Welcome to the Wacker Chemie AG conference call on our Q1 2018 results. My name is Joerg Hoffmann, and I'm Head of Investor Relations at Wacker. With me are Dr. Rudolf Staudigl, our CEO, and Dr. Tobias Ohler, our CFO, who will take you through a presentation in a minute. This presentation is available on our webpage under www.wacker.com under the caption, Investor Relations. Before they begin, allow me to point you to our safe harbor statement, which is situated at the beginning of the deck. For this, let me now hand you over to Dr. Staudigl, our CEO. Dr. Staudigl.
Ladies and gentlemen, welcome to our Q1 2018 conference call. We saw a strong performance of our businesses in Q1 despite some headwinds. We reported Q1 sales of over EUR 1.2 billion at the level of last year. Q1 EBITDA came in at EUR 255 million, 11% over last year. The main drivers for the earnings growth were higher prices and improved product mix in chemicals, especially in the buoyant silicones division. Markets for polysilicon, however, saw a slow start to the year. In addition, polysilicon, as you know, operated with reduced capacities because our Tennessee plant was still down in Q1. Raw materials and a stronger euro provided headwinds throughout the quarter. Silicones saw a strong quarter as supply is tight. Prices increased in standards and also in specialties. We are moving our mix towards a larger share of specialties in our volumes.
Rising raw material costs had some negative effects. The tightness in silicones is sometimes very challenging for our customers. We are doing our best to service them. Our plants are running at full capacity and our logistics department is stretched. We look to provide relief to our customers by expanding our production. However, this will take some time and very careful planning as we need to keep our costs competitive. Trade politics stay an important factor in our business. The U.S. Trade Court recognized unanimously that the requested tariffs on silicone metal were without merit. As a result, there will be no additional tariffs on silicone metal shipping into the U.S. This confirms our position on this matter. In response to the activities of some silicone metal manufacturers, we look to expand our backward integration over time.
Polymers increased prices and volumes, but these were not sufficient to compensate for the strong and recently accelerating increases in raw material prices. In addition, the strength of the euro had a negative impact on sales and earnings. Demand for solar products were seasonally slower in Q1. Many competitors chose to curtail production and went into maintenance mode. Our German operations ran at full capacity with a good cost performance during the quarter. We used the mid-quarter softness to replenish some of our inventory. Since the start of April, we see demand strengthened. polysilicon is looking to start up production at the Charleston, Tennessee plant over the next weeks. We expect to ship first material out of the plant in Q2. Overall demand for polysilicon remains solid, especially in monocrystalline applications. The industry saw a number of long-term supply agreements closing in the quarter.
Large mono customers are looking to lock in deliveries as they grow their capacities aggressively, outpacing supply growth. At Biosolutions, we just announced the acquisition of SynCo Bio Partners of Amsterdam. This move doubles our overall biopharmaceutical capacity, and as such, provides a fast growth option for the segment. Let me hand over to Tobias.
Thank you, Rudy. Welcome to our Q1 2018 call, ladies and gentlemen. I will just go over our group financials and present the segment outlook. Let's begin with the P&L on page three. Sales stayed essentially flat year-over-year as volume and mix were pretty much balanced. Price increases of 3.9% supported sales, but the strong EUR lowered sales slightly more. Our gross margin increased by over 200 basis points to 19.9% as depreciation fell by about 15% to EUR 133 million in Q1. In addition, mix effects and efficiency gains helped to lower our cost of goods sold by 3% over last year. Our results benefited from the at-equity contribution from our holdings in Siltronic. Our tax rate came in at 24.5% as the Siltronic contribution is effectively a post-tax item. Earnings per share from continuing operations in the quarter more than doubled to EUR 1.52.
Moving on to the balance sheet on page four. The balance sheet shows no significant changes to the prior quarter. Pensions were slightly up as the discount rate declined a bit to 2.01%. Our biggest business, silicones on page five, achieved a record margin level of 24.5% in Q1. We now expect full year sales to grow by high single-digit percentage and full year EBITDA to grow at a low double-digit percentage. This further improved outlook is based on pricing and mix, as well as a high plant loading and a good cost performance. At polymers, on the next page, our price increases took hold while volumes stayed solid. However, increases in acetic acid and VAM, as well as a strong EUR, are challenging. In Q2, the segment will see a plant turnaround as communicated previously.
We now expect the full year EBITDA margin somewhat below the chemicals margin target of 16%. On page seven, Biosolutions expects mid-single digit percentage sales growth in 2018. EBITDA in the segment will be just below EUR 30 million as we start loading our new facilities and digest some integration costs. We now look to fill our new capacities with our own products and custom manufacturing orders while continuing to support Synco's existing customers. Guidance on polysilicon also stays the same as we continue to take a conservative view on pricing. Our focus in this segment is on continuous cost reduction and on a higher share of high-efficiency systems and semiconductor volumes in our portfolio. Our Tennessee plant is about to start producing again in the next weeks. Overall, we expect to ship this year about as much as last year.
We see sales in polysilicon being down by a high single-digit percentage. EBITDA should come in above 2017. As discussed previously, our insurance should compensate us fully for the Charleston incident. So far, we have received a down payment of $100 million, excuse me, in January. We have not accounted for the business interruption as part of the insurance compensation in this quarter. Let's turn to the cash flow bridge on page 10. Please note that the operating cash flow shows the strong business performance and also includes the insurance down payment. This lowers our net debt to about €300 million. As you project cash flows and net debt for the full year, please bear in mind two items. First, our CapEx guidance of €470 million for the year, which is some 50% above the prior year. Second, the dividend payment in May, which amounts to €224 million.
With this, let me hand you back to Rudi.
Thank you, Tobias. Ladies and gentlemen, the strong quarter shows how our strategy deploys. Our strategy in silicones of combining aggressive cost-cutting and upstream materials with growth in specialty applications bears fruit. At the same time, we are mindful of our customers' needs and are looking to expand capacities to better serve them. You saw us acquiring capacities in Amsterdam as part of our efforts to keep the momentum in our biopharmaceutical business. The complementary skill sets at Synco, coupled with well-trained employees, are a great step forward to us. Synco expands our reach in biomanufacturing and adds much needed capacities to our fully utilized operations. While polymers works to overcome temporarily rising raw material costs, polysilicon demonstrates a great cost performance in our German plants. We raise guidance in silicones and adjust our outlook for polymers to reflect current trading.
We have chosen to keep our overall outlook unchanged at this time, as we also watch the disputes on trade barriers and higher increases in raw materials than originally projected. We continue to see a low single-digit percentage growth in full-year group sales. Despite this, full-year EBITDA for the group will come in higher than last year by a mid-single digit percentage as some volume growth, better mix and pricing, as well as cost performance and equity results support earnings. Overall, the quarter leaves me very confident about our future. Strong market conditions persist in all our businesses. We are on a good track. If there are no unexpected changes to this favorable business environment, we might exceed our guidance for the full year. Thank you. This concludes our presentation today, ladies and gentlemen. Thank you for your attention so far. We will now be happy to answer your questions.
Operator?
Thank you. 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. First question is from Andreas Heine, MainFirst. Your line is now open.
Thanks for taking my question. First, I would like to ask two question on polysilicon. Could you give, please, some more details on how you see the demand trend? You were talking about the seasonal pattern and that you see now in April demand going up. Is that already enough to tighten the high-end segments where you are in? What does it mean for the price trend in the second quarter? Secondly, you said that big mono customers went into long-term contracts. Two, we noticed, did Wacker also went into a long-term contract with these players, or is that of no interest for you? Lastly, on silicones, one question. Very strong results indeed for the first quarter. Was there anything special in, or can we take the Q1 earnings as a good guidance, what we can expect for Q2 and Q3 as well? These are my questions.
Thank you.
Andreas, on the polysilicon, we see a very healthy demand, especially compared to parts of the first quarter. This you can see also on the PVinsights price trend. It came down in the first quarter, and now it has stabilized for quite some weeks. There is healthy demand, especially for monocrystalline silicone applications. There were some long-term, or let's say, longer-term contracts announced. What we can say is that we are a significant participant in that market. You can imagine that we are a player in all segments, and people are interested to enter into longer-term commitments.
Are you also interested? Okay.
Yes, of course. Of course. We are a high-quality, long-term, stable, reliable supplier of polysilicon, and we play in the same market.
Yeah. Everyone should be interested to have a long-term contract with Wacker. It was more whether Wacker is also interested to get in these contracts.
If the conditions are right, yes.
Okay, thanks.
The next question-
Excuse me, the silicones, whether they are special?
On silicones, Andreas, there were no special items in the first quarter. We increased guidance for this segment to a high single percentage sales growth and a low double-digit percentage EBITDA growth. Fundamentals in the segment are unchanged, very positive. Yeah, we don't give any specific guidance now for the next quarters.
Okay, thanks.
The next question is from Patrick Rafaisz, UBS. Your line is now open.
Thank you. Good afternoon, everyone. Three questions, please. The first one would be also on silicones. Can you comment a bit on what you're seeing in the competitive landscape here happening? When would you expect more capacities to come online? Can you update us also on your capacity expansion plans in a bit more detail? You mentioned you're looking for some expansions. That's the first question. The second would be on your backward integration into silicone metal. You mentioned you're looking to expand that in the future. Is that just a reiteration of the existing expansion plan in Norway, or do you plan to expand your backward integration even above the 30% you've usually had in the past? The last question on the Charleston ramp, can you give us some more details how you see this progressing over the next three quarters, please?
Thank you very much.
Yeah. Let me start with the question on silicones and the competitive landscapes. It's probably best explained by, let's say, a rough example. The total siloxane raw material capacity for silicones in the world is a little bit over 2 million tons per year, and there has been a shutdown of certainly over 100,000 ton capacity last year. If you assume a roughly 5% growth of the silicones business per year, that means there is the need in the world for an increase in capacity of roughly 100,000 tons per year in siloxanes. We don't see that capacity on an annual basis coming. Of course, there will be additional siloxane capacities from a few players in the market, but 100,000 tons per year is pretty hefty. In other words, we see this, let's say, tight supply in silicones going on for quite some time.
At least we do not see an end to that as of now.
We said that we are in the midst of the planning phase for a significant expansion of our siloxane capacity. As I said, careful planning needs to be done because you have to do these expansions so that you don't compromise your cost position. You even have to increase or improve your cost position, and this is what we are targeting, and this is what we are going to achieve with such an expansion. It doesn't make us work on anything.
Can you say when you have an update?
That will come in time.
Mm-hmm. Okay.
We will not plan forever. We want to implement, planning needs to be done, and everything, including capital expenditures, needs to be carefully looked at. That's exactly what we are doing. Good. On silicone metal, we are in the midst of a significant capacity expansion right now. We have not decided on an additional capacity expansion yet. Let's say our resolve is pretty clear, that we do not want to get into a squeeze by suppliers who want to play the political game. Third, on the Charleston ramp. Well, this has to be done very carefully, as a ramp-up of such a sophisticated capacity has to be done. We assume right now, and I think that's very real, that we will achieve our total capacity at least in the fourth quarter of this year.
Mm-hmm. Okay. Thank you.
The next question is from Thomas Swoboda, Société Générale. Your line is now open.
Yes. Good afternoon, gentlemen. I have three questions, one on polysilicon and two on silicones. On polysilicon, I'm just interested in your inventory levels. If I understand your comments correctly, you had the opportunity to rebuild inventories in early Q1. Could you comment whether your inventories are back to normal or are still below normal? Any indications here would be very helpful. The second question on silicones. I think it's perfectly understood that you are in a sweet spot here probably for longer. Two related questions on that. Firstly, the improvement in Q1, could you give us a help? How is this split between volumes, I think that was very little, price, and mix? The second question on this is there a natural barrier to price increases where clients start to look into alternative materials?
I'm just asking in order to make sure that we do not overshoot in our pricing expectations. Thank you.
Thomas, Tobias speaking here. On the silicone sweet spot here for longer, it's a nice wording. The improvement in Q1, as you rightly said, is
Not very much from volume as we are capacity constrained. In this situation, we improved our mix considerably, and it means that specialties grow while we have less volume available for standards. On the price side, it's different. There, standards do increase much stronger, but also specialties grow in price. That is the composition of the improvement of the first quarter. With respect to your question on the limits of price increases, there are not many substitutes for silicones in their tremendous applications that you have. On the other hand, as we also see it from our own raw materials, you need to be in a position to pass it somehow on to your own customers. If not, it doesn't become feasible to work with higher input costs than normal. That's why I would take the guidance as we have given them.
It's a very good environment, and we see the price increases to continue. Strong fundamentals. Please bear in mind that there are some limits at some point. To polysilicon, we mentioned that we took the opportunity to put something into our inventories when the demand was a little bit slow around Chinese New Year. We would always do that again because we had very limited inventory recently. It's not back to normal as you phrased it. It's very little in comparison to the big demand that we see in Asia.
That's very clear. Thank you very much.
The next question is from David Simmons, JPMorgan. Your line is now open.
Yeah. It is actually Chetan Udeshi from JPMorgan. A few questions. Number one, can you give some indication on how much price increases have you seen in the polymers business? If I just look at your reported sales, it does not seem like you are still seeing any material price improvements there to the extent that you are seeing the squeeze on raw materials. Just wanted to understand, where are you in terms of increasing the pricing in polymers? That is number one question. Number two question is more just looking structurally. Last year was the first time you gave numbers, ex-Siltronic, maybe this might not be fully reliable. If I look at your working capital as a percentage of sales, it is over 20%. Most of the other chemical companies have range of, say, 15%-20%. Why is this structural?
Do you see a room to bring that down going forward? If not, why does Wacker need to operate at higher working capital as a percentage of sales than rest of the industry? Thank you.
Chetan, on the working capital question, percentage of sales, we had seen in the first quarter an increase in working capital from the business pickup. That is one course. Also in our inventories, as we just discussed a little bit in polysilicon, but also in silicones where when we run production really at the capacity limit, also focusing on specialties, you need more intermediates. That is optimizing our assets, but it comes with a higher working capital. My answer to is that a competitive level in the industry? As a chemical player, we are more integrated. We have a huge production complex on our sites in Burghausen and Nünchritz. If we compare us one-to-one to our peers, we have very competitive working capital ratios. On the question number one on polymers, how much was the price increase against the raw material increases? It was not enough.
We had significant increases, more than last year. Over last year, step by step, we improved quarter over quarter, in the full year, we still had a negative pricing. Now in the first quarter, we have a positive pricing. The raw materials, especially VAM, turned much stronger against us, and that is also linked to the higher oil prices and coal. In addition to that, both segments, polymers and silicones, felt the exchange rate headwind.
Understood. Maybe the last question I would have is just on the structural capital intensity of the chemical businesses, especially silicones. Of course, you have two new projects at the moment with expansion of silicone metal capacity and the HDK silica plant in the U.S. Structurally speaking, just outside of those two projects, do you see a reason why structurally the capital intensity of your chemical businesses should be structurally higher in the midterm than what it has been for the last 10 years on average?
No, not really. In times of extremely high demand, for example, in silicones, that puts a lot of stress into the manufacturing operations, and we have to restructure some of these to make the material flow a little bit easier, and that certainly will reduce the working capital over time. That's certainly an effect that we have to keep in mind presently.
Understood.
May I add to this? If you look at the CapEx profile of the group, we definitely focus on silicones, and it's stable year by year. In 2018, we will have a CapEx budget, which is almost three times depreciation in this segment. Overall, the Wacker Group will stay in CapEx below depreciation. We see tremendous opportunities in the silicones to grow that business in a very profitable manner.
Understood. Maybe can you give us some sense of how much of the margin improvement in silicones is just commodity siloxane and derivative price increases driven, and how much is actually just business mix driven, just to understand the level of froth, if there is, in the margin because of, say, currently tighter markets in the commodity parts.
I don't want to go to that detail, but I can tell you it's good to be an integrated player and have a standard business at a very attractive cost and have a specialty portfolio with a lot of innovation.
Understood. Thank you.
The next question is from Laura Lopez, Baader Bank. Your line is now open.
Good afternoon. My first question is on polymers. You announced at the beginning of the year your maintenance shutdown in the second quarter. Can you maybe give us a guidance of the impact that this will have on polymers next quarter? I don't know if you have some inventories, so there won't be a significant volume impact, but maybe there is. Maybe if you can share with us a little bit of the details there. Also in polymers, so in the press release you mentioned again some price increases in polymers to counteract the high raw material prices. Were you there referring to the ones that started already or further price increases? Lastly, with the acquisition of Synco, you double your biopharmaceutical production capacity.
How much of Synco's capacity is not being utilized currently with its projects, do you have enough visibility to know in how many years Wacker could fill this capacity?
Maybe let me start with Synco. Presently, the capacity utilization there is really low. Of course, since we are at the very limit of our capacity of our so far existing facilities, we believe that we can fill it very soon. Definitely between one and two years.
For the polymers maintenance question, we had flagged that we have a turnaround in one of our plants in the second quarter that is now in the process of being prepared. That would be a low double-digit million EUR number in maintenance cost that needs to be absorbed in that segment, it would not have an impact on the sale.
Okay. Perfect. The price increases in polymers?
There's more to be done, as I said before.
Okay.
It's a challenge to have moving targets on the raw material side, as, again, we also lowered our guidance for polymers for the full year, and said that we will only come in somewhat below our target margin of 16%.
Thanks. Just very shortly on silicone metal, can you please again tell us what the situation there is with the tariffs? Do you believe that now there's no tariffs, then the price pressure in silicone metal should disappear now, or prices at least shouldn't go up anymore?
It was good news, positive news that the tariffs were dismissed, and that rightly so, because they were not based on facts. It could mean that there is some pressure now on silicone metal prices. We would assume slightly lower prices in the second half of this year. This is only one side of the medal. The other side of the medal is you also need to look at the cost structure of silicone metal, and there, increases in coal prices and increases in graphite electrode prices do also play a role. We would assume slightly lower silicone metal price in the second half.
Thanks. That was very helpful.
The next question is from Thomas Wrigglesworth, Citigroup. Your line is now open.
Good afternoon, gentlemen. Thanks very much for allowing me to ask my questions. Focus on silicones. Firstly, we understood there were some outages in Asian markets in addition to a well-publicized Western closure last year in silicones. Is your sense that those tons are returning to the market? Whether, obviously, that could still lead to the market being tight, but whether you think those are back in the market already post-Chinese New Year. The second question is, obviously you note your plants are fully loaded and following on from Thomas's earlier question about specialties. Where are you in the kind of specialties versus non-specialties kind of mix? How much more beyond the guidance you've given for 2018 would you think there could be from further kind of upgrading of the mix from specialties? That would be very helpful.
Lastly, obviously you talk about planning of debottlenecking, which sounds like capital investment, but are there other kind of maybe more operational excellence, kind of better management of the whole site that would enable you to get some volume maybe in the next 12 to 15 months, rather than having to deploy, obviously, building another line or whatever the brownfield would be. Thank you.
Yeah. Let me answer your questions or let me at least try. There have been additional closures of Asian plants. This is never really totally transparent. I would assume that some of the capacities could come back. If they come back, then at considerably higher costs because they have to adhere now to, let's say, standard environmental standards. Fortunately, the Chinese government has done the right thing to really demanding higher environmental standards for the production facilities. There will not be, let's say, a significant increase in capacities through these facilities or very low-cost increase in capacities. Yeah, we have made significant progress, of course, in the share of our specialties in silicones over the last few years since we established this strategy. I think we have really done what we have planned to do.
In the meantime, you have to understand that because of the material shortage, the so-called standard materials also have significantly increased in the profitability due to higher pricing. Of course, we always try to do as much, let's say, standard debottlenecking through better operational efficiency and so on. We do that on a regular basis. That provides also, let's say, some additional growth opportunities. We do not only rely on big capital investments for additional capacity. I think it's standard in the well-performing chemical industry.
Okay. Thank you very much.
The next question is from Martin Jungfleisch, Kepler Cheuvreux. Your line is now open.
Yes. Hi, good afternoon. Three questions, if I may. First one is on biosolutions. Could you tell me when you expect the integration costs you guide for it to be incurred? What can we expect from the recent acquisition in terms of sales and EBITDA contribution this and next year? Also some clarification as the second question on the insurance payment. Do you expect any significant additional cash payments from the insurance, and any timing on that would be helpful. Also, how much do you expect to be booked as EBITDA as it is part of the polysilicon guidance? Lastly, if you could provide us an update on your stake in Siltronic. Do you still feel comfortable with the stake or would you also consider further selling down on the stake? Yeah. That's it. Thank you.
Maybe on the Siltronic, to jump in there. We feel very comfortable with our stake in Siltronic.
On biosolutions, we have already baked in the integration costs into our guidance. As the closing just occurred two weeks ago, we already knew that it was so likely. So additional revenue and the cost impact from the integration is part of the guidance that we show. As Rudy mentioned, we do have the technology to fill that capacity quickly, and that will bear fruit mostly in the year 2019 and following. For the insurance payment, there's no news to that. As we said, we got an advance payment of $100 million. Yes, for sure, we do expect more. It's a sign that the insurance accepts our claim and that we are talking about bigger numbers, and that's why they sent the $100 million in advance. The recognition for the business interruption that we will decide when we have full clarity on that.
We expect that it will be settled at the latest when the plant is running again at full capacity.
Okay, great. Thanks a lot.
At the moment, there are no further questions. As a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. Next question is from Sebastian Bray, Berenberg. Your line is now open.
Good afternoon, thank you for taking my questions. My first one would be on the quarterly run rate for silicone as it relates to your guidance for low double-digit EBITDA growth. Is there any reason, seasonal silicone metal or otherwise, why you would expect the figure that you reported in Q1 to decline on a quarterly basis in any of the subsequent quarters during the year? My second question is on your expansion at Holla into silicone metal in 2019. Do you expect this to be margin positive in 2019? Is there still further upside independent to pricing to silicone margins? My final one is on additional costs related to polysilicon. Does the EBITDA guidance of having flat 2018 EBITDA for polysilicon include a set of ramp-up costs? If so, what are these, please?
Sebastian, I'll start with the last question. Our guidance for polysilicon includes also the insurance, as we said before. We have an increase in EBITDA, including everything. That means that we are put as if the incident in Tennessee hadn't happened by the insurance. That also includes the absorption of ramp-up costs. That could deviate quarter by quarter, as I said, because we would expect that we would recognize the business interruption only when the plant is running from today's perspective. The second question on the Holla expansion, I'm not entirely sure, but I think it's the second half of 2019 that we have the silicone metal furnace available. Do not bake too much of cost improvement for 2019 from that expansion into your model. For silicones, as I said before, we don't want to give quarterly guidance.
We said that the overall performance in silicones is very strong. That's why we upgraded, and we now guide for a low double-digit percentage in EBITDA growth.