Earnings Call: Q2 2017

Jul 28, 2017

Welcome to the Wacker Chem EAG Q2 twenty seventeen Conference Call. My name is Joach Hoffmann, and I'm the Head of Investor Relations at Wacker. With me are Doctor. Rudolf Schaussigel, our CEO Doctor. Andreas Ola, our CFO, who will take you through our presentation in a minute. Presentation is available on our website under www.wacker.com under the cash on Investor Relations. Before they begin, please have a look at our Safe Harbor statement, which you'll find at the beginning of the deck. With this, let me now hand you over to Doctor. Staudigl, CEO. Doctor. Staudigl? Ladies and gentlemen, welcome to our Q2 twenty seventeen conference call. We reported today Q2 sales of €1,200,000,000 2% over last year and at the level of Q1, driven mostly by volumes. Our Q2 EBITDA of €253,000,000 is 11% over Q1 and only 4% behind last year despite substantial increases in raw material prices. Again, our performance is driven by the dynamic evolution of our chemicals businesses, which saw strong volume gains year over year. Despite higher raw material costs, our chemical segment's EBITDA improved slightly to €182,000,000 While Polysilicon saw volumes improve throughout the quarter, its EBITDA contribution came in at €71,000,000 This quarter's results show us making good progress in our strategic path. We see significant cash flow generation on lower CapEx and the move towards a more specialized and differentiated product offering. In chemicals, this is supported by significant volume growth and mix effects, while polysilicon gains market share in high performance solar wafers, especially in mono applications. Our outlook for the Chemicals segment reflects substantially higher raw material costs than last year. Sequentially or looking from Q2 into Q3, some raw material prices seem to improve and we should see some early benefits from our pricing initiatives. In silicones, we now expect an improved EBITDA margin over last year, coupled with high single digit sales growth. In addition, EBITDA in others now includes the equity result of Siltronic adjusted for effect from the purchase price allocation. Siltronic's raised outlook for the full year will also have a positive impact on us. All in all, we are raising our full year EBITDA guidance for 2017 to a range between 900,000,000 and €935,000,000 The upper end of the range constitutes the prior year result excluding special income. Our previous guidance was a mid single digit decrease. Doctor. Ola, please. Also welcome from my side. Let me just point you to the highlights of this quarter's reporting. Starting on Page three with the P and L, what were the major factors that defined sales this quarter? Prices declined year over year, most pronounced in polysilicon, but declining prices were also still a factor in silicones and polymers. Volume increases in our chemicals businesses supported sales with a small benefit from currency. Q2 sales amounted to €1,200,000,000 just over last year and at the level of Q1. Looking at the gross margin, we see both a good product mix and a strong cost performance. Despite a lot of headwinds from raw materials, our gross margin went up to 19.5% following high utilization of our plants and a good progress on productivity and cost initiatives. We completed in Q2 the purchase price allocation following the Siltronic transaction at the end of Q1. The result from investments in joint ventures and associates includes now our share of Siltronic's net income adjusted by purchase price allocation effects. Profit before tax came in at €76,000,000 This is about 6 percent €6,000,000 lower than in Q2 last year, but over 50% better than Q1. With a tax rate of just 20% following better result in overseas operations, this translates into a net income from continuing operations of €61,000,000 Our balance sheet on Page four shows total assets of just over €7,000,000,000 Pension liabilities are now at €1,500,000,000 following a small increase in the discount rate. On Page five, silicones recorded Q2 sales of €549,000,000 up 7% over last year. EBITDA increased by 18% to €111,000,000 resulting from high plant loading, good cost performance and an improved product mix. The EBITDA margin in silicones increased from 18% to 20% in Q2. Supply is globally tied for many silicone products. Demand for our products was strongest in construction, electronics and automotive as well as in wound care applications. Our outlook for the full year improves. We expect a high single digit increase in full year sales and a better EBITDA margin in silicones despite a higher raw materials bill in the second half. Sales in Polymers again saw strong growth in volumes supported by strong demand in construction, non wovens and carpet applications. Sales were up 3% to €335,000,000 9% better than in Q1. EBITDA expanded sequentially to €62,000,000 from typical seasonality. While raw materials were still slightly up quarter over quarter, first price increases came into effect in Q2 on our sales side. For the full year 2017, we continue to see significant headwinds in Polymers from higher raw materials leading to a lower EBITDA for the full year. Most of these year over year effects will be visible in the second half as minor acetate had its lows late in last year. Q2 sales in BioSolutions came in at €51,000,000 Despite lower plant utilization in some products and adverse mix effects, EBITDA was essentially unchanged year over year at €9,000,000 For the full year, we continue to expect here an EBITDA contribution of about €30,000,000 with integration costs from the acquisition in Spain expected later in the year. Lower prices for polysilicon weighed on sales in Q2 sequentially. Sales came in at €247,000,000 at minus 8%, while EBITDA was at the level of Q1. We saw good progress in cost reductions from productivity and technical developments. Shipments improved throughout the quarter as demand for our products went up. We see this trend continuing into Q3 as July sales are coming in higher than sales in June. Our polysilicon outlook for 2017 remained unchanged with sales at prior year level. We continue to see EBITDA excluding special income somewhat over 2016 as we continue to focus on cost reduction efforts. We see good performance on costs, but lower prices will hold us back in EBITDA. I am moving now on to Page nine. Our net financial debt now stands at €671,000,000 about €60,000,000 lower than at the end of Q1 despite a dividend payment of €99,000,000 Positive cash flows in Q2 and currency effects benefited our net debt position. Net cash flow increased from €53,000,000 in Q1 to €94,000,000 in Q2. As you can see on Page 10, we upgraded our guidance for the full year following a very strong performance in silicones and a better results indication from Siltronic. We now see full year EBITDA at 900,000,000 to €935,000,000 Our expected tax rate improved in the full year to below 30% as overseas operations improved their performance and utilized tax loss carry forwards. Looking back to the first half of the year, we saw chemicals with strong volumes. We see silicones and polymers maintaining their momentum despite higher raw material builds with smaller impacts sequentially from trading effects on raw material prices and much larger impacts year over year. Polysilicon sees strong demand for its products in July. With this, let me hand you back to Rudi. Thanks, Tobias. We are looking at a strong performance in Q2 despite tough comparisons over the last year and an unusually strong Q1 performance in chemicals. Looking into current trading conditions, we continue to see a strong demand for our product portfolio. Our strategy in silicones works out. Here, we combine upstream cost competitiveness with downstream excellence. Polymers does a good job in continuously expanding its available markets, moving closer to the customer, while at the same time focusing on productivity gains. In polysilicon, we focus on high quality applications and are looking at further efforts to reduce costs and have identified quite some potential. We will present on our businesses, their strategies and our initiatives at our Capital Markets Day on October 4 in London. We are looking forward to seeing you there. Thank you, operator. We're moving on to the Q and A now. Thank you. Now we will begin our question and answer session. 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 an equipment today, please lift your hands before making your selection. One moment, please, for the first question. We received two questions. The first question comes from, Patrick McFreighton, UBS. Your line is now open. Thank you and, good afternoon. Three questions from my side, please. The first would be on Siltronic and your associate income. Are you able to provide a guidance for that based on the outlook given today by Siltronic? And then the second question is on polymers. You talked a bit about the margins and the raw material price effects. But would it be possible for you to pinpoint when you would see an inflection point in the squeeze from raw materials and give some quantitative data around it? And then the last one would be on polysilicon where you also mentioned some byproduct mix effects that benefited second quarter. If you could explain that? And also maybe if you could give us some more quantitative insights into the inventory effects and the shipments when compared to production? Thank you very much. So Patrick, this is Tobias speaking. I'll take the first two questions. On Siltronic, we now include, as you said, the equity result minus the effects from the purchase price allocation. And we take, yes, a number that is moving. But I can tell you that even if there's an upgrade with the new consensus, our guidance would still be valid with the €900 to €935,000,000 in EBITDA. So that's what I can say on this. On the second question, polymers margins, we had a significant increase already in the first half. And we see that now some raw materials come down. But at other raw materials, we see trailing effect also from the contract structure. So I would assume that raw materials still go up slightly in the third quarter. But I think when you model more important is if you do the year over year comparison and we had very low raw material prices in the second half of last year. That's why the spread against last year even increases in the second half. As we have talked so much about raw materials, there's a lot of volatility. And we see that some raw material prices actually come down in Polymers. Can I just quickly follow-up on the Siltronic equity income you report in the second quarter and based on the net income of Siltronic, is it a fair assumption that the PPA is around €6,000,000 per quarter? Is that a fair run rate? It's pretty fair, I would say. If you want to do the numbers, I would guide you at Page 30 of the quarterly release where we have the details for the purchase price allocation. The step up in assets is €135,000,000 And we depreciate that over I mean, depending on the assets over five to ten years. So if you take the midpoint of, say, seven years, you come pretty close to your €6,000,000 maybe more to €5,000,000 Very helpful. Thank you. Your question on polysilicon, yes, as we reported last time, we increased inventory in our hubs. But over time, over the quarter, this was less and less. And of course, in the future, we always every now and then, we'll take some efforts to keep our inventory at reasonable levels in order to be able to provide excellent service to our customers. So I think this was a strategic effort, and I think it turned out to be right. Okay. Thank you very much. The next question comes from Andreas Heine, MainFirst. Your line is now open. Thank you. A couple of questions. I start with polysilicon, please. If my math is right, then I would get to cost per kilogram of less than €10 an improvement quarter over quarter of more than 10%. Could you elucidate a little bit on whether this is about right, my math, and whether it's really possible that you have increased that fast within one quarter or whether there were some one offs in so that we cannot extrapolate the current cost base into the second half? And following on, on what you just said on this inventory step up you made for strategic reasons, is it then fair to assume that in polysilicon, you will have higher volume deliveries in the second half than in the first half? And then coming to the others line, I still do not fully understand what's all in there. So there is Siltronic, minus the PPA. Is there anything else we have to be aware of or is that, everything? Because the first quarter has shown minus €12,000,000 and we would not get there with the Siltronic earnings. And maybe one question finally on polymers. Sequentially, you said that Q3 might be somewhat higher in prices. However, most of your products are related to methanol, VAM acetic acid at least. So I would guess that raw materials come down over the second half. And you said that prices have increased. So if you look sequentially first half, second half, is there any reason to believe that the second half will be materially weaker than the first half in EBITDA, I mean? Thanks. Let me start on the polysilicon. Yes, I think it's fair to assume that, of course, provided the market develops reasonably, our shipments will be higher in volume in the second half than in the first half. On the specific cost, I mean, traditionally, we have not commented any cost numbers. I just can tell you that some of the cost curves that have been published even recently are simply wrong. And you can really, yeah, you can assume that our cost reduction efforts have been very successful over the last few years. And there was nothing special in the same quarter. So it was, what I'm whatever I have calculated, I do not have to be more negative on the cost base in the second half. I mean, as I said, basically no. I mean, you're right in your assumption. But as I think mentioned last time already, there are simply wrong or underrated cost reduction assumptions out there. So I think we have been more successful in our cost reduction efforts than some people think. And to your third question on the others line, we typically have some fluctuation quarter over quarter in this other line. But for the full year, the assumption is still fair. As always, it should be EBITDA zero. And to this, we need to add the equity result adjusted for the PPA effects of Ziltronik now and this will show up in the full year. We did not have any equity result in the first quarter. It's the first time that we reported in the second quarter. With respect to the raw materials, I had the question before on polymers, where I talked a little bit about trailing effect in some of our contracts, which might lead to even slightly higher prices in Q3. If I now take silicones, and you were asking after going after methanol, I mean, definitely comes down from its very high levels. But we, on the other hand, see that silicon metal prices, at least in our supply portfolio, will go up sequentially because we had a mitigation effect of the overall market price increase from our contract structure is getting weaker in the second half. I was basically methanol also referring to polymers because VAM is linked to methanol and acetic acid also linked to methanol. So I would expect that these two to follow the sharp decline we have seen in methanol. Yes. Is that You're absolutely right. I mean, methanol is driving VAM. And VAM, we were a little bit concerned in meanwhile, when many plants were in turnaround situations, it's good news that all of them came back without any meaningful delay. So that actually also led to VEM prices recovering or easing again. Your question is what is that impact for the second half? I think when modeling our full year performance, you always need to take into account that our Q4 is a little bit weaker than the Q3. So just to add, first half and second half typically does not bring the right results. Okay. Thank you. The next question comes from Sean McLaughlin, HSBC. Your line is now open. Operator, we seem to have an issue here. Please the next question is from Chetan Udeshi from JPMorgan. Yes. Thanks. Can I follow-up on silicones? Margin has been doing much better despite raw material headwinds, and you mentioned mix as one of the drivers. How sustainable is this mix going forward? And clearly, sustainable is the margin? And second point, I think you mentioned the others line going forward would include the equity contribution from Siltronic. Did I hear that correctly? And why are you including that in the EBITDA line rather than just having it below the EBIT line as associate income? And last question is, there is a big increase in your selling expenses and G and A on a year on year basis. And can you just explain what is driving that? Thank you. Okay, Chetan. I will go through the questions. First question, silicones is doing much better. That's how you frame it. And it's coming, we have said, from a good cost performance, but also from a very good product mix. So our specialty strategy actually pays off, and we see that sustainable. So we will, yes, try with all efforts to keep that momentum. And as we have said, we have lifted our full year guidance in silicones. So we see now an improved margin over last year. So EBITDA may be up low double digit, while sales up high single digit. With respect to the segment reporting and reporting of the equity income, I mean, that's how we do it. I think that's the market standard and we follow that. So we show our equity results of all participations in the EBITDA and that's why it shows up there. And if you need help for modeling, think please contact IR and you just take it out of your way of doing your modeling. So welcome to that. And the last question was on the SG and A increase. If you would look at SG and A sequentially, you wouldn't see that increase. So it's more an effect that the SG and A of Q2 in 2016 was artificially low from just some special effects. So there's nothing to be concerned about SG and A. Okay. Thank you. The next question is from Sean McLaughlin, HSBC. Your line is now open. Can you hear me? Sean, we can hear you well. Okay. Okay. I'm not sure what happened. I just had a question on polysilicon outlook for the second half. We've seen this huge number of installations in China suggesting underlying strong H1 demand. You are expecting higher deliveries in the second half. How can we square that with overall ore demand? Do you see a very negative pricing environment developing in the second half? Well, we do not specifically see a pricing issue developing in the second half. Actually, we think that, let's say, the market volume totally could increase if everything goes right. We actually increased our forecast. We originally said we expect the installation market to be between seventy five and eighty five. And now we think it could even go up to 90 gigawatts potentially. It really depends on individual markets and on China, of course, but also on The United States. And of course, I mean, the business has been volatile and but we do not see any specific issues at this point. At this point, as we said, we see strong demand. And can I confirm that you will know that you have already built your two months of inventory, therefore, no longer require additional inventory in Polysilicon? We have reported on our inventory buildup in the first and second quarter of this year. And as I said before, we will adjust our inventory a little bit up, a little bit down in the future, but this is something that is within the ordinary course of business. Thank you. The next question comes from Peter McKee, Exane BNP. Your line is now open. Thanks very much. I just had one question comments on the cost position in polysilicon. I'm not sure how much you're going to be willing to tell us. But I just wanted to try and get a bit of color of what you might have been doing and perhaps whether the and we've long seen productivity improvements at the European facilities. I mean, is the is a lot of the improvement due to The U. S. Now that the Tennessee facility has been operating for a while, you're finding operating improvements there? Or are you seeing similar a step up in productivity improvements in Europe as well? And perhaps you could give us an idea maybe of the relative cost position of U. S. Versus Europe as it stands today, please? We certainly have seen improvements in the costs in all our facilities. As you know, we have three, two in Germany, one in The U. S. We do not report on the efforts on the individual facilities. But yes, we are working hard to reduce our costs because aside from quality, this is the competitive issue in polysilicon this year, has been over the last years, and certainly will be for the time to come. But I just give you a number on maintenance shutdowns, for example. Some of our competitors shut down their deposition holes once a year, and we shut them down once every five years. You know, there there are productivity advantages in in something like that. And then we certainly, we will keep on working on on issues like that. If I can just push a little further on the The US situation, just trying to understand where you are on the sort of experience curve. Know, has have you seen big when Tennessee came on stream, obviously, was a cost advantage from an energy perspective. But, do you see as you're getting moving along the experience curve there, greater strides in improving the productivity of that plant further? Well, when you start up a facility like that, as you can imagine, the first year is tough. The second year in the second year, you already have gained experience, but you still can make significant improvements. But sometimes, we surprise ourselves in improving the cost position also in established facilities. And by the way, the same in other parts of our chemicals businesses, for example, in our siloxane operations. Just the yes, the operational excellence in these facilities is one of the reasons for a good cost position and for the profitability of the business divisions and the company. So this is why this is such a major effort to continuously work on these things. And as I said, of course, in a new facility, the relative improvements are higher than in established, but there has to be improvements in established facilities as well. Thank you. The next question comes from Thomas Vovada, Societe Generale. Yes. Good afternoon, gentlemen. I have two questions. And sorry for coming back on polysilicon again. Thank you very much for the insights on the cost savings. However, I still struggle to understand the math behind the profitability in Q2 and the guidance you're giving for the full year. I understand the cost savings is the one part. I'm just asking myself how much inventory situation and the high utilization rates and the profit you book when you put product on inventory has contributed to the comparably good result in Q2. Because if all of the benefits in Q2 that help to keep your EBITDA flat quarter over quarter is actually from cost savings, then your guidance for the full year somehow does not make sense anymore. So could you please clarify that? And I'll wait with my second question. Thank you. There was certainly a little bit of help of the inventory buildup, of course. But the important I think the important part of the answer is, we certainly have built caution into the second half because we just the business has been volatile and we simply cannot make precise predictions for the second half. I think in the chemical businesses, it's much more reliable in terms of forecasting the business, of course, provided there is no major worldwide economic problem. But in polysilicon, just from experience, yes, volatility is high and we want to care for that. Right. That's fair enough. And sorry sticking to that. But if I look at your inventories development in Q1 and Q2, so you had $40,000,000 inventory built up in your free cash flow in Q1 and $100,000,000 in Q2. Could you explain a little bit the split of the rise in inventories in Q2? Is the majority then not coming from polysilicon? That is what I would have understand from your answer. Thomas, I take over Tobias here. I mean, the impact on cash flow in Q2, I mean, the number you mentioned is a blend of all divisions. And so it's not only polysilicon. We also had some inventory increase in silicones. And then there's an additional effect from exchange rate because we with a stronger euro at the quarterly close, we need to adjust for the exchange rate impact on our inventories and that shows up in the cash flow statement. And as we have a globalized business, I mean, silicones, including polymers, I mean, this number is higher also for FX reasons. Right. This is very, very helpful. Thank you both very much. The second question is actually very, very easy, I hope. And it's on silicones. And you have set on one of the questions that you see the margin development in silicones as rather sustainable. I'm just wondering if you could expand on that. I suppose it's not just because of the demand situation. So do you think this capacity closures in China that is this sustainable then? And do you expect more to come eventually? If you could expand on that, that would be helpful. Thank you. Well, there are several reasons for the improvement of the silicones business. One thing is, of course, siloxane capacity closures in Europe, for example, then there is the overall demand because of the economic development of the world and in China especially, yes, there is an impact on the closures of some of the smaller plants because of their environmental and safety impact. And we see a strong effort from the central government China to make sure that the environmental and safety performance of the chemical plants get somewhat more up to world standard. That's a fair effort and we certainly support that in order to improve the levelness of the playing field in the chemical industry. And we certainly welcome that in the polysilicon business as well. I think this is important not only for the business conditions, but also for the people who work in these plants and for the people who live around these plants. But that certainly has also an impact on the pricing situation for base materials in China. This is super helpful. Thank you very much for that. There are no further questions. I would like to hand back to the speakers. 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. We will be back with a conference call on Q3 on October 26. Goodbye.