Dear ladies and gentlemen, welcome to the Wacker Chemie AG at the full results of 2016 telephone conference. 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, who will lead you through this conference. Please go ahead, sir.
Thank you, operator. Welcome to the Wacker Chemie AG full year 2016 conference call. My name is Joerg Hoffmann, and I'm the 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 our presentation in a minute. The presentation is available on our webpage under wacker.com under the caption, Investor Relations. Before they begin, let me point you to our safe harbor statement, which you'll find at the beginning of the deck. With this, let me now hand you over to Dr. Staudigl, our CEO. Dr. Staudigl.
Ladies and gentlemen, welcome to our full year 2016 conference call. 2016 was a year of records for us. Silicones went through the EUR 2 billion sales level for the first time in history. Silicones EBITDA contribution was at EUR 360 million, the highest on record, testifying to the success of our combined specialty and cost-focused strategy. Polymers alone contributed about as much EBITDA to the group as polysilicon following another year of very strong demand for its products. Our chemicals operations contributed 70% of group EBITDA excluding Siltronic and special income. 2016 ended the year with a strong quarter. Strong demand for semi wafers, silicones, and for our polysilicon drove performance higher than we had expected at our last call. Current trading conditions suggest that these trends, coupled with seasonal recovery in polymers, will continue. Before we get there in detail, let's have a look at our results presentation.
Starting on page two, 2016 sales came in at EUR 5.4 billion, slightly over the prior year, mainly driven by strong demand for our products. Full year EBITDA, excluding special income, grew at 19% year-over-year, almost twice as fast as expected, with the full year result coming in at EUR 1.08 billion. As I just said, our chemicals operations saw very strong volumes, especially in silicones. Across all segments, we saw very good cost performance last year also. Page three shows how the year shaped up against prior year and our last guidance. You can also see that our net cash flow increased substantially to EUR 400 million as CapEx declined to EUR 428 million. As outlined-
Dear ladies and gentlemen, welcome to the Wacker Chemie AG at the full results of 2016 telephone conference. 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, who will lead you through this conference. Please go ahead, sir.
Thank you, operator. Welcome to the Wacker Chemie AG full year 2016 conference call. My name is Joerg Hoffmann, and I'm the 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 our presentation in a minute. The presentation is available on our webpage under wacker.com under the caption, Investor Relations. Before they begin, let me point you to our safe harbor statement, which you'll find at the beginning of the deck. With this, let me now hand you over to Dr. Staudigl, our CEO. Dr. Staudigl.
Ladies and gentlemen, welcome to our full year 2016 conference call. 2016 was a year of records for us. Silicones went through the EUR 2 billion sales level for the first time in history. Silicones EBITDA contribution was at EUR 360 million, the highest on record, testifying to the success of our combined specialty and cost-focused strategy. Polymers alone contributed about as much EBITDA to the group as polysilicon following another year of very strong demand for its products. Our chemicals operations contributed 70% of group EBITDA excluding Siltronic and special income. 2016 ended the year with a strong quarter. Strong demand for semiwafers, silicones, and for our polysilicon drove performance higher than we had expected at our last call. Current trading conditions suggest that these trends, coupled with seasonal recovery in polymers, will continue. Before we get there in detail, let's have a look at our results presentation.
Starting on page two, 2016 sales came in at EUR 5.4 billion. Slightly over the prior year, mainly driven by strong demand for our products. Full year EBITDA, excluding special income, grew at 19% year-over-year, almost twice as fast as expected, with the full year results coming in at EUR 1.08 billion. As I just said, our chemicals operations saw very strong volumes, especially in silicones. Across all segments, we saw very good cost performance last year also. Page three shows how the year shaped up against prior year and our last guidance. You can also see that our net cash flow increased substantially to EUR 400 million as CapEx declined to EUR 428 million. As outlined for the leverage phase of our growth path, we expect similar net cash flows in 2017. As you saw today, we have proposed a EUR 2 per share dividend for 2016.
This reflects about 53% of net earnings, just over the level we have set as a new target at our last Capital Markets Day in October. Looking into the full year 2017 per today, we are confident about our capabilities, but also somewhat concerned about macroeconomic impacts and some pricing trends. We are seeing raw material inflation in methanol, vinyl acetate monomer, ethylene, and acetic acid, which will affect our chemicals businesses. We now expect full year 2017 sales to increase by mid-single digits over last year, with an EBITDA at the level of last year on a comparable basis. If current market conditions remain unchanged during the year, we definitely see additional upward potential for EBITDA over and above our present expectations. Let me now hand over to Tobias for more detail on our financials and an outlook into Q1.
Looking at last year's P&L on page four, sales were driven by volumes and overall performance was held back by price attrition. All segments show similar performance with the exception of Siltronic, where price, volume, and exchange rate were balanced year-over-year. The increase in depreciation from EUR 575 million to EUR 735 million had an impact on gross margins and operating results. As a result, gross profit was down despite a better performance in underlying volume and a better cost performance than in the prior year. Over the next three years, we expect to see depreciation decline back to 2015 levels. If you look at EBITDA performance and adjust for special income, EBITDA was up 19%. In light of top-line pressure from lower prices, this figure shows impressively our underlying volume and cost performance. EBIT was lower due to the increase in depreciation.
Other operating income improved by EUR 62 million despite lower special income. In 2015, we still booked pre-operational expenses and currency losses were also higher in 2015 than in 2016. The net financial result decreased from minus EUR 67 million to minus EUR 101 million. The key factor in the change was the lack of capitalized interest as we completed the Tennessee plant during 2016. This had an impact of EUR 17 million. Full year tax rate came in as expected at just 28.5%. We suggest to model with 30% going forward. Looking at our balance sheet on page five, you see that non-current assets actually decreased over 2015 as we depreciated more than we added to assets. Pension liabilities are up year by year by about EUR 500 million to EUR 2.11 billion, as the pension discount rate declined from 2.75% for 2015 to 1.94% for 2016.
However, compared to Q3 2016, our pension liability actually came down by about EUR 460 million, as the pension discount rate increased again towards year end 2016 to 1.94%, up from 1.38% at the end of Q3. In 2016, as announced, we advanced EUR 50 million cash as a top-up into our pension scheme, which will be booked against pension liabilities in Q1 in 2017. Prepayments decreased by EUR 182 million to EUR 271 million as legacy contracts with prepayments are running out. For the next 12 months, we expect a decrease in these prepayment levels of about EUR 100 million. Working capital increased year-over-year by 15.3% to EUR 1.25 billion. This reflects the strong operating performance in Q4, which drove up receivables combined with slightly higher inventories and lower payables. I'm now moving to page six in the presentation.
Silicones saw a strong demand for its products and benefited in the last weeks of 2016 from competitive outages. Demand was strong in all regions, with an overproportional increase in specialty products. Silicones exceeded EUR 2 billion of sales for the first time in history. EBITDA increased by 31% to EUR 360 million following high plant loading, good cost performance, and an improved product mix. The EBITDA margin Silicones increased from 14.2% to 18.1% in 2016. Looking into 2017, we expect a mid-single digit increase in full-year sales and slightly higher EBITDA. Headwinds come from sharply rising methanol costs. On the next page, sales in Polymers were slightly up as price deflation nearly compensated strong volume growth. Sales reached about EUR 1.2 billion. Full-year EBITDA came in at EUR 261 million, 17% up from last year. The biggest contributors to this increase were volume growth and a good cost performance, including efficiency gains.
The 2016 EBITDA margin was a record of 21.8%. 2017 is going to become more difficult in Polymers as VAM, ethylene, and acetic acid costs rise. We expect a significant decrease in EBITDA, but despite this, full-year EBITDA margin in Polymers should come in above our 16% long-term target for the chemical segment, with sales in Polymers up mid-single digits. On next page, Polysilicon. Polysilicon reported sales of EUR 1.1 billion as volume growth only slightly overcompensated for lower price and mix effects. Reported EBITDA was down 29% year-over-year as special income decreased. We also incurred ramp-up costs and prices fluctuated substantially during the year. When adjusting for ramp costs and special income, EBITDA margin was 29% versus 33% in 2015. Shipments increased to 66 kilotons in 2016 as all plants, including Tennessee, were utilized at their respective capacity limits throughout the year.
Looking into 2017, we expect sales at the level of 2016 and an EBITDA excluding special income slightly higher than in 2016. We expect volume growth year-over-year, yet the lower ASPs will largely compensate those gains. Siltronic on next page. Siltronic reported their full-year results today with sales at last year's level. EBITDA increased by 18% to EUR 146 million. Key contributors were high plant loading combined with a good cost performance and lower hedging costs. For 2017, Siltronic expects sales over EUR 1 billion with an EBITDA margin of at least 20%, if not significantly higher. For more details, please contact Siltronic directly. Net financial debt on page 11 decreased as guided to just under EUR 1 billion as gross cash flows increased to EUR 737 million and net cash flow came in at EUR 400 million as cash outflow for investments decreased by about EUR 300 million to EUR 517 million.
The difference between cash outflow for investments and 2016 CapEx is in the timing of the cash flows. Some CapEx was booked in 2015, but the actual cash outflow happened shortly after the year-end 2015. Looking into the first quarter on page 12, we see strong demand for our chemical operations with order intake over the level of last year. While volumes look good, we are looking with some concern to the recent rise in raw materials, in particular to methanol and ethylene. Polysilicon operates at full utilization and Siltronic guided to a strong 2017. We expect Q1 group sales at about EUR 1.4 billion with an EBITDA clearly above Q1 2016. With this, let me hand you back to Rudi.
Thank you, Tobias. As you heard, we think we're in good shape. We see some challenges going forward, but our course is clearly set. For the full year 2017 guidance on page 12, we expect a mid-single-digit increase in sales and an EBITDA at the level of 2016, excluding special items. With CapEx discipline, our CapEx should stay at about the level of last year, leading to net cash flow of about EUR 400 million. That said, we believe that the coming year can bring upsides and downsides to this guidance. Should current end market conditions persist, however, we would look to improving our guidance as we move on through the year. This concludes the presentation today, ladies and gentlemen. Thank you for your attention so far. We will now be happy to answer your questions. Operator?
If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selections. One moment, please, for the first question. The first question is from Andreas Heine of MainFirst. Please go ahead.
Yeah. Good afternoon. First, I would like to understand a little bit more what your assumptions are for polysilicon. You were addressing that the average selling price will be down year-on-year, and you addressed also that that might be due to the prepayment going down, so the contract volume having a lower percentage there. Could you shed some light what you can see right now in Q1? Will we see this already, or is what we see on the spot market as quite price leveled something we will also see in higher earnings and price in the first quarter? Maybe anything what you can say to us, what you assume from today's point of view, what the spot price is, the only thing we can see from the outside, you have put into your guidance assumption. That's on the polysilicon.
Then polymers, basically the only thing, obviously a quite harsh impact comes from raw materials. Could you address how much of the raw material headwind you might be able to transfer by higher pricing? As this is the only segment where you indicate that profits are going down, but that on group level earnings might be flat, it means that the substantial decline of this segment should be offset all of the increase of the three others, which would highlight really a quite significant decline. Could you shed some more light what your own assumptions for this segment are? Thanks.
Yeah. Andreas, let me talk first on the conditions of the polysilicon market. I think we have seen this last year, this up and down, which was represented by the PVinsights price fluctuation. Within the last few weeks, there was a little bit of a downward trend. For the year, we simply assumed decreasing prices just to be on the safe side because we don't know what will happen. Whether we will see something like last year or not. If conditions are getting good, of course, we see upsides. It's just very difficult to read right now.
Looking on Q1 is what we see in this PVinsights. Is that something which should come through in a sense of higher prices, or is the lower percentage of contract volume offsetting this? Basically, if I look on what we have seen last year was around EUR 60 per kilogram in the first quarter, if my math is right. Looking on what we see right now on the spot market is similar, but probably volume through the semiconductor industry has higher prices and your contract volume has also higher prices. What is the mix out of this, what you should have clearly already seen in your pocket for Q1, just to get a flavor on impact this contract mix is.
There's a lot going on if you compare Q1 to the prior year, also if you compare Q1 to Q4. We definitely see that increase in prices if you compare especially the first month of Q4 to the first month of Q1. On the other hand, we also had, for example, higher electricity prices in January. I would be a little cautious on just extrapolate that price index into our results. I think that is a simplification that many would love to use. Our result is basically coming from a strong volume and then our continuous cost improvement. Everything is going according to plan as we see it. The mathematics not entirely predict maybe what we see today.
Okay. Thanks.
With respect to raw materials, your key question was on how do we pass it on to our customers. As we continuously said, we do have in polymers roughly 25%, which is 50% of the liquid business or 25% of the total business indexed. For this, we pass it on. For the rest, it's more or less value-based pricing. Then it very much depends on the competitive situation that we have. We assume overall for polymers
Still despite the formula pricing, an overall slight price decline, but less than in 2016. We see significant headwind in ethylene and VAM, and also acetic acid. That more or less comes from higher naphtha pricing, which goes back to oil prices, but it also comes from higher coal prices, which almost doubled since the trough that we had seen in 2016. That's why we guide for a significantly lower absolute EBITDA, but we are very confident that we will be above our target margin of 16%.
Thank you.
The next question is from Peter Mackey of Exane BNP Paribas. Please go ahead.
Good afternoon, everybody. A couple of questions if I can, please. First, I wanted to ask some questions about the volume number in polysilicon. I was a little bit surprised by the 66,000 tons that you suggest you shipped last year. I was sort of under the impression that at the nine-month stage, volumes were something in the low 40s, which suggests a very significant shipment in the fourth quarter above your production rate. I wonder if you could just confirm that, if so, given the pricing points that we saw, the shift in pricing in the fourth quarter, and the fact that you had put inventory strategically into the system, I think, during the third quarter. Just wonder about your thought process of effectively apparently selling out of those inventories at what were pretty low prices in the early point of the fourth quarter.
The second question was just coming back to the prepayments question. I note you're talking about prepayment amortization of around EUR 100 million. I think around EUR 20 million of that is Siltronic, so around EUR 80 million for the polysilicon business. Should we read that basically as a lower for longer prepayment amortization program? You expect now to have some prepayment benefits or some to pricing into 2018 and probably 2019 as well. Thanks very much.
Peter, maybe I start with the first two, which are more or less, as I understand them, linked. We reported that we had, in September, with the dry up in demand, built some strategic inventory at our Asian hubs close to the customers.
Yeah.
For Q4, there was no big change in that. Basically we kept this strategic inventory and our save was, you could argue, close to our production level. We ran Tennessee as high as we could, close to the total capacity. Going forward, we see that with the lead time that we have to our customer, that we would take the opportunity to again build strategic inventory if prices are low. That's what we have as clear intention.
I wonder, could you Apologies. I apologize for interrupting, could you confirm, were volumes around 20,000 tons in the fourth quarter? My assumption of the nine months was wrong.
As a matter of principle, we do not comment on quarterly volumes. I can't help you on that. Sorry.
Okay. Thank you.
Maybe on the prepayments, yes, there is some prolongation of the prepayments. There is, even on certain contracts, even an inflow of prepayments, although on a much lower basis than in the past.
Thank you very much.
The next question is from Oliver Schwarz of Warburg Research. Please go ahead.
Good afternoon. Thank you for taking my three questions in that case. Firstly, sorry to labor that, but back to polymers, please. You're saying that you're looking for a volume increase in 2017, as well as maybe some price declines, if I heard that correctly, in spite of the higher raw material prices, but you're still looking to beat the 16% EBITDA margin. All in all, the pressure from pricing can't be too bad. If we compare that to 2016, where we saw lower pricing but favorable volume growth, leading to the growth that you just communicated. How can volume growth in 2017 be only in the mid range of single-digit percentage if we'll see favorable volume growth and, let's say, only slight movements in the price? That would be my first question. Polysilicon, just to verify what I just heard.
Is it true that you're basically sold out and is it that you're at the moment currently selling basically what you produce without having, let's say, sizable inventories that would enable you to give customers, let's say, better trading conditions from their point of view. Basically, you're able to ship at once, not only four weeks after the contract with the customer has been placed. Lastly, could you tell me in the gap between the cash flow from long-term investment activities before securities, the almost EUR 517 million and the CapEx you highlighted, EUR 428 million, what is that related to? Thank you.
pretty long list, Oliver. I would love to start with the last one. I think the key difference between the CapEx and cash outflow is that we had some CapEx booked in 2015, which led to cash outflow in 2016. That's why there's that deviation. It's typically, if you have a large project at Tennessee, you run very high and intense on year-end, and then you pay bills in the beginning of next year. For polymers, as I just indicated, we guide for mid-single-digit sales growth, but in that forecast, we include a slight price decline. As I said, this price decline is actually lower than the price decline that we saw in 2016. To give you a little bit flavor, it depends on how the market also develops.
Just recently, we have seen some price increases in China and also, for the dispersible powder business, Europe is getting tighter. We try to pass on any cost increase if it makes sense to our customers and if the competitive situation allows. That's why we are really confident that we are above our target margin.
May I jump in there? Just to labor the point, is expected volume growth more or less on the level of 2016 for 2017? Would that be a fair assumption?
It's broadly right. I would say we assume a stronger year for dispersible powder. As we had really a terrific year for dispersions last year, it could be the other way. dispersible powder is stronger than dispersions.
Thank you.
Okay, maybe on the polysilicon. Basically, we sell what we produce. As Tobias already mentioned, we sort of reserve the right to put some material in inventory rather than selling it, just to reduce the future shipment time to some Asian customers.
Thank you.
The next question is from Gurpreet Gujral of Macquarie Securities. Please go ahead.
Oh, hello, guys. I've got three questions. Firstly, how should we think about Wacker's stake in Siltronic? I know in the past you've indicated a complete exit at some point in time. Can you give us an update on the timing of this? I'll follow on after that, please.
Okay. Our strategy definitely is to reduce our stake, to go to a minority position. That's certainly the next step, which we'll follow at the right time.
Okay. Fair enough. Secondly, question on your slide two, your global PV forecast. I'm quite curious to know about your rest-of-the-world forecast. It seems relatively large compared-
The key difference between the CapEx and cash outflow is that we had some CapEx booked in 2015, which led to cash outflow in 2016. That's why there's that deviation. It's typically, if you have a large project at Tennessee, you run very high and intense on year-end, and then you pay bills in the beginning of next year. For polymers, as I just indicated, we guide for mid-single-digit sales growth, but in that forecast, we include a slight price decline. As I said, this price decline is actually lower than the price decline that we saw in 2016. To give you a little bit flavor, it depends on how the market also develops. Just recently, we have seen some price increases in China, and also, for the dispersible powder business, Europe is getting tighter.
We try to pass on any cost increase if it makes sense to our customers and if the competitive situation allows. That's why we are really confident that we are above our target margin.
May I jump in there? Just to labor the point, is expected volume growth more or less on the level of 2016 for 2017? Would that be a fair assumption?
It's broadly right. I would say we assume a stronger year for dispersible polymer powders, as we had really a terrific year for dispersions last year. It could be the other way, so dispersible polymer powders stronger than dispersions.
Thank you.
Maybe on the polysilicon. Basically, we sell what we produce. As Tobias already mentioned, we sort of reserve the right to put some material in inventory rather than selling it, just to reduce the future shipment time to some Asian customers.
Thank you.
The next question is from Gurpreet Gujral of Macquarie Securities. Please go ahead.
Hello, guys. I've got three questions. Firstly, how should we think about Wacker's stake in Siltronic? I know in the past you've indicated a complete exit at some point in time. Can you give us an update on the timing of this? I'll follow on after that, please.
Okay. Our strategy definitely is to reduce our stake, to go to a minority position. Yeah, that's certainly the next step, which we'll follow at the right time.
Okay. Fair enough. Secondly, question on your slide two, your global PV forecast. I'm quite curious to know about your rest-of-the-world forecast. It seems relatively large compared to previous years. Can you give us a bit more clarity on this line, please?
Yeah. I'm just looking it up right now. Yeah. We do really extensive research on country basis. The rest of the world, basically, the biggest part of the rest of the world is South America, and there are significant projects going on in South America.
Okay. Any specific countries within South America?
Chile, for example. Chile, Brazil.
Yeah. Okay. All right. My final question is about the poly price right now. I'd like to just get a bit more of an understanding on the differential between the spot price in China versus the international market, and how you guys see that going forward. Is the spread wide now? I know from one of your competitors, they have talked about that spread widening. We just wanted to get a feel for what you think will happen in that dynamic this year.
Well, certainly you can see that on the PVinsights price. The polysilicon price outside of China tends to be lower than in China. This is due to the significant pressure outside of China because there are capacities that cannot be sold in China. That's the reason.
Okay. All right. Thank you, guys.
As a reminder, if you would like to ask a question, please press zero one. The next question is from Georgina Iwamoto of Deutsche Bank. Please go ahead.
Hi. Thank you for taking my question. Just a couple more around polysilicon. Could you just tell us what the competitive environment is like? Are you seeing significant additions or capacity additions for polysilicon in markets such as China, which may impact your ability to sell there, going forward? Previously you'd mentioned that for 2017, you expected to sell volumes of around 80,000 metric tons. Is that a kind of like a guidance that we can look for 2017 in terms of the volumes you expect to sell? Also, if you can give us an update on the preferential agreement you have with MOFCOM and how that sort of update is proceeding, that would be great.
First of all, we did not say that we will sell 80,000 tons. We said our capacity this year is 80,000 tons. It's just the 20,000 in the U.S. and the 60,000 in Germany.
Sure.
Of course, the amount which we sell also depends on the product mix. There are some products that eat up a little bit more capacity than others. This is why we cannot be more specific at this point in time.
To previous years. Can you give us a bit more clarity on this line, please?
Yeah. I'm just looking it up right now. Yeah. We do really extensive research on country basis. The rest of the world, basically, the biggest part of the rest of the world is South America, and there are significant projects going on in South America.
Okay. Any specific countries within South America?
Chile, for example. Chile, Brazil.
Yeah. Okay. All right. My final question is about the polysilicon price right now. I'd like to just get a bit more of an understanding on the differential between the spot price in China versus the international market, and how you guys see that going forward. Is the spread wide now? I know from one of your competitors, they have talked about that spread widening. We just wanted to get a feel for what you think will happen in that dynamic this year.
Certainly you can see that on the PVinsights price. The polysilicon price outside of China tends to be lower than in China. This is due to the significant pressure outside of China because there are capacities that cannot be sold in China. That's the reason.
Okay. All right. Thank you, guys.
As a reminder, if you would like to ask a question, please press 01. The next question is from Georgina Iwamoto of Deutsche Bank. Please go ahead.
Hi. Thank you for taking my question. Just a couple more around polysilicon. Could you just tell us what the competitive environment is like? Are you seeing significant capacity additions for polysilicon in markets such as China, which may impact your ability to sell there going forward? Previously you'd mentioned that for 2017 you expected to sell volumes of around 80,000 metric tons. Is that a kind of guidance that we can look for 2017 in terms of the volumes you expect to sell? Also if you can give us an update on the preferential agreement you have with MOFCOM and how that sort of update is proceeding, that would be great.
First of all, we did not say that we will sell 80,000 tons. We said our capacity this year is 80,000 tons. It's just the 20,000 in the U.S. and the 60,000 in Germany.
Sure.
Of course, the amount which we sell also depends on the product mix. There are some products that eat up a little bit more capacity than others. This is why we cannot be more specific at this point in time. In terms of capacity additions, there are several pieces of information that there will come additional capacities over time, especially in China. We are watching that, and we'll see what's coming. It does not give us sleepless nights at this point in time. In terms of MOFCOM, I have to start with the European deal first. As you probably know, this trade dispute between China and Europe on modules and cells has been almost resolved. I mean, the so-called minimum import price for Chinese modules has been reduced by 20% beginning of the year for Chinese producers.
A so-called interim review has been started that takes about six to nine months. The intent of the European Commission is to consecutively reduce the minimum import price to ultimately get to a world price level for modules themselves. I think this is, from our point of view, a great development. We think that Europe made a mistake in putting up such high barriers. It's not only our view, there's a whole industry here in Europe that shares that view. Since China always said they would mirror what Europe is doing, would mirror that on polysilicon, our assumption at this point in time is that the import hurdles for us would be reduced as well in China.
Great. Thanks.
Sure.
The next question is from Patrick Rafaisz of UBS. Please go ahead.
Thank you, good afternoon. Three questions, please. First, again, circling back to raw materials, I'm afraid, in polymers, would you then agree that your total raw material bill, as you budget today, will increase by something around 10%-15% in 2017 based on the guidance you're giving? Similarly, at silicones, you mentioned methanol being an issue. I understand you've also locked in some lower price contracts for silicon metal. How does that pan out? How does that offset each other? What's the raw material bill increase here year-on-year? Lastly, on VAM. From memory, I thought you had a net long position in VAM, especially in the U.S.
In terms of capacity additions, there are several pieces of information that there will come additional capacities over time, especially in China. We are watching that, we'll see what's coming. It does not give us sleepless nights at this point in time. In terms of MOFCOM, I have to start with the European deal first. As you probably know, this trade dispute between China and Europe on modules and cells has been almost resolved. I mean, the so-called minimum import price for Chinese modules has been reduced by 20% beginning of the year for Chinese producers. A so-called interim review has been started that takes about six to nine months. The intent of the European Commission is to consecutively reduce the minimum import price to ultimately get to a world price level for modules and cells.
I think this is, from our point of view, a great development. We think that Europe made a mistake in putting up such high barriers. It's not only our view, there's a whole industry here in Europe that shares that view. Since China always said they would mirror what Europe is doing, would mirror that on polysilicon. Our assumption at this point in time is that the import hurdles for us would be reduced as well in China.
Great. Thanks.
Sure.
The next question is from Patrick Rafaisz of UBS. Please go ahead.
Thank you, and good afternoon. Three questions, please. First, again, circling back to raw materials, I'm afraid. In polymers, would you then agree that your total raw material bill, as you budget today, will increase by something around 10%-15% in 2017, based on the guidance you're giving? Then similarly, at silicones, you mentioned methanol being an issue. I understand you've also locked in some lower price contracts for silicon metal. How does that pan out? How does that offset each other? What would the raw material bill increase year-on-year? Lastly, on VAM. From memory, I thought you had a net long position in VAM, especially in the U.S. and China. Wouldn't that mitigate the impact from increasing raw material costs for you, or am I mistaken here? Thank you.
Patrick, I think your raw materials assumption in polymers is sort of okay. I wouldn't debate that. There's a substantial increase in raw materials for polymers. For the second question, methanol. Methanol is largely traded at an index. There we see a substantial impact immediately on our bill if we procure the methanol based on the index with a discount. That is what we are seeing as significant impact to the silicones. Asking the question about silicon metal, you are right. Given our contract structure, we also see at the silicon metal price indices, we see increases, but that is largely mitigated by our contract structure. The impact is mainly from methanol for the silicones business. For the VAM, I think we are not long in VAM, but we are net buyer in VAM. We only have production capacity for our German demand.
We procure VAM in addition to the capacity also in Europe, but to 100% in the Americas and Asia.
Understand. Thank you very much.
The next question is from Andrew Benson of Citi. Please go ahead.
Thanks very much. You talked about the European position. I was wondering if you'd give us an update on the U.S. Well, you indicated the storage of the Tennessee could be part of the tariff regime, and just how that's panning out. On the prepayments, you said that had changed, and you said you're actually starting to get some incoming. I wondered if you could give some more color on the prepayments and how you see that evolving over the medium term, and how that could affect your volumes over the medium term as well. What was the cause of the change in the digression of all the use of those prepayments? Thanks.
On the tariff regimes, as an American producer at this point in time, we cannot export to China, which I think is a problem for our Chinese customers because it's a new and very high quality, very productive facility. That's a fact, so we are selling the material outside of China. In terms of the prepayment, as I said, there's no prepayment incoming, nothing compared to the times when heavy prepayments were paid in order to reserve capacities. It just demonstrates that our high-quality polysilicon, there is a high demand for that, and some very high-quality customers want to make sure that they get enough of that material. Then, there is the fact that some of the prepayment contracts are prolonged into the future, the existing prepayment sort of is distributed over more years.
This all together determines the lower prepayment reduction within a year, that it's distributed over more years.
How much of your business Can you just give us more, what was the provocation for the change? Is it customer-led or is it-
Yeah. It's individual customers, I really want to emphasize that it's by far not to that extent as in the past. As I always stressed, even for a long time, basically polysilicon will be a normal chemical business. In a normal chemical business, you do not get prepayments for future deliveries. In some instances, you get it to make sure that customers want to make sure that they really get enough quantity of high-quality material. You should not look at the polysilicon business globally as a business where there is a change in trend towards more prepayments again.
Yes.
These are very customer-specific issues.
Okay. Just one last question. Am I right in thinking that it's simply you being cautious? I don't understand what you're saying that what you're seeing currently is you don't believe will be a trend for the full year, or you're not prepared to assert that it's going to be a trend for the full year. Is that just natural conservatism on the part of Wacker?
It might be part of it. Absolutely. What we saw in polysilicon last year, this significant decline in demand and pricing mid of the year was certainly to an extent that nobody had expected throughout the first half of the year. With our first guidance of the year, we just do not want to mislead anybody. It's just careful. I think it's the way we do business.
Yeah. Okay. Thank you very much.
The next question is from Mathew Hampshire-Waugh of Credit Suisse. Please go ahead.
Hi. Thanks for taking my question. Sorry, one more on the polysilicon guidance. Can you just clarify? You're guiding to flat sales with volumes up but offset by lower prices, then somewhat higher EBITDA. This also includes the EUR 50 million lower costs as you don't have the ramp-up costs for Tennessee, if I'm correct. The maths on this would imply that you're expecting volume growth at 5% or below, which seems pretty low to me. Is that correct, or am I missing something? Thank you.
Mathew, we're not commenting on the assumption of volume growth. Overall, we do see volume growth, as we already said. We do have the capacity available. As Uli said, we also have the effect of a demanding product mix. If you take this together, lower ASP also coming from the product mix and maybe a cautious market price outlook. You see that price effects go one-to-one into our profitability to the bottom line, while adding volume just increases the contribution margin over your variable cost. What I also mentioned for the question on the first quarter, electricity prices were up. Basically, as we see it today, it's a fair guidance for the segment. We see revenue at the level and EBITDA slightly above prior year, if you exclude the special effects from prepayment.
Okay, thank you.
Of course, we also do everything to reduce our costs as well over the year.
The next question is from Sean McLoughlin of HSBC. Please go ahead.
Thank you. Good afternoon. Two questions. Firstly, on group CapEx, I noticed this is slightly up year-on-year. You still got a number of large projects, both at the Charleston plant, Burghausen, in Brazil. Was 2016 a CapEx trough? Are we likely to stay on an upward trajectory? Is my first question. Secondly, on polysilicon, just to clarify, are you confirming that 80,000 tons is not a production target for 2017?
It is a production target, no question. We do not comment on how much we sell, how much we put potentially in inventory. There is an influence of product mix specifications, how much goes to semiconductor, how much goes into multi-crystalline solar wafers, how much goes into monocrystalline solar wafers. There is this multitude of influences, and that's just very hard to predict at this time. Our nameplate capacity is 80,000, and we certainly always try to exceed that.
One more on the polysilicon guidance. Can you just clarify? You're guiding to flat sales with volumes up but offset by lower prices, and then somewhat higher EBITDA. This also includes the EUR 50 million lower costs as you don't have the ramp-up costs for Tennessee, if I'm correct. The maths on this would imply that you're expecting volume growth at 5% or below, which seems pretty low to me. Is that correct, or am I missing something? Thank you.
Mathew, we're not commenting on the assumption of volume growth. Overall, we do see volume growth, as we already said. We do have the capacity available. As Rudy said, we also have the effect of a demanding product mix. If you take this together, lower ASP also coming from the product mix and maybe a cautious market price outlook. You see that price effects go one-to-one into our profitability to the bottom line, while adding volume just increases the contribution margin over your variable cost. What I also mentioned for the question on the first quarter, electricity prices were up. Basically as we see it today, it's a fair guidance for the segment. We see revenue at the level and EBITDA slightly above prior year, if you exclude the special effects from prepayment.
Okay. Thank you.
Of course, we also do everything to reduce our costs as well over the year.
The next question is from Sean McLoughlin of HSBC. Please go ahead.
Thank you. Good afternoon. Two questions. Firstly, on group CapEx, I noticed this is slightly up year-on-year. You still got a number of large projects, both at the Charleston plant, Burghausen, in Brazil. Was 2016 a CapEx trough? Are we likely to stay on an upward trajectory? Is my first question. Secondly, on polysilicon, just to clarify, are you confirming that 80,000 tons is not a production target for 2017?
It is a production target, no question. We do not comment on how much we sell, how much we put potentially in inventory. There is an influence of product mix specifications, how much goes to semiconductor, how much goes into multi-crystalline solar wafers, how much goes into monocrystalline solar wafers. There is this multitude of influences, and that's just very hard to predict at this time. Our nameplate capacity is 80,000, and we certainly always try to exceed that.
With respect to CapEx, I think the 450 number that we have for 2017, there's no trend in comparison to prior year. We always said that we would invest below depreciation, take a number between 450-500, we have sufficient CapEx also to have larger projects. As we announced, we have included the pyrogenic silica in Tennessee. We have included a silicon metal expansion in Norway. Yeah. I think that's the level of CapEx that we see. Don't forget that depreciation will also come down over time. The peak that we had in last year was EUR 735 million. We will see below 600, I would say in 2020.
EUR 450 million per year is a lot to work with.
Very clear. Thank you.
The next question is from Oliver Schwarz of Warburg Research. Please go ahead.
Thank you for taking my follow-on questions. Firstly, silicones. You are expecting a good product mix, some raw material price increases, you think you are still able to raise your EBITDA. Firstly, your market position in silicones as you are number 2 in the market, is weaker than in polymers. It seems like you are more successful passing on the higher raw material prices in silicones compared to your polymers franchise. Why is that the case? Secondly, in that context with good product mix, we should see some higher prices, which leaves little room for volume increases. Would that be a fair assumption? Lastly, just a housekeeping number, the 80,000 tons or 80 kilotons in polysilicon. Is that as good as it gets for the time being, or will we see some more debottlenecking already in 2017? Thank you.
We are always working on debottlenecking projects. This is very important for cost reduction. We said the 80,000 is a nameplate capacity number, we do not want to speculate on anything we achieve through debottlenecking. In polymers and silicones, a significant difference between the two is that the percentage of raw material influence on total polymer cost is much higher than on silicones. That is important to know. In silicones, the clear strategy is, and it is successful, to go more and more into higher value-added products. With higher value-added products, the pricing power is also-
With respect to CapEx, I think the 450 number that we have for 2017, there is no trend in comparison to prior year. We always said that we would invest below depreciation, take a number between 450 to 500, we have sufficient CapEx also to have larger project. As we announced, we have included the pyrogenic silica in Tennessee. We have included a silicon metal expansion in Norway. Yes. I think that is the level of CapEx that we see. Do not forget that depreciation will also come down over time. The peak that we had in last year was EUR 735 million. We will see below EUR 600, I would say in 2020.
EUR 450 million per year is a lot to work with.
Very clear. Thank you.
The next question is from Oliver Schwarz of Warburg Research. Please go ahead.
Thank you for taking my follow-on questions. Firstly, silicones. You are expecting a good product mix, some raw material price increases, but you think you are still able to raise your EBITDA. Firstly, your market position in silicones as you are number two in the market, is weaker than in polymers. It seems like you are more successful passing on the higher raw material prices in silicones compared to your polymers franchise. Why is that the case? Secondly, in that context with good product mix, we should see some higher prices, which leaves little room for volume increases. Would that be a fair assumption? Lastly, just a housekeeping number, the 80,000 tons or 80 kilotons in polysilicon. Is that as good as it gets for the time being, or will we see some more debottlenecking already in 2017? Thank you.
We are always working on debottlenecking projects. This is very important for cost reduction. We said the 80,000 is a nameplate capacity number and, yeah, we do not want to speculate on anything we achieve through debottlenecking. In polymers and silicones, a significant difference between the two is that the percentage of raw material influence on total polymer cost is much higher than on silicones. That is important to know. In silicones, the clear strategy is, and it is successful, to go more and more into higher value-added products. With higher value-added products, the pricing power is also much better. On the other hand, our market position, as you rightfully said, in polymers is better because we are number one. You can rest assured that we are trying to pass on additional costs that we have as much as we can.
Okay. Thank you.
The next question is from Chetan Udeshi of JPMorgan. Please go ahead.
Yeah. Hi. Thanks for letting me ask questions. I had a follow-up question on polymer business. I'm seeing one of your major competitor announce multiple price increases over the last 6 months in products that they compete with you. I was just wondering, why do you think your pricing will still be down? Is it more a function of more competitive or the competitive environment becoming more fiercer or tougher this year versus, say, last year? The second question would be, historically, if you've seen over the past 8 to 10 years, we've always seen a big volatility in your chemicals business margin because of raw materials price changes. Is there a way that you could lower that in the future by maybe structurally changing some of your selling prices, how you define your contracts with pricing, et cetera? Thank you.
To the question on the price increase of our competitors, you can rest assured that we will also increase prices in those products and in those regions. It always depends on the very specific competitive situation that you have. As I mentioned in a previous answer, we do see price increases, for example, in China, and we still see very strong demand. That's what's going on in the polymers business. It really depends on which product and which region. With respect to the volatility, and passing on more of the raw materials to our customers, as we said, we try to do that, but most of the business, as we are a specialty chemicals company, we are value adding very much to the processes or to the products of our customers. With that, we always try to seek the best solution.
Raw material price index contracts are, for that reason, not so much common.
Okay. Thank you.
The next question is from Andreas Heine of MainFirst. Please go ahead.
Thank you for taking my follow-up questions. Two I have. The first is the efficiency gains you mentioned you're striving for the polysilicon segment. Are they able, from today's point of view, to outstrip what you have at higher cost for electricity? That's the first question. The second is on CapEx. You said that the EUR 450 million is enough even to have growth projects, and you have mentioned some. If Siltronic wants to go for capacity additions, then it probably needs more than doubling what they spend right now, which is focused on maintenance only. Would Wacker support-
Much better. On the other hand, our market position, as you rightfully said, in polymers is better because we are number one. You can rest assured that we are trying to pass on additional costs that we have as much as we can.
Okay. Thank you.
The next question is from Chetan Udeshi of JP Morgan. Please go ahead.
Hi. Thanks for letting me ask questions. I had a follow-up question on polymer business. I'm seeing one of your major competitor announce multiple price increases over the last six months in products that they compete with you. I was just wondering, why do you think your pricing will still be down? Is it more a function of more competitive or the competitive environment becoming more fiercer or tougher this year versus, say, last year? The second question would be, historically, if you've seen over the past eight to 10 years, we've always seen a big volatility in your chemicals business margin because of raw materials price changes. Is there a way that you could lower that in the future by maybe structurally changing some of your selling prices, how you define your contracts with pricing, et cetera? Thank you.
To the question on the price increase of our competitors, you can rest assured that we will also increase prices in those products and in those regions. It always depends on the very specific competitive situation that you have. As I mentioned in a previous answer, we do see price increases, for example, in China, and we still see very strong demand. That's what's going on in the polymers business. It really depends on which product and which region. With respect to the volatility, and passing on more of the raw materials to our customers. As we said, we try to do that, but most of the business, as we are a specialty chemicals company, we are value adding very much to the processes or to the products of our customers. With that, we always try to seek the best solution.
Raw material price index contracts are, for that reason, not so much common.
Okay. Thank you.
The next question is from Andreas Heine of MainFirst. Please go ahead.
Thank you for taking my follow-up questions. Two I have. The first is the efficiency gains you mentioned you're striving for the polysilicon segment. Are they able, from today's point of view, to outstrip what you have at higher cost for electricity? That's the first question. The second is on CapEx. You said that the EUR 450 million is enough even to have growth projects, you have mentioned some. If Siltronic wants to go for capacity additions, it probably needs more than doubling what they spend right now, which is focused on maintenance only. Would Wacker support these investment ideas going forward for Siltronic, or is the EUR 450 million budget more important?
I think within the EUR 450, there is already a significant budget for Siltronic. Of course, there's no budget for an additional fab. As you know, Siltronic does not need an additional fab for 300 millimeters. Because in case additional capacity is needed, they could do it within the existing buildings.
With respect to the question on efficiency gains and the electricity cost increase, I would like to emphasize that the cost increase that we saw was in the beginning of the year. Markets also seem to have normalized. I would definitely assume that efficiency gains would be more than what we see as a cost increase in the first quarter.
Thank you.
The last question is from Oliver Schwarz of Warburg Research. Please go ahead.
Sorry for having me again. Ohler, is it possible to quantify the increase in the electricity price you are paying?
No, I'm sorry. We don't do this on such a detailed level. I would like to explain the rationale why it increased. It really comes back to, in January, a situation where the coal price was very high, as I mentioned initially, suddenly you had France, which is a typical producer of energy, having their nuclear power plants down and has a very strong demand of electricity in winter. They needed to import electricity, which made the coal-fired power plants run even higher. Added to this, we had some low level of Rhine water and all this led to higher electricity prices in the beginning of the year.
Understood. Thank you.
Thank you for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses. We will be back again with a conference call on Q1 on April 27th. Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.
These investment ideas going forward for Siltronic, or is the EUR 450 million budget more important?
Well, I think within the EUR 450, there is already a significant budget for Siltronic. Of course, there's no budget for an additional fab. As you know, Siltronic does not need an additional fab for 300 millimeters. In case additional capacity is needed, they could do it within the existing buildings.
With respect to the question on efficiency gains and the electricity cost increase, I would like to emphasize that the cost increase that we saw was in the beginning of the year. Markets also seem to have normalized, and I would definitely assume that efficiency gains would be more than what we see as a cost increase in the first quarter.
Thank you.
The last question is from Oliver Schwarz of Warburg Research. Please go ahead.
Sorry for having me again. Ketter, is it possible to quantify the increase in the electricity price you are paying?
No, I'm sorry. We don't do this on such a detailed level. I would like to explain the rationale why it increased. It really comes back to, in January, a situation where the coal price was very high, as I mentioned initially, then suddenly you had France, which is a typical producer of energy, having their nuclear power plants down and has a very strong demand of electricity in winter. They needed to import electricity, which made the coal-fired power plants run even higher. Added to this, we had some low level of Rhine water and all this led to higher electricity prices in the beginning of the year.
Understood. Thank you.
Thank you for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses. We will be back again with a conference call on Q1 on April 27th. Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.