Earnings Call: Q1 2018

Apr 26, 2018

Welcome to the Vacker Kimi AG conference call on our Q1 twenty eighteen results. My name is Joe Kaufman, and I'm Head of Investor Relations at Vacker. With me are Doctor. Rudigal, our CEO and Doctor. Tobias Ola, our CFO, will take you through a presentation in a minute. This presentation is available on our webpage on www.vacker.com under the caption of Investor Relations. Before they begin, Allow me to point you to a safe harbor statement, which is situated at the beginning of the deck. For this, let me now hand you over to Doctor. Staudigl, our CEO Doctor. Staudigl, Ladies and gentlemen, welcome to our Q1 2018 conference call. We saw a strong performance Q1 sales of over 1,000,000,000 at the level of last year. Q1 EBITDA came in at 1000000, 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 plants were still down in Q1. Raw Materials and a stronger euro provided headwinds throughout the quarter. Silicones saw a strong quarter as suppliers 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 The U. S. Trade court recognized unanimously that the requested tariffs on Silicon Metal were without merit. As a result, there will be no additional tariffs on Silicon Metal shipping into the years. This confirms our position on this matter. In response to the activities of some silicon 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 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 1st material out of the plant in 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 Synchro BioPartners of Amsterdam. This move doubles our overall biopharmaceutical capacity and as such provides a fast growth option for the segment. Now let me hand over to Tobias. Thank you, Rudy. Welcome to our Q1 twenty eighteen call, ladies and gentlemen. I will just go over our group financials and present the segment outlook. Let's begin with a P and L on page 3. Sage stage essentially flat year over year as volume mix were pretty much balanced. Price increases of 3.9% supported sales but the strong euro lowered sales slightly more. Our gross margin increased by over 200 basis points to 19.9% as depreciation fell by about 15% to 1,000,000 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 Sertronic. Our tax rate came in at 24.5 percent as an electronic contribution is effectively a post tax item Earnings per share from continuing operations Moving on to the balance sheet on page 4. 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 5 achieved a record margin level of 24.5 percent in Q1. We now expect full year sales to grow by digit percentage and full year EBITDA to grow at a low double digit percentage This further improved outlook is based on At polymers, on the next page, our price increases took hold while volumes stayed solid. However, increases in exceeded asset and VAM as well as a strong euro are challenging. In Q2, the segment will see a planned turnaround as communicated previously. We now expect the full year EBITDA margin somewhat below the chemicals margin target of 16%. On Page 7, Biosolutions, expects mid single digit percentage sales growth in 2018. EBITDA in the segment will be just below 1,000,000 as we start loading our to fill our new capacities with our own products and custom manufacturing orders while continuing to support Synchord'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 1000000 $100,000,000 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 the strong business performance and also includes the insurance down payment. This lowers our net debt to about 1,000,000. As you project cash flows and net debt for the full year, please bear in mind two items. First, our CapEx guidance of 1,000,000 for the year, which is some 50% above the prior year And second, the dividend payment in May, which amounts to 1,000,000. With this, let me hand you back to Rudy. 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 bear's 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 skillsets at Cinco, coupled with well trained employees, are a great step forward to us. Cinco 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 our outlook for polymers to reflect current trading. We have chosen to keep our overall outlook unchanged at this at this time as we also watched the disputes and trade barriers and higher increases in raw materials than originally projected. We continue to see a low single digit percentage growth 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 persists in all our businesses. We are on a good track. If there are no unexpected changes to this favorable business environment, we might exceed concludes our presentation today, ladies and gentlemen. Thank you for your attention so far. We'll now be happy to answer your questions. Thank you. You. First question is from Andreas Heine, MainFirst. Your line is now open. At first, I would like to ask 2 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? And what does it mean for the price trend in the second quarter? Secondly, you said that big mono customers went into long term contracts. 2, we noticed did Vaca also went into a long term contract with these players? Or is that of no interest for you? And lastly, on silicon swine 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, Yeah, we see a very healthy demand, especially compared to parts of the first quarter. And this you can see also on the PV Insights price trend, It came down in the first quarter and now it has stabilized for quite some weeks. Yes, there is healthy demand, especially for monocrystalline silicon applications. And there were some long term on, let's say, longer term contracts announced. What we can say is that we are a significant participant in that market. And then you can imagine that we are a player in all segments, and people are interested to enter into longer term commitment. Yes, of course. Of course. I mean, we are a high quality, long term, stable, reliable, supplier of polysilicon and we play in the same market. Everyone should be interested to have it contract with Vaca. It was more whether Vaca is also interested to get in these contracts or 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. And we increased guidance for this segment to a high single percentage sales growth and a low double digit percentage, EBITDA growth. So fundamentals in this segment are, yes, unchanged, very positive And yes, we don't give any specific guidance now for the next quarters. The next question is from Patrick Rafais, UBS. Thank you, and good afternoon, everyone. Three questions please. The first one will be on, on Austin 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? And can you update us also on your capacity expansion plans in a bit more detail. You mentioned you're looking for some expansion. So that's the first question. The second will be on your backward integration into Silicon 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 are you do you plan to expand your backward integration even above the 30% you've usually had in the past? And then 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. Yes. 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 2,000,000 tons per year. And there has been a shutdown of certainly over 100,000 ton capacity last year. And if you assume a roughly 5% growth of the silicones business per year, So that means that is the need in the world for a 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. So 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 and enter that as of now. And I mean, we said that we are in the midst of the planning phase, for a significant expansion of biosavoxane capacity. And as I said, the 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. Can you say when you have an update? That will come in time. Okay. We will not plan forever. We want to implement, but planning needs to be done and everything including capital expenditures need to be carefully looked at. And that's exactly what we are doing. Good. And on Silicon Metal, I mean, we are in the midst of significant capacity expansion right now. We have not decided on an additional capacity expansion yet, but our, 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. And third, on the Charleston ramp, Well, this is this has to be done very carefully as a ramp up of such a sophisticated capacity has to be done. And we assume right now, and I think that's That's, yeah, very real that we will achieve our our capacity, our total capacity, at least in fourth quarter of this year. The next question is from Thomas Vovoda, Societe Generale. Your line is now open. Yes. Good afternoon, gentlemen. I have three questions. 1, on polysilicon and 2 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 two related questions on that. Firstly, the improvement in Q1, could you give us help how is the split between volumes? I think that was very, very little price and mix. And the second question on this is, is is it a natural or natural barrier to price increases where 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. 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 But 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. Their standards do increase much stronger but also specialties, grow in price. So that is the composition of the improvement of the first quarter. And with respect to your question on the limits of price increases, there are not many substitutes for silicones in their, yeah, tremendous applications that you have. But on the other hand, as we also see it from our own raw materials, I mean, 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. And it's a very good environment and we see the price increases, to continue. So strong fundamentals, but, we are pleased bear in mind that there are some limits at some point. And 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 a very limited inventory recently but it's not back to normal as you phrased it. It's very, very little in comparison to the yes, big demand that we see in Asia. The next question is from David Thomas, JP Morgan. Your line is now open. It's actually Chetan Udeshi from JP Morgan. Few questions. Number 1, can you give some indication on how much price increases have you seen in the polymers business? Because if I just look at your reported sales, it doesn't seem like you're still seeing any material price improvements there to the extent that you are seeing the squeeze on raw materials. So just wanted to understand where are you in terms of increasing the pricing in polymers? That's number one question. Number two question is more just looking structurally, and last year was the first time you gave numbers ex Siltronic. So maybe this might not be fully reliable, but if I look at your working capital as a percentage of sales, it is over 20% and most of the other chemical companies have range of say 15% to 20%. So why is this structural? I mean, do you see a room to bring that down going forward? And if not, why does Walker need to operate Hat? Higher working capital as a percentage of sales than rest of the industry? Chidan, on the working capital question, percentage of sales, we had seen in the first quarter an increase in working capital from the business pick up that's one course and then also in our inventories as we just discussed little bit in polysilicon, but also in silicones where when we run production really at the capacity limit also focusing on specialty you need more intermediates and that's optimizing, our assets, but it comes with a higher working capital. And my answer to is that, a competitive level in the industry, we are more integrate I mean, as a chemical pay, we are more integrated. We have a huge production, complex on our sites in Brookhouse And Wincrude. And if you compare us 1 to 1 to our peers, we have very competitive working capital ratios. On the question number 1 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, we step by step, we improved quarter over quarter, but in the full year, we still had a negative pricing. Now in the first quarter, we have a positive pricing But the raw materials, especially WAM turned much stronger against us. And that is also linked to the higher oil prices and coal. And in addition to that, both segments, polymers and silicones felt the exchange rate headwind. Understood. Maybe, you know, the last question I would have is just on the structural capital intensity of the chemical businesses. Silicones. I mean, of course, you have 2 new projects at the moment with expansion of silicon metal capacity and the SDK silica plant in the U. S, but 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, not really. I mean, in times of extremely high demand, for example, in silicones, that puts a lot of stress into the manufacturing operations. And we have to reach 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 group, we definitely we focus on silicones and it's not that it's stable year by year in 2018, we will have a CapEx budget, which is almost three times depreciation in this segment, but overall, the group Wacker Group will stay in depreciation in CapEx below depreciation because we see a tremendous opportunities the silicones to grow that business in a very profitable manner. Understood. And maybe can you give me 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 fraud, if there is in the margin because of say currently tighter markets in the commodity parts? I don't want to go to that either, 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 the specialty portfolio with a lot of innovation. Understood. Thank you. The next question is from Laul Lopez Barajevia. Your line is now open. Good afternoon. My first question is on polymers. So you're announcing the beginning of the year, and you're maintaining a shutdown in the 2nd quarter. So 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. So maybe if you can share with us a little bit of the details there, And just also in polymer today in the press release, you mentioned again some price increases in polymers to counter effects the high raw material prices, were you referring to the ones that started already or further price increases? And lastly, with that position of Kingold, you doubled your biopharmaceutical production capacity. And how much of single capacity is not being utilized currently with this project? And do you have enough visibility to know in how many years backup, could fuel this capacity? Maybe let me start with Cinco. Presently, the capacity utilization there is really low. And, of course, since we are at the very limit of our capacity of our existing, so far existing, facilities, we believe that we can fill it very soon, definitely between 1 2 years. And for the polymers, maintenance questions, we had flagged that we have a turnaround in one of our plants in the second quarter. That is now in process of being prepared that would be a low double digit million number and maintenance costs that needs to be absorbed in that segment, but it would not have an impact on the sales. Okay. Perfect. And the price increases in polymers? There's more to be done, as I said before. Okay. But it's a challenge to have, I mean, 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 tell can you please again tell us what the situation there is with the tariff? And do you believe that now there's no tariff than the price pressure in silicon metal should disappear now or prices at least shouldn't go up anymore? Jenny, it was good news, positive news that the tariffs were dismissed and that rightly so because they were not based on facts. And it could mean that there is some pressure now on silicon metal prices. So we would assume slightly lower prices in the second half of this year. But this is only one side of the metal. The other side of the metal is you also need to look at the cost structure of Silicon Metal and there, increases in coal prices and increases in graphite electrodes prices to also play a role. So but we would assume slightly lower silicon metal price in the second half. Thanks. That was very helpful. The next question is from Thomas Bouyguesberg, Citigroup. Your line is now open. 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, and whether you think and whether, obviously, I mean, 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 obviously 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 and 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. And lastly, I mean, obviously, you talk about planning of of debottlenecking, which sounds like capital investment, but are there other, kind of maybe more operational excellence kind of better management of a 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. Yes. Let me answer your questions. Let me just try. Of course, there have been additional closures of Asian plans. However, this is never really totally transparent. I would assume that some of the capacities could come back. But if they come back, then considerably higher costs because they have to adhere now to, let's say, a standard environmental standard. And fortunately, the Chinese government has done the right thing to really, demanding higher environmental standards for the production facilities. So there will not be, let's say, a significant, increase in capacities through these facilities or very low cost increase in capacities. Yes, we have made significant progress, of course, in the the share of our specialties in silicones over the last few years, since we established this strategy and I think we have really done what we have planned to do. But in the meantime, you have done stands at, because of the material shortage, the so called standard materials also have significantly increased in the profitability due to higher pricing. And of course, we always try to do as much, let's say, standard debottlenecking through better operational efficiency and so on. I mean, we do that, on a regular basis, And that provides also, let's say, some additional growth opportunities we do not only rely on big capital investments for additional capacity. That's a I think it's standard in the well performing chemical industry. 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? And what can we expect from the recent acquisition in terms of sales and EBITDA contribution this and next year? And then also some clarification That's the second question on the insurance payments. Do you expect any significant additional cash payments from the insurance? Any timing on that would be helpful. And also how much do you expect to be booked as EBITDA as it is part of the polysilicon guidance? And lastly, if you could provide us an update on your stake on in Siltronic. Do you still feel comfortable with the stake or would you also consider further selling down on this stake? That's it. Thank you. Maybe under 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 2 weeks ago, we already knew that it was so likely. And so additional revenue and the cost impact from the integration is part of the guidance that we show. And as Rudi mentioned, we do we have the technology to fill that capacity quickly and that will bear fruit mostly in the year 2009 and following. And for the insurance payment, there's no news to that. As we said, we got an advanced payment of USD 100,000,000. And 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 US100 million dollars in advance. But the recognition for the business interruption that we will decide when we have full clarity on that. And we expected that it will be settled at the latest when the plant is running again at full capacity. Okay, great. Thanks a lot. Next question is from Sebastrian Bray, Berenberg. Your line is now open. My first one would be on the quarterly run rate for silicones 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 at Hola into Silicon Metal in 2019. Do you expect this to be margin positive in 2019? So is there still further upside independent pricing to silicone margins. And my final one is on additional costs related to polysilicon. And does the EBITDA guidance of having flat 2018 EBITDA for polysilicon? Include a set of ramp up costs? And if so, what are these, please? Sebastian, I thought was the last question. Our guidance for polysilicon includes also the insurance as we said before. So we have an increase in EBITDA including everything. And that means that we are put at if the incident in Tennessee hadn't happened by the insurance. And that also includes, the absorption of ramp up costs. But 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 hollow expansion. I'm not entirely sure, but I think it's second half of twenty nineteen that we have, the silicon metal furnace available. So do not bake too much of cost improvement for 2019 from that expansion into your model. And 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. As there are no further questions, I would like to hand back to you gentlemen. Thank you, operator. Thank you all for joining us today and for your interest in Bakken City. We're looking forward to further discussions with you as the quarter progresses If you would like link can be found next to the financial publications and IR presentations on our web page. We will be back again for the conference call on Q2 on July 26. Goodbye.