Earnings Call: Q2 2016

Jul 28, 2016

Good afternoon, ladies and gentlemen, and welcome to the Wacker Chemie AG Conference Call regarding the Second Quarter Results 2016. At this time, all participants have been placed on a listen only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Jorg Hoffmann. Who will take you through our presentation in a minute. Presentation is available on our webpage on www.bucka.com, captioned Investor Relations. Before they begin, allow me to point you to our safe harbor statement, which you'll find at the beginning of deck. With this, let me hand you over to Doctor. Our CEO. Doctor. Staudigl? Thank you, Jorg. Ladies and gentlemen, welcome to our second quarter twenty sixteen conference call. Let me walk you through our presentation starting on Page two with the Q2 highlights. Q2 results exceeded the market's expectations. The good cost and efficiency performance in chemicals as well as positive pricing effects and cost benefits in polysilicon drove our results. The second quarter recorded sales of €1,400,000,000 with an EBITDA of €300,000,000 EBITDA excluding special income was 21% better than last year. Similar to Q1, strong volumes and efficiency gains drove Chemicals EBITDA. Siltronic benefited in a weak pricing environment from lower hedging costs and cost improvements. Polysilicon saw sales essentially unchanged, but a sequentially better EBITDA reflects lower ramp costs, price improvements and further efficiency gains. In polysilicon, the ramp in Tennessee continues well and as expected. The overall market environment in solar polysilicon continues to be positive with strong volumes. As leading indices show, pricing picked up sharply from historically low levels in Q1 and are now slightly weakening again. Monocrystalline products continue to make their way in the market as cost conscious buyers focus on overall system costs. The result of the combination of fierce cost competition and the drive towards higher level technologies should make solar even more attractive going forward. We support this industry development with our commitment to quality and tech service offerings. Our chemicals businesses saw good volumes in essentially all areas. The performance of our European business here is notable. Against somewhat slower general chemical industry sales, our segments performed better than the rest of the industry with strong volume gains. This is a result of a strategically good industry positioning in diversified end markets, leveraging global reach with local customer interaction. Our chemicals businesses continue to develop well and the shift in our investment strategy towards more downstream investments supports this momentum. I am proud to say that across the board all our segments saw a very good cost and efficiency performance in Q2. On Page three, our guidance for the full year is largely unchanged. We now expect to reach the upper end of the range for our full year EBITDA projection. All other guidance items are unchanged except for the tax rate, which we now see below 40%. Altogether, this was a good quarter. Macro effects such as the potential fallout from Brexit caused some concern. After good performance in the first half, we are very confident about our full year guidance. In fact, as I said before, we now lean more towards the upper end of the range we communicated previously. Let me now hand you over to Tobias for more detail on the financials. Thank you, Rudy. Chart four shows our P and L. I guess everything in here is largely as expected. Our tax rate in Q2 was 32. This is a result of a better profit before tax and an improved regional profit distribution. For the full year, we are now optimistic to stay below a 40% rate. From 2017 onwards, we should reach tax rates of about 30%. We reported a small item of €7,000,000 in special income in Q2 after €87,000,000 in Q2 last year. For the full year 2016, we continue to see no significant additional special income. Page five shows our balance sheet. Prepayment levels are now down to €360,000,000 The number was €566,000,000 a year ago. When adjusting for the retention of prepayments in defaulted contracts, this shows a run rate of about €150,000,000 due to ongoing deliveries to our customers. At €1,280,000,000 working capital was up 18% compared to year end, reflecting an operations driven increase in trade receivables. At the same time, trade payables declined substantially following a reduction in investment related liabilities for the Charleston side. You will note that our pensions number is up again. At €2,400,000,000 we see a similar situation to Q1 twenty fifteen when we were at €2,200,000,000 Pension liabilities are now 22% higher than in Q1 and 50% higher than at the end of last year. Over the last two years, we have seen bond rates fluctuating significantly. Rates were at 1.65% at the end of Q1 twenty fifteen, at 2.75% at the end of last year and are now at 1.6% at the end of Q2. The lower discount rates result in higher pension liabilities. This corresponds to an impact on equity, which is mitigated by higher deferred tax assets. This has no P and L impact. I believe this is a mathematical exercise that clearly exaggerates the economic reality of our pension scheme. Our German pension fund shows a historical return on plan assets of around 4%. Nevertheless, from a prudent financial perspective, we flagged that we assessed the situation and looked potentially increase our cash contributions to our pension funds. This would have no P and L impact and no impact on our net financial debt guidance. Needless to say, it also has no impact on our dividend policy. On the next three slides, you can see our Chemicals businesses. Silicones came in with sales up by 1.6% and an EBITDA margin of 18.2%. The major drivers for this were volume growth and efficiency gains. For the second half of the year, we see a performance pattern similar to last year, but on a higher level. Polymers saw strong volume growth and high plant loading, leading to a good cost performance. Sales were held back by some price declines and unfavorable currency effects in some emerging markets. Raw materials seemed to have passed the trough. In both segments, Silicones and Polymers, we saw a 2% to 3% growth rate in the first half. We are now adjusting our full year sales guidance to low single digit growth. This is based on good volumes, but also takes into account headwinds from pricing and foreign exchange. In silicones, we expect a significant EBITDA increase, now targeting a 17% full year margin. In polymers, we target a material improvement in EBITDA for the full year to about 20% margin. Moving on to Polysilicon on Page nine. We were sold out again effectively throughout the quarter just as in the previous quarters. Volumes in Q2 were slightly below Q1 as Q1 saw some reductions in inventory. Following a pickup in demand in the market, prices recovered from historical lows in the course of Q2. We saw positive effects from lower ramp costs, product mix shift and strong demand for our products. For the full year, we expect to ship close to 70,000 tons. As Rudi said, our ramp in Tennessee is progressing well with a focus on our signature quality levels. We do not expect additional ramp costs in H2, which should simplify modeling for you. We continue to see strong demand for our products in Q3 as end markets continue to grow fast. We project a total global solar PV installation of between sixty seventy gigawatts in 2016. Siltronic on Page 10 saw a slightly better Q2 than expected, benefiting from lower FX costs and continued cost reduction efforts. For the second half, Siltronic management sees currently no further rise in demand for silicon wafers as end markets lack stimulus. Our net financial debt on Page 12 increased slightly over year end twenty fifteen to €1,150,000,000 after about €100,000,000 in dividend payments. Gross cash flow from operations increased in Q2 by 27% over Q1 to €172,000,000 At the same time, cash flow from investing activities declined by about 50% sequentially from Q1 into Q2 to €97,000,000 This reflects the switch to a lower CapEx operating mode as discussed previously. Now let me hand you back to Rudi. Thanks, Tobias. Before we go into the Q and A, let's have a quick look at current trading conditions. We continue to see good momentum in all our businesses. Holding pricing firm is an issue in all segments, but works better in the chemicals businesses. We see very high plant utilizations in chemicals and polysilicon. Successful new product introductions support sales in many segments. Recent events, some very near to our base, are showing that the world is not becoming a safer place. Market disturbances from Brexit and other potential risk factors such as the Italian banking crisis may well influence the industries we are working in. On the other hand, we are confident about our performance for the full year. This year is reaching the upper end of the range of our projection for EBITDA excluding special income, effectively targets an EBITDA for the full year of about €1,000,000,000 And if everything goes well, we could even slightly exceed it. Ladies and gentlemen, this concludes the presentation today. Thank you for your attention so far. We are now happy to answer your questions. Operator? Operator, the first question is from Mr. Andreas Heine from MainFirst. The first question I have is a small one on raw materials. You say they are in a process of bottoming out or getting to the trough. I would assume that at least silicon metal is something where you have still quite some benefits going forward in the second half and maybe even in 'seventeen on the average level. And then could you elucidate a little bit what you see on the prices going forward in Q3 on polysilicon? I think you should have quite a good visibility with, on the one hand, quite a lead time until you deliver the business what you have made on spot prices and then the contract prices, you should know it as well. So I would assume that even if spot prices are going down now that sequentially from Q2 to Q3 prices for you are still on the way up. And could you elicit a little bit how the split between the volume is from the first to the second half in polysilicon? So how sharp the ramp up in at Tennessee is? And how important the inventory sale in the first quarter was? Andreas, on your question on raw materials, you're absolutely right that silicon metal is still trending lower. We discussed on the last call that there is a time lag. I think it's too early to talk about 2017. But we see lower pricing in silicon metal in third quarter. And yes, most likely that won't change too much in the fourth quarter. And on the polysilicon pricing, I mean, I'm sure you know the development of the PV Insights Index, for example, that is sort of slowly going down by about 1% per week. And now I think from the peak, it's down something between 710%. So this decrease is slower than what we saw in the past actually. In terms of our visibility, you have to take into account that it's not that we see the pricing after, let's say, a six to eight weeks shipment time to Asia. You might know or I'm going to tell you and everybody who's listening, we ship after we received cash or LCs. So before we ship, we know what the price for the material is that we ship. So we are very close to the market. I mean, what we see is that volume demand is still very healthy. And we don't think that there is an overcapacity for very high quality material in the market. Then the from the 70 kilotons you are approaching this year is a little bit was distorted by inventory sales in the first quarter. Is the split there sixty-forty or 40 five-fifty five with this ramp up? Is there any kind of guidance you can give? And maybe sorry for my not understanding fully this what you said is the pricing, the spot pricing. When you receive the order and you are getting the money in advance, is that the time when you book it as sales or when you deliver it in, for example, China? We book the sales when we ship the material. But if that is six to eight weeks, then you should know already the your average sales price on the spot price business by the September. Yes. But I mean, we are negotiating the prices before we ship the material. I might jump in here. From my personal perspective, it's more that the customers know that this price that we offer today, when they get the materials in six to eight weeks' time, seems to be a fair price. Right. But it's already known now from the customer's point of view as well as from our point of view. And in terms of the total volume, yes, as we said, we had some inventory reduction in the first quarter. That's why the total volume was higher than in the second quarter. But of course, volume will increase because of the ramp up of Tennessee. But just like in the past, we announced the total volume after the end of the year. But I think we gave a good guidance with coming close to 70 kilo tons. Thank you. Operator, the next question is from Mr. Jean Francois Mie Mandi from Morgan Stanley. I would like to spend a bit of time on your guidance quickly. So if I look top end of your guidance, 10% increase just north of EUR 1,000,000,000, then I strip out the guidances in chemicals tells me and putting the 70,000 tons in tells me that you would bake in some pretty conservative price assumptions in polysilicon for the second half of the year. Can you discuss a bit about that? The second thing is in polymers, you did have record margins almost since IPO and for any quarter actually. And there comes on a 3.5% sales increase on the low operating leverage business. What happened there? You get such high margins and how can you sustain that? Was there something transformational or would that come down a bit? And the last one on silicones, was it mainly on construction or were the strength or were there other elements there? Thank you. May I start with the overall guidance? I think as you said, yes, we are a little bit more conservative on pricing for the second half. For polymers, record margins in 2016 in the second quarter. Yes, I mean, it's a as we said, it's a combination of that exchange rate has changed dramatically in last year, plus our headwind that we had from raw materials turned in last year. But we continue our path forward growing the business strongly volumes, having high utilization in the plants above 90%, which allow us efficiency gains. And on the pricing side, we try to do as much value based pricing as possible and only have very limited raw material formulas. So in that combination, we are performing in 2016 strongly. We guided for roughly around 20% margin. And you know that we had a target margin set of 16%. And for sure, we will look into that whether we should we wise that upwards. But you also see that with around 20% margin for the full year that we see that the second half, especially the fourth quarter, will be slower. That's on a seasonal basis. But that means that your from your FX comment that your U. S. Business is more profitable than your European business. Is that fair in Polymers? No, I wouldn't say that. I think in The U. S. Business, we actually benefit from our additional capacity that we invested in right in time that is now up and running so that we see substantial volume growth in The U. S. Business. But I wouldn't, yes, make it just translation effects that our results get the benefit from. Okay. And for silicones, yes, as in polymers with our products, we have a strong performance in construction. But it's not construction alone. As you know, our silicone setup is broad based. So when we report healthy volume growth, it's definitely across all segments. Maybe less growth in automotive at this point in time, but that certainly will come back. Operator, the next question is from Mr. Andrew Heap at Berenberg. I just had a question on the pensions first. Obviously, the liability has gone up. Are you seeing that you're going to have to make like big cash out payments towards that? Secondly, I want to ask which end markets you're seeing right now in the Chemicals division performing quite well? And then thirdly, how sustainable you see the margins in Chemicals going into next year? Thank you. May I start with pensions, Andrew? As we said, it's more a mathematical exercise, what we see. But nevertheless, the low interest rate environment is reality. So that's why we flagged that we are looking into making an additional one off contribution to increase the funding level of our pensions. But that is similar to what other German companies also do. And the order of magnitude is definitely reflected in our guidance for our net financial debt for this year. And the order of magnitude is maybe something around €50,000,000 That's something similar that we had done also in the past. And it's a one time increase of the funding level we are talking about. But it's not decided. It's we are, yes, right in the middle of the assessment. And it will not have a P and L impact. And for sure, it will not change our dividend policy, as I said in my presentation. And in terms of the end markets, I mean, we certainly see good growth in the construction industry, energy, textile. There are certain applications of silicones, for example, in the automobile industry that are growing fast, are combined with electric vehicles, for example. But that's, I think, the beauty of our chemical business that it's very broad based. And yes, I mean, in the products we are in, we are one of the leaders in these businesses. And then just on the sustainability of the margins, like looking out into 2017, 2018? As Tobias said, in polymers, we are certainly reviewing whether we increase our targets. And it depends on the overall economic growth and the economic environment. And this is why, of course, we cannot predict it by numbers over the next year. Our target setting, I think, is clear. Okay, thanks. Operator, the next question is from Mr. Patrick Rafaisz at UBS. Thanks. Good afternoon. Few follow-up questions. One on the pensions, Can you explain how much of the increase in the liability was actually in Germany and how much was in The U. S? I think that's the two markets you mentioned affected by the interest rates. And on your discussions currently about the top up to $50,000,000 or so, what exactly will determine this decision or what are the factors you're taking into consideration so that we have a sense process? Then on the special income in polysilicon, I think I didn't get what you said in the beginning. Did you expect no more special income in polysilicon? Or is there a guidance for the full year? I somehow have in my head around €50,000,000 was the idea for 2016. And then lastly, on your utilization rates, they're pretty good, 90% you mentioned. Nevertheless, CapEx are going down significantly this year as planned. If these utilization rates continue and volume growth also utilizes your new capacities, when would you say could new projects, new investment projects be triggered? Thank you. Maybe I'll start with the investment project. I mean, we guided this year for a capital expenditure of around EUR425 million, and we said that in the future it certainly will be that order of magnitude, roughly. And everything we need to do in our downstream chemicals business is covered by that. So we are not looking at huge new plants or huge upstream capacity investments. Understood. And on the special income of polysilicon, I think if the market develops well, if our customers are doing well, then hopefully, there are no more or significantly more special income items. And with respect to pension, Patrick, it's more than 90 percent in Germany and very little in The U. S. Especially. And with respect to the top up, I mean, we are looking into that. And as we described, that's not something unusual. That's something other companies also do. And we might do that either in the second half of this year or first half of next year. But can you confirm according to German law that there is no legal obligation for you to do that. Is that correct? Yes, that's correct. Okay. Thank you. Operator, the next question is from Mr. Thomas Voorhe, Societe Generale. Yes. Congratulations, firstly, on polymers. This is indeed very nice. Still, I have three questions just on polysilicon. Firstly, I would like to ask you on for Tennessee, on EBITDA for the full year, including the idle costs, do you expect a positive EBITDA contribution on a full year basis from Tennessee? If you could comment on that, that would be very, very helpful. Secondly, also on Tennessee, you cannot ship directly to China. So you must be selling outside of China from Tennessee and you must be shifting around the volumes also from your German plants in order to arrange that geographically. My question is, are you expecting increased logistic costs in the second half in polysilicon because of this or for any other reason I might not have picked up yet? And the third one, I'm sorry for coming back on the pricing. This polysilicon pricing is always very confusing. And this time, I'm even more confused than usual. You just said on one of the questions before that you are more cautious on pricing in the second half. Still, when I look into the data we have available, and this is the the Chinese Chinese customs data, you currently do not have any premium on your contracts versus spot. While in history you had a 20% premium roughly. At the same time, you also said that there is no capacity overhang in the high quality polysilicon. So without being wanting to be bullish, but my understanding would have been that your contract prices should continue to climb. So this is why I'm confused. Why are you more cautious on pricing in the second half of the year? Maybe if possible, could give us some arguments what could go wrong? And sorry for talking so long. Thank you. Let me start with the pricing point. If you read the projections for the second half of the year and the uncertainty about the installations in China and so on. You have to be cautious. I mean, at this point in time, we are not seeing a significant slowdown in demand. But it's caution, it's nothing else than caution. And on the logistic costs, I mean, the logistic costs are not very relevant in polysilicon, because it's a high specific weight. And with respect to the EBITDA contribution of tenancy, I know that's a very good question, but we do not give any specifics on individual sites. Know that we look at polysilicon as the segment. That's our cash generating unit. So we have one sales and we have three sites, two in Germany, one in The U. S, but we have no individual breakout. You very much. But I still must say polysilicon confuses me still very, very much, especially the your cautiousness on the guidance and the mathematics we can do, it does not really match. So my understanding would be at the end of the day, there is a probability that prices might dip quite significantly in H2. I don't I do not have a betting expectation for your cautiousness. Sorry. It's, I would say, just experience from the past. I mean, it's sometimes it's hard to predict what some suppliers do. Sometimes they go in with extremely low pricing. I mean, are definitely and we never have been the leader in low prices. Thank you. Okay, operator, there seem to be no more questions in the queue. There are no further questions. Thank you, everybody, for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses. Our Capital Market Day is upcoming in October. Invites for that will be sent out in a few weeks. And this Capital Market Day is actually scheduled for the October 11 in Burghausen, where we have our main site. We'll be back again on October 27 with our Q3 results. Thank you very much, and