the strong demand growth for our products. Price increases achieved so far are not yet sufficient. We are looking to improve pricing further as we digest higher raw material prices. In polysilicon, we are on track to reach full capacity in Q4.
While we are facing a temporary challenge in the market today, our positive view on solar is unchanged. Photovoltaic solar is the fastest-growing power generation technology in the world. No other technology offers as attractive economics or installs more capacity globally. In power auctions around the world, solar keeps winning as the lowest cost power supply. Many markets outside of China are now reporting growing installation numbers. In Europe, we see installations doubling following lower prices and the end of tariffs on solar modules. For next year, analysts forecast significantly higher installations globally. We are convinced that this development will ultimately benefit us. You saw today that we confirm our previous guidance. We continue to see a mid-single-digit increase in the EBITDA, translating into over EUR 1 billion in EBITDA in this year. Joerg?
This concludes the presentation today, ladies and gentlemen. We will now begin 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 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 are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. Here is the first question. It comes from Charlie Webb of Morgan Stanley. Your line is open. Please go ahead.
Good afternoon, gentlemen. Just a couple from me. First off, in Silicones, can you help us understand kind of the exit run rate from the quarter, how we should see that going into Q4, and into the next year? Clearly, this year has been a very strong year for Silicones, both standard grades, but also specialties. Just understanding that mix dynamic, where is the weakness, if there is any? Where it is still strong, and how will that evolve as we move into next year? First question. Just second question around kind of cost inflation, energy price inflation globally. Is this something you guys are noting in your business? Are there any kind of spots of significant inflation? It could be raw materials, energy, wage inflation, et cetera, that will become increasing headwinds as we move into next year? That would be my second.
Okay. Let me start with answering the Silicones question. Well, run rates right now are very high, and they will remain high into next year. Just for you to remember, the siloxane undersupply to the market development, which caused this market development, was the shutdown of the capacities in China due to environmental issues and shutdown of a European capacity for siloxane. In addition to that, there was continued growth in demand worldwide for Silicones products. We do not see any fundamental change in these characteristics so far. Overall, market demand is still high and there are no overcapacities. We expect this to stay like this for the time being. As mentioned in the last call, the announced and planned additional capacities are needed to supply the market for its general growth. I already mentioned this example in the last conference call.
We have a total market size of about 2 million tons per year, and if we assume a 5% growth, we need, or the industry needs, 100,000 tons per year additional on siloxane raw material. The fundamentals are strong. Yes, in China, right now we can see a drop in commodity material prices. However, from a very high level back to a level which is lower compared to a few months ago. However, it is still twice as high, roughly, as two years ago.
Oops, sorry. Carry on.
No, go ahead.
Does that mean, given your mix geographically and in terms of grades and the underlying growth of the market, you're still kind of stressing it's very healthy. Do you believe you can still grow next year, in kind of EBITDA terms, Silicones, against that backdrop, even with some normalization in China? Is that the message, or is that normalization in China going to weigh on next year EBITDA for Silicones on the kind of potential growth of that business?
Well, I cannot give you detailed numbers about next year, obviously. It's certainly a fact that our exposure to commodity pricing or commodities in China is very low. Our focus and our strategy was to focus on specialties all over the world. We see our strategy really to pay off. Without being able to give specifics for next year, but demand is strong and our positioning is extremely well.
Charlie, this is Tobias speaking. On the questions on input costs, I think very good questions looking ahead into 2019. I would start with raw material prices. If I go back to 2018, we have had a pretty strong headwind, and that headwind actually turned out stronger than we initially expected. Forecasting in that is difficult, but as some of the headwind was induced by some unforeseen shutdowns in, for example, in acetic acid, also pushing up VAM prices. I would say from today's perspective on raw materials, we should expect some normalization for next year. With respect to energy prices, again, also in 2018, we had headwinds and increasing headwinds. That goes back to oil and coal prices. Everybody is looking at that. There's also, I would say, a political element in that. We had higher energy prices in 2018 already than in 2017.
I would say from today's perspective, again, we should see also higher electricity and gas prices in 2019. Again, going back to predictability in this environment, just in recent weeks, we had observed some volatility on the oil price. First oil went up, and now it's down again. Our assumption is now more or less building on the futures that we have in those markets.
Brilliant. Thank you very much, guys.
Thank you.
Thank you. The next question is from Andreas Heine of MainFirst. Your line is now open. Please go ahead.
I actually have three. I start with one on Silicones, and then later on two on polysilicon, if I may. I still want to understand a little bit better what's going on in China. Of course, it came down from very high levels, but it seems that there is a softer demand and that supply-demand situation in China has changed. Looking forward that we might enter into a somewhat lower growth environment, how do you see the chance that, let's say, the weakness we see in spot prices in China can spill over to other regions, or that Chinese player export at lower prices to other regions? Can anything, what we see and observe now in China, spread around the globe, or is that something you would exclude? I leave it, the Silicones question first and then
Well, the softer demand in China is certainly due to the impact of the trade war and cautiousness of market participants in China about their chances to export to the United States. That softened this type of market, obviously, a little bit. Again, we are not a big contributor or a big participant in this market. We mainly read the statistics that we get about the market there. The question is, of course, will the Chinese economy grow much slower than it did? If it grows much slower, of course, then Silicones demand growth will certainly be slower in China. Will they export more siloxane or basic commodity materials? It's hard to say, but I do not expect a big impact on the Western markets through that.
Of course, if the Western market, that means European, American market, South American markets, et cetera are still growing fast, I think, as I said, there is no reason to assume that the tightness in the Silicones market will disappear. This is why we continue to stay optimistic about the Silicones business in general, and especially, of course, the specialties business, which is certainly a very significant share of our total Silicones business.
Thanks. Maybe on polysilicon. I have to say, I was a little bit surprised about the sales level, which I think was very high in that quarter given the environment. Either you had reasonably high prices or your volume was very high. To get to this EUR 174 million, if I assume that there was a drop in prices, you probably had still deliveries of maybe 13 to 14 kilotons. Looking on how weak the market is, could you explain a little bit how you operate in this market where I thought it's very difficult to sell any polysilicon?
Andreas, to be speaking, we typically do not comment on exact volumes. As we have the highest quality polysilicon, for sure, also in this environment, the demand for Wacker material was stronger than for others. That's why we might have over-participated in this environment.
The second question relating to this. There is not a particular uptick in demand, but you said you ramp up Tennessee, and you will have the plant fully ramped up during Q4. That means that you intend and plan and do operate all your plants at a full capacity. Despite this market, does it lead to additional inventories, or do you think you can sell this additional volume into the market in Q4?
It leads to additional inventories that we have alluded to in our presentation. Of course, we are not happy with the total market environment right now, but we certainly are happy to be able to build enough inventories close to our customers, so that when the market really gets stronger, we are in a better supply position to be able to supply more directly and faster to the customers. If it doesn't stay for too long, which we don't expect, it's positive.
Mm-hmm. Maybe lastly on this, and then I stop. In this buildup of inventories, you do not fear that you have finally to write inventories off because of very low prices. Is that a risk you have? Are your production costs low enough that that is unrealistic to assume?
First of all, IFRS rules always apply, and we take typically full manufacturing costs, and those include depreciation. You know that our depreciation, especially from the Tennessee side, it's really high after the recent investment. According to IFRS, we do mark to market at quarterly end. We need to adjust for market prices. That is the accounting part. Looking at it from a strategic perspective, as Dr. Staudigl just said, the stock buildup is part of our strategy. We target to optimize our production. That's number 1, and we target to optimize our customer service. That's number 2. At the end of it, that's number 3, we are optimizing our financial results from that. It's really part of the strategy that we leverage those temporary low-market environments to build our strategic stock.
Okay, thanks.
Thank you. The next question is from Patrick Rafaisz of UBS. Your line is now open. Please go ahead.
Thank you, good afternoon, everyone. I have two questions on polysilicon and two questions on Silicones, please. Polysilicon, do you feel the pressure? Let's assume the market remains sour for longer, right? Do you think you can or would have to accelerate the cost takeout that you're anyway doing? At what point would you consider to cut or mothball capacities?
Well, we certainly try to reduce our costs as fast as possible, independent of the market situation. We are working hard on that, and I think we are also working very successfully on that.
Yes, please. Go on.
Go ahead. I'm sorry, but what did you say?
I was just going to ask, it's still the 30% you targeted on the 2016 baseline, right? Cost reduction.
At least. I certainly do not want to speculate too much about the market development, I do not see any reason why there shouldn't be, within a reasonable period of time, a pickup of the market. The prices for panels is so low, the energy cost or electricity cost out of photovoltaic is so attractive, that there has to be an elasticity of the market, and this is what we expect. We are not going into gloom and doom scenarios. I think there is no reason to do that.
Okay, thank you. On Silicones, you mentioned that commodity grades prices are falling in China, you have little exposure. Can you talk about what's happening in Europe and the U.S. for the commodity grades? The second question on Silicones would be on EBITDA, right? You've increased your guidance almost every quarter for the Silicones EBITDA. How big would you say, or how much of that is excess earnings attributable to things like panic buying of customers due to shortages and spikes in standard grades? How much would be just the kind of clean EBITDA?
Well, to the first part of your question, again, there is no excess siloxane capacity in the world so far, certainly quite for some time. That means, of course, there are still sort of modulating changes in supply and demand, and maybe pricing in the commodity area, because, just as you mentioned, it's certainly the case that some customers, when more material was available, they bought excess of it and stored it as much as they could store it. Then especially at the year-end, they want to get rid of the inventory and acquire or purchase less for a certain period of time. This could get into some or result in some fluctuations of supply and demand and commodity pricing, which is very short-term.
That certainly could happen, but it does not change the overall market situation, because there are no, as I said before, I repeat myself, but it's important, there are no overcapacities for siloxane in the world.
Been answered?
Yes. Thank you very much. Thank you.
Okay. Thank you. We have the next question. It comes from Chetan Udeshi of JPMorgan. Please go ahead, your line is now open.
Yeah. Hi, thanks. Maybe a few. Firstly, can you just give us some number around the ramp-up cost for Tennessee in Q3 that you had? That is number 1 point. The second question is, again, sorry, I think this might have been asked previously, but I wanted to ask it in a different form, which is, previously, we have had this polysilicon module prices going down and stimulating demand for almost 10 years now. Every time the market has, or demand has gone up, it has not meant that the pricing for the solar supply chain has gone up. Maybe you can answer this in a different way, but it seems at this point, this is the first time at Wacker in the polysilicon business, looks like the spot pricing is probably below the cost of production. Maybe my calculation might be wrong.
Given these dynamics, do you think structurally the environment is now much different than in the past, where maybe internally the company has to take a different approach than in the past on this business, just structurally speaking? The third question would be on Silicones. Can you clarify how much do you think your silicone earnings would have benefited from what has happened in China in terms of commodity pricing going through the roof, or the tightness in the market just in China? Thank you.
With the little we sell in China in Silicones, to the second question, but I will come back. Of course, we also participated in the certainly very high commodity pricing in China, but to a small amount, only. Of course, prices in China needed to go up, because two, three years ago, they were significantly too low. This certainly was positive. To the polysilicon, of course, what we are doing is reducing our costs. We have been very successful on our cost roadmap over the last years. I think we continue to work hard to come down with our costs additionally, and I said that before. The changes in the polysilicon market and in the solar market certainly go into our directions. The quality of the material that is needed is going up, and the industry is becoming more mature.
More and more customers realize how important the quality of the material is to get high output, especially in monocrystal growing, to get a high carrier lifetime, et cetera. These significant values. This market is becoming more and more mature. I am not in a position to forecast pricing in the future, but I think it will be a profitable market in the future because of the rise in demand and the rise in the requirements and our position to fulfill the requirements in terms of quantity and especially quality.
Chetan, Tobias speaking to your first question on the ramp costs. I think you already assume that we don't want to go to that level. I can say that the ramp cost in Q3 would have been higher than what we expect for Q4. As we are getting closer to full capacity at the Tennessee site, these effects should fade away.
Thank you.
Thank you. The next question is from Raghav Bardalai of Exane BNP Paribas. Your line is open. Please go ahead.
Hi. Good afternoon. I just had two quick questions, please. Maybe first on a sort of macro level, I think you've mentioned that trade tensions are a factor that could lead to a slowing in macro growth momentum. Could I just confirm that you've actually not seen any visible change across any of the sort of key regions or end markets in your chemical businesses, please? Secondly, could I just check on polymers? Could you maybe share some color on the traction with your pricing initiative so far? Is the combination of higher prices and potentially stable inputs sufficient to take you to the 14% EBITDA margin that consensus has for next year? Or is the ambition that you would go above that, more closer to what you've been tracking at in the last few years? Thanks.
On a macro level this is really hard to say. There are no significant changes that we can observe right now. The whole trade war has only started.
Yeah.
The whole industry, the whole world has to experience what it means with such drastic tariffs from one country to the other. The question really is, what kind of ripple effects will we see throughout the economy? Since I'm not an economist, I'm a chemist, I'm the last who can really predict in detail what will happen. In a company, we just can try to prepare for all eventualities as much as possible. This is what we are doing. We will see what happens.
Okay, thanks.
Raghav, Tobias on the question on the polymers outlook, a very good question. For sure, the price increase that we achieved in 2018 was not sufficient. We talked about the high headwind that we had from our input cost, the raw materials. What you can achieve price-wise always depends on supply-demand. We only have 25% of our prices formula base that pass through inflation to our customers. Our strategy is to maybe move to shorter terms. Also, we announced price increases that give you a hint to the direction. Prices should go up for next year. I don't have a specific outlook for EBITDA for next year, but we are definitely not satisfied with the temporary EBITDA margin, and this is not at our target level. In the past, we recovered over time, maybe not in a single year.
We would make progress, but we need to see how far we get in next year.
Okay.
I would like to add one more thing to the previous questions.
Sure.
Of course, even when the overall economic growth in the world is going down, just from past recessions and recessions that are maybe decades ago, let's say, at the end of the '80s in Japan, for example, there was always still a strive for better quality of life. The last demand that is going down was for some specialized products that everybody needs in everyday life. I think we are very well-positioned with our products, in specialty segments. In an economic downturn, raw material prices usually are going down significantly. There is no reason to assume why we wouldn't be able, even under such a difficult scenario, that we wouldn't be able to perform in our company. I'm not pessimistically looking into the future.
Okay. Very clear. Thank you.
Thank you. The next question is from Sebastian Bray of Berenberg. Your line is now open, please go ahead.
Good afternoon, and thank you for taking my questions. My first one would be on the certainty of the timing and magnitude of insurance payments that will be received for polysilicon. Is it a certainty now that the full body of insurance materializes in Q4, and have you agreed with the insurer what this will be? My second question is. Pardon me. On the development in the polysilicon market. Am I right that implicit in your guidance is that the segment as a whole would make negative EBITDA excluding insurance for Q4?
Sebastian, very good question on the insurance. As we always highlighted, we said we would conclude the discussions with the insurance company in Q4. This is part of our guidance. It's part of our guidance for the P&L impact. It's part of our guidance for the cash flow. That's our expectation. We are in the discussion right now, and we will not disclose, and I think you can understand that. Our clear goal is to get the right compensation to be made whole, and that is what the insurance is for, and we're working on that. With respect to the polysilicon development operationally into Q4, that's how I understand your question. I think we should split cost and market. We expect to continue to make progress on the cost roadmap in Q4.
We also expect to continue to see less burden, as I discussed before, in the Tennessee ramp. On the market side, I think that will give the input to the top line and then finally also to the bottom line. We talked about our expectation that at some time the market will pick up again. We have baked into our Q4 assumptions that we at least see a late pickup in the demand. That's how we see Q4. Finally, if you want to do the math, you come to Q4. We typically do not guide for single quarters. You take our full-year numbers, which we calculated to around 25% lower in sales and EBITDA from last year's level, 25% below.
If you do that, you come to a sales that is in Q4 somewhat higher than in Q3, and you come to an EBITDA which is above EUR 100 million.
Thank you very much.
Thank you. The next question comes from Thomas Swoboda of Societe Generale. Please go ahead, your line is open.
Yes. Good afternoon, gentlemen. I still have three questions. I will try to take them one by one. Firstly, inevitably on polysilicon. A lot of discussions on this lack of pickup in market demand. I would like to pick your brain on what is actually holding back the market recovery in our view. Is it still demand? Is it supply? You are usually well informed. Could you give us some hints, please?
Well, there was a big demand drop in China, and that's what it mainly is.
I mean.
Yeah, maybe, you could also think about another reason in the deflationary trend as we saw it, and we still see it for modules. Investors simply are waiting and see if they can get even lower module prices. A situation like that can hold back even markets that normally would really grow fast. I think these are basically the two main effects.
That makes sense. Thank you. On Silicones, you mentioned the drivers for the run in Silicones over the last two years, and one of them being the closures in China. We see that in the face of the trade conflict with the U.S., the Chinese apparently are stepping back from some of the environmental measures and so on. The worry I have or the question I have is: Is there a risk that some of the most old or closed down plants could come back to the market if the environmental controls should become less strict, or are those plants really gone for good? How do you see this?
First of all, I do not believe that the demand and positive environmental behavior will be released in China. I don't see this. Maybe one or the other of the plants really now adhere to strict environmental regulations, but these capacities are not really very significant compared to the total demand. In other words, I do not expect a relief in the shortage for siloxane in the world because of that.
This is very clear. Last question on admin costs. They are relatively high, and the proportion to sales has increased in Q3. I think you have some digitalization projects going on. The question is there some lumpiness in those admin costs? Could we expect some relief?
If we should subtract from the wage increases or is this the run rate we should be looking at?
Thomas, on the admin costs. First, if you take the ratios to sales, you need to bear in mind that with the lower sales, you get to higher numbers, percentages. If you look over the cost below the cost of goods sold on an annual basis, from one quarter to the other, you can see some fluctuations. If you look at it for the full year, for the first three quarters, those effects are less pronounced. You hinted to the right topic. We are investing more in digitalization, and that is a big effort. Then we have some wage inflation that also shows up. I would always go more for, not for the quarterly numbers in this area, look more at it on a yearly basis to get some modeling assumptions for next year.
That's fair enough. Please get well soon, Mr. Staudigl.
Thank you very much. I'm on the right track.
Thank you. We have the next question. It comes from Oliver Schwarz of Warburg Research. Please go ahead, your line is open.
Thank you for taking my questions. I'll try to ask them one at a time. It's mostly technicalities, so we should be over quite quickly. Firstly, inventory building. By Q4, Tennessee will reach, or most likely will reach full capacity again. Given the low price environment you're currently facing, given the implied sales guidance you gave for Q4 2018, would you say you will be running flat out in Tennessee as soon as you can, or would you be more conservative given the current price environment and step on the brake in regards to notching up capacity at Tennessee?
No, Oliver, we're going as fast in Tennessee as possible.
Okay. Understood.
We have baked into the guidance that we have a slight further increase in overall inventories.
Right.
That depends on the market. We are ready to serve the market if there's a late pickup in demand. As we discussed, solar markets are so attractive, and we had observed late rush buying in many years when there's a cutoff date for feed-in tariffs, and that could happen also in this year still, but late, not visible today.
Yeah. Playing the devil's advocate here. Should we not see that, would you still be notching up inventories, or are you give or take on a level now which you say is fine? How would you proceed? Would you return to the spot markets and sell material there to not, let's say, get inventory build get out of hand? How would you like to steer that should we not see that just discussed pickup in markets?
We continue to run full steam.
Okay.
We have a very strong position, and we are definitely going for a strategic stock to be well-prepared when the market picks up again. We always said that we wanted to have stock closer to our customers to improve our delivery times.
Yeah. Understood. Thank you. On the technicalities on the insurance payment, can you quickly delve in on how that insurance payment is going to be taxed? I guess there's a split of replacement of damaged equipment and business loss and compensation for the business loss. Let's say, how is that put into the cash flow calculation or the P&L? Is the full lump sum recognized as a gain, or is only part of that, the replacement part, let's say, seen as replacement CapEx and only part of the insurance payment recognized as a gain on the EBITDA line?
Oliver, I hope you are fine with taking the last part of your third question offline, because it's very specific. The first part I am happy to answer, looking at the tax impact. Just think back about what the insurance does. It makes us whole again. Basically, we are profit-wise put as if we are running the plant full, so that also leads to taxable profit.
Very clear. Thank you. That would be all. Thank you.
Thank you. Now we have a last question. It comes from Kaldi Purgo of Maven Securities. Please go ahead, your line is now open.
Hi there. Thanks for taking my call. My question. I know you're not going to guide too much or help us with next year's number, on my calculations, your underlying, excluding the insurance number, is probably around EUR 470 for the second half of this year. If I just multiply that by two, I get something around the EUR 900 mark, just a bit over. Given the way the polysilicon price has gone and also the kind of softness in the Silicones market, can you just confirm that you can grow that to EUR 1.1 billion, at least that's where consensus is? Thank you.
No, we do not give any forecasts for next year. I mean, not at this point.
Okay. If I just ask a follow-up, would you agree that my calculation is correct and that your run rate is currently around just over EUR 900 for EBITDA? What you would require is for either the polysilicon market to improve or the Silicones market, or your Silicones business to improve somewhat as well. Is that a fair assumption?
It is too early to talk about next year. The only hints that we can give you are on the segment level. I think polysilicon look at the overall solar market.
Take the assumptions on that. We have all three sites back available in next year for the full year. Polymers, we expect some normalization in raw materials. In Biosolutions, we expect to load our new assets, and for Silicones, we again expect a strong market environment with tightness to continue, and especially in specialties.
Right. Do you think you can grow your Silicones business? I understand you expect tightness to continue, do you think the environment is going to become more favorable or as favorable as it is currently?
I-
Clearly the Polysilicon market is going to be a headwind. I'm just trying to work out where the delta is versus analyst expectations. Thank you.
The Silicones market is a growth market. Fundamentally with the versatility of applications, the broad setup, we are not selling to specific segments that have an overproportional share in our portfolio. We are growing above GDP in the Silicones environment.
Hmm. That doesn't make up the EUR 200 million shortfall from run rate to consensus. Sorry to labor the point, I'm just trying to get a grip as to what improvement needs to happen next year for you to hit the numbers.
I think we'll leave it there. We are not talking about specific guidance for next year.
All right. Okay. Thank you very much. I take my call.
Thank you. We've received another question. It comes from Laura Lopez of Baader Helvea. Please go ahead. You may proceed.
Good afternoon. Thanks for taking my question. I just have two left. One, you mentioned a little bit about the pricing environment in the polysilicon for the semiconductor industry. I just would like to know how good is your visibility in this business. How long are your contracts, and do you think this is going to continue for several quarters, and have you seen any pricing also pressure there maybe coming from the solar side? Also one of your competitors was trying to push some prices up. Has this been the case? The pricing has been moving actually upwards, polysilicon for the semiconductor industry. Secondly, in Silicones, I would just like to know, do you have any visibility on the current inventory situation by your clients?
Because it might also be the case that due to tariffs in the U.S., many customers increased their inventory levels prior to that, and now we might see a restocking trend continuing in the fourth quarter. How do you see this? That's all. Thank you.
Let me start with the Silicones. As I mentioned before, during a time of shortage, if a customer gets a hold of more material than he presently needs, of course, he builds up inventory. As I mentioned before, it can happen that, especially in the fourth quarter, people want to get rid of excess inventory to improve the balance sheet. That can happen. These are short-term modulations in the pricing environment for commodities. I do not rule that out.
Thank you.
This is part of the normal seasonality. As I said before, there is still an underlying tightness in the supply of raw material for the Silicones.
short-term effects can happen but do not change the medium to long-term effects. In semiconductor polysilicon, we are always pushing for higher prices.
Okay.
That's standard. The demand is there.
Okay.
We can absolutely say, and I really have to mention that here, that the semiconductor people really need the highest possible quality, especially for 300 mm wafers for DRAM, NAND applications, et cetera. Everybody's relying on Wacker polysilicon.
Maybe there, how good is your visibility? Because although the semiconductor players are now being able to have significantly better contracts than in the past, longer, is that the same for you and for polysilicon?
Well, we always had longer term contracts. In addition to some short-term additional supply, this really has not changed significantly. Although, because of this high demand for silicon wafers, customers are interested in long-term, very reliable, high-quality supply. Whether we have long-term contracts or not, we are in this business for the long term. This is what our customers know.
Okay. Maybe, sorry, the very last one, very short. It is a housekeeping question. You confirm your CapEx guidance for 2018, but your nine-month spendings were rather low. This means we will have a significant step up in the fourth quarter in CapEx?
Yes, that's what we see. With the big projects, we see a step up in the fourth quarter.
Okay. Thank you very much. That was all.
Thank you. As we have no further questions, I will hand back to you.
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'd like to meet us next time when you're in the city, please send us a message or register your interest with our corporate access partner. The link can be found next to financial publications and IR presentations on the webpage. We will be back again with a conference call for the full year 2018 results on March 19th, next year. Goodbye.
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