Earnings Call: Q1 2016

Apr 28, 2016

Good afternoon, ladies and gentlemen, and welcome to the Rubber Chemie AG Conference Call regarding the First Quarter Results 2016. At this time, all participants have been placed on a listen only mode. The floor will be opened for questions following the presentation. Let me now turn the floor over to your host, Mr. Joerg Hoffmann. Thank you, operator. Welcome to the Wacker Chem EAG Q1 twenty sixteen conference call. My name is Jorg Kaufmann, I'm the Head of Investor Relations at Wacker. With me are Doctor. Rudolf Schaudhild, our CEO and Doctor. Tobias Bohler, our CFO, who will take you through our presentation in a minute. The presentation is available on our webpage under www.berlbacher.com under the Capital Investor Relations. Before we begin, please allow me to point you to our safe harbor statement, which you will find at the beginning of the presentation day. With this, let me hand you over to Doctor. Salvi Lozbeiro. Doctor. Salvi Lozbeiro? Thank you, Jorg. Ladies and gentlemen, welcome to our Q1 twenty sixteen conference call. You will have noticed that we are taking advantage of the new rules for quarterly reporting. We have reformed our reporting package also based on your inputs and hope that it now better meets your requirements. That said, your feedback is always welcome. Let me start now with Page two in the presentation. With a strong volume and cost performance in chemicals and the beginning of large scale polysilicon production in Tennessee, Q1 was certainly an exciting quarter. It saw sales of EUR1.3 billion with an EBITDA of EUR $229,000,000. Strong demand and efficiency gains drove the share of chemicals in EBITDA up to 70% of the total group result. Polysilicon and Siltronic on the other hand saw lower prices quarter over quarter. In addition, ramp costs of about EUR30 million reduced earnings during the quarter in the Polysilicon segment as expected. With a solid EBITDA performance in Chemicals and an improving pricing environment in Solar, our confidence in the outlook for the full year has risen since we last presented to you. We still see a slight increase in full year sales, but now with more than just slightly better profitability for the full year. As a result, we are increasing our full year guidance to an EBITDA between 510% higher than in 2015, excluding special effects. In silicones and polymers, efficiency and productivity programs are supporting earnings even as some areas see softer pricing. All our chemicals businesses benefited from strong growth in Asia. Within Asia, regional performances vary. China, for instance, has good volumes, but with softer pricing. India, on the other hand, maintains a strong upward momentum. At polymers, we are happy to have the new capacity in Calvert City to support very strong demand for dispersions in The United States. In polysilicon, we have just celebrated the inauguration of our plant in Tennessee. It is an impressive site with the latest and most advanced polysilicon technology. So far, we have produced about 1,000 tons, which we are currently shipping to customers for evaluation. The overall market environment in solar polysilicon is improving. We are facing very strong demand. Inventory seems to have almost been cleared out of the value chain. Although Q1 ASPs were still below Q4, prices have been moving up with a clear positive trend for a few weeks now. Throughout the solar industry, power density in modules has become a focal point. As a result, we are seeing faster growth in high performance and especially in monocrystalline applications. This trend favors us as a market leader for high quality silicon material. Let me now hand over to Tobias for more detail on our financials. Thank you, Rudy. I believe the slides on the segment are essentially self explanatory, so let me focus on just a few items. Moving on to Chart four, you will see our Q1 P and L with some comments. Our gross margin decreased as expected by four percentage points to 16.7% after €30,000,000 of ramp costs and additional depreciation in Tennessee. Other moving parts were year over year price declines in polysilicon and Siltronic as well as volume improvements and efficiency gains in most segments. Depreciation in Q1 increased year over year from €141,000,000 to €170,000,000 This follows the tenancy investment and the associated growth in the asset base. For Q2, we expect this to grow to €180,000,000 and depreciation for the full year will reach about €720,000,000 Page five shows our balance sheet. Please note that the prepayment levels are now at €413,000,000 a number that we expect to decline to below €300,000,000 in the course of this year. Pension liabilities increased significantly as the reference basket of bond rates declined further. We are now discounting pension liabilities in Germany at 2.15% and in The U. S. At 3.8%. On the next three slides, you can see our Chemicals businesses. While some areas saw price deflation, all segments showed better cost performance leading to margin expansion. Both silicones and polymers generated strong volumes in Q1. In silicones, the strong operational performance and efficiency gains from various initiatives were coupled with the vast average growth in specialty applications. Polymers on the other hand saw very strong growth in dispersions and strong volumes in dispersible powders also with a very good cost performance. Looking ahead, our outlook for Chemicals is basically unchanged. In Silicones and Polymers, we are seeing mid single digit sales growth at 16% margins in Silicones and about 19% margins in Polymers for the full year. BioSolutions had a solid start and our guidance there remains unchanged. At Polysilicon, Page nine, prices were substantially lower than last Q1 and still lower than in Q4. However, during the quarter industry pricing started to improve. We will see this effect in our Q2 results. Cost reductions, debottlenecking efforts and productivity improvements in our German plant supported Q1 results. Excluding the €30,000,000 in ramp costs in Q1, we generated an EBITDA margin of 25%. We are currently seeing very strong demand for our products as global demand increases and mono installations outpace multi crystalline modules with better conversion efficiencies. On Page eleven had their own call today. They spoke of slightly better than expected sales growth in a softer industry environment and related effects on pricing. Against this background, electronic managed to keep its margin at Q4 level achieving an EBITDA margin of 10.7%. For the full year 2016, Siltronic has narrowed its guidance to a low to mid single digit sales decrease. On EBITDA, Siltronic has confirmed its guidance on a slightly improved EBITDA margin relative to 2015. Our net financial debt on Page 12 was essentially flat compared to year end 2015. CapEx in the quarter amounted to €111,000,000 more than a third below last year's Q1 CapEx. Cash outflows for investments were higher than the recorded CapEx for the quarter as some CapEx from Q4 was paid in Q1. As you mentioned as mentioned on our last call, our guidance for CapEx for the full year stands at four twenty five million euros As we increase our guidance for EBITDA, this also implies an improvement in underlying cash flow generation. As a result, net financial debt should come in slightly lower than last year. Now let me hand you back to Rudi before we begin Q and A. Thank you, Tobias. Before we go into the Q and A, let's have a very quick look at current trading conditions. In Chemicals, we are seeing the typical seasonal improvements in Q2. As indicated, polysilicon sees pricing moving up, and we operate at fuller rates. The ramp at Tennessee continues and will hold earnings in Q2 back by about €20,000,000 Siltronic will see some relief from lower hedging losses against similar trading conditions as in Q1. As I said at the beginning of this call, our overall confidence level has risen since we last spoke six weeks ago. Given the solid and profitable start in chemicals and improving pricing in polysilicon, we see better than initially expected profitability now for the full year. Therefore, while we continue to expect a slight increase in sales, our projection for EBITDA, excluding special income, is now between 510% higher than last year. Jorg? Thank you. This concludes the presentation today, ladies and gentlemen. Thank you for your attention so far. We are now happy to ask your questions. Operator? You. Operator, the first question is from Andreas Heine from SunTrust. Yes, thank you very much. Can you hear me? Yes, we can hear you well. Okay. I have a question on silicones. The silicon metal prices came down quite a bit. I know that you have probably quite a number of supply contracts. I would like to know whether the silicon metal price decline is something which we see immediately so within the coming quarters or whether this is more an issue for 2017. But even looking into lower raw materials, the strong increase in margin is probably not driven by that. Could you elaborate whether the step up in margin from last year to this year is something which at first is sustainable and might continue like this in the coming years? Second, on polymers. The polymer margin improvement was probably very much driven by raw material costs, substandard moles and silicons. Now raw material costs are increasing. How do you see here the margin progression in the framework of higher ethylene and potentially higher VAM prices? And then last but not least, CapEx is they have given us the guidance for this year. But as far as I know, the CapEx for this year even includes some investments for the tenancy plan. So going forward into twenty seventeen, twenty eighteen, nineteen and so on, is it fair to assume that the CapEx will stay on the level between €400,000,000 and €500,000,000 for several years? Thank you. Okay. Andreas, this is Tobias speaking. May I start with Silicom's question? For silicon metal, we have a bunch of different contracts. And as you said, some of those contracts will react immediately to the price declines that you see in public prices and others will trade that. So I would assume that we see yes, we see something already in Q1 and we see that also going forward in the next quarters. And how silicon metal prices will look in 2017, I think it's too early to say. If you look at the margin starts, silicones had an excellent start above prior year. And that has a number of factors without rank order. It's about that very good volume and product mix that we had with reasonable prices in some pockets lower. But beyond that, a very good cost performance also in our Upstream production units. And for the full year, we are targeting to achieve our margin of that we have set as target of 16%. And that's the guidance. So it could be that the first quarter is margin wise the strongest. For polymers, we also have a very good start with strong margins. But here you can compare it to last year. We also had a very strong start. And that has something to do that we now have after having achieved very good volume growth in last year on a different exchange rate level also, We are now trying to keep that momentum. And we see a little impact from raw materials. And as you have said, some of the raw materials are trending in the other direction already. But if you look at key raw materials like ethylene and VAM, I would mostly see them flat for the next quarters. So our target there is to achieve 19% margin. That is the number that we have achieved last year. Okay. Thanks. And on the CapEx line? For CapEx, I think we have been explicit on this year. This is CHF 125,000,000. We have been explicit on the next year. It should be a similar number. I think beyond that, we have always said that the capital intensive phase of Wacker Chemie has been completed with the tenancy investment. So I think that range that you mentioned is sort of okay. Operator, the next question is from Laurent from Bank of America. Questions. The first one is on polysilicon pricing. It looks like we are now at an interesting picture where the data we get from Chinese customs show a price level for Germany, which is now below spot level. Through last year when spot was coming down, we heard on conference calls that the supply demand of your grade and your quality was actually not loosening. So I'm just wondering, can you talk about how you see the dynamic for the rest of the year? Do you think that actually it's the supply demand for your grade is tightening even more and therefore you can see price increases from here? Or should we just forget about the spot price? That's the first question. And the second one on emerging market generally for the chemical businesses, there was a lot of scare obviously on conditions on the ground. It looks like this was more of a scare than actual demand for. I'm just wondering, have you seen a slowdown in demand for your chemical products earlier this year and then acceleration through the first quarter? Or would you say that it's been business as usual? And for the rest of the year, you think that it's going to continue to be a very strong growth center? You. Laurent, this is Tobias. I'll start with the second question on the regional performance in Chemicals, especially in emerging markets. I think it's a little bit a mixed bag. It's patchy. There's no clear result from looking at the numbers. We have said that we had good volume growth in China, an area of concern, but we had seen softer pricing. We had an outstanding growth in India that continues and is a very dynamic market. In silicones, we also had a very good strong growth in good growth in Southeast Asia. But for example, polymers was a little bit slower on that. So I wouldn't draw any clear conclusion from the first three months of this year. But overall, the performance in Asia for chemicals was very strong. On your question about polysilicon pricing, what you see in this import data, you have to consider that there always is a time lag of something between six to eight weeks between the agreement with customers and what is recorded in the import statistics. So the agreements are from quite some time before you saw this price level. This is really important to know. On the dynamic, there is this upward trend in general that is reported right now. We can see that in our agreements with customers. I'm not in a position to really forecast pricing for the rest of this year. It certainly goes in the right direction now. What we are seeing is this trend for significant growth in especially so called high-tech applications for monocrystalline material. And in order to really very efficiently grow the crystals, you have to use high quality material. And that's a very positive trend. The first one is on your MOFCOM agreement, Doctor. Scharlickl. Can you tell us where we stand right now because the agreement is expiring in two days for your antidumping in Germany? And if there is anything to report in The U. S. As well because there's a lot of chatter around that at the moment? And the second one is in Polysilicon. We have seen, let's say, supposedly good volumes in Q1. You start having some volumes in Q2 from Tennessee. Are we going to see higher shipments quarter over quarter or the higher shipments will come from Q3 onwards? Thank you very much. Okay. Let me maybe start with the volumes first. Demand in the first quarter was certainly very strong. So there I mean, as a consequence, there was some destocking as well. So stocks are running very low. On the other hand, we will see increased volumes from Tennessee in the second quarter. If you can put that together and you can make a good guesstimate. On the tariff issue, as you know, and as you rightfully said, the agreement expires on April 30. What you have to keep in mind is that our polysilicon case always has been mirrored to the solar module case in Europe between the Chinese solar module producers and the European Commission. In December 2015, the European Commission has entered into a so called expiry review on the module case. And as a consequence of that, the price undertaking agreement, this minimum import price agreement for the solar modules into Europe has continued unchanged. This decision to open this expiry review was officially communicated by the European Commission on the last day, I mean, on the expiry day. And therefore, we expect the same behavior of MOFCOM in the polysilicon case. As I reported in previous conference calls, we I said that we are in good communication between Wacker and MOFCOM. And therefore, I would summarize it that we have all the reasons to assume that our price undertaking agreement, our minimum import price agreement continues unchanged after April 30. And we consider this very positive for our Chinese customers who depend on our high quality material. And maybe a remark to The U. S, there is heavy discussion between Chinese officials and American officials. When would you expect I this don't know. In this case, it's direct communication between government officials of both sides. And of our visitors, right? We are informed, but we are not part of the discussions. And is your big American competitor part of the discussion or not? We are in America, we are an American producer. So we have the same rights and obligations as American producers. Operator, the next question is from Mr. Simon Fickling at BNP Hi, good afternoon. I have two questions, please. Firstly, on polysilicon, you mentioned the faster growth in mono over multi. Can you just help us understand a bit the current split between mono and multi in your business? How different the growth rates are? And what the different price points are? And if there is a big margin difference, just so we can now think about the impact of that trend going forwards? And the second question is on the Calvert City plant in dispersion. Is there any help you can give us on as to the scale of potential impact on that on the at the divisional level and current levels of utilization at that plant and therefore spare capacity? Thank you. But of course, cannot give you a detailed split of our business for different application of the polysilicon. But we have published and I think there are published data on the split in general between mono and so called high performance multi applications. And what you can see in the forecast is that the mono application is growing. So over the years, there will be there is definitely a trend towards more and more mono. And with respect to the Calvert City capacity increase, I mean, we have an additional reactor with 85,000 tons in capacity, and we are really happy to have that now online. What I can say is that we had record volumes in the first quarter in The U. S. Production volumes we have never seen at that level before. I don't have the specific number on the utilization of the new asset, but it's performing very nicely. Okay. Thank you. And what you do normally when you start up brand new assets like that, that are certainly much higher in productivity than some old assets. You fully run the new assets and then you reduce the utilization. I mean, if you're not 100% filled in production, you reduce utilization of all the assets in order to improve productivity and efficiency. Okay, thanks. Operator, next question is from Mr. Gopri Gottfried with Macquarie. Hi. Just one question from me. Your 16% target for silicon's EBITDA margin implies that the Q1 margin of just short of 18% is seasonally very high. Can you just explain the dynamics there? Why is Q1 usually very high in terms of margins? Is typically strong as we start with very slow cost also in the area of technical spending, for example. And then your production run at full steam as we did in the first quarter having first decreases of silicon metal raw material prices that helped a lot with the good product mix prices that were mostly okay. There are some areas of price pressure, but we ran really high utilization. And all this put together, I mean, led to that very good performance in the first quarter. Okay. Thank you. Operator, the next question is from Mr. Thomas Cowder, Societe Generale. Good afternoon, gentlemen. I would try four questions, if I may. Firstly, in silicones, I think there have been a plant closure in Siloxanes in Europe. I guess that was somehow reflected in your comment on the better mix. I'm just wondering if you think that this positive effect is sustainable or will fade away over time? And secondly, on polysilicon, your comment about normalized inventory across supply chain. I'm just wondering based on your insights to the markets, do you think the normalizing of the inventories is just a function of the better demand you have been seeing and you have been commenting on? Or are there also some have there been also some limitations on the supply side? Have anybody given up production? Has have there been any changes? If you could give us any insights on that, that would be very helpful. Very quick one on Tennessee costs. I mean, plan to be fully up and running in Q3. Q4 is a slow quarter. But beginning from next year, do you think you will have lower production costs compared to the average of the German plants in Tennessee already? Or will you still have to work on costs in Tennessee? And the fourth one, quick. If other financial expenses look rather high in Q1 of this year? I know last year there was a special income just in terms of modeling. Should we take the financial expenses as a run rate for the remainder of the year? Or would you have a better guidance for us? Maybe let me start with the silicones question. You mentioned that siloxane facilities are shut down. Well, far as we know, there were no official announcements. There was a report in the newspaper. There was a financial reporting done in The U. S. And this, in the long run, certainly will have an impact, but I would guess mostly on the commodity side, with improved conditions on the commodity side. On the inventories in polysilicon, of course, demand for modules and installation was very strong definitely in the last quarter, and it's continuing very strong and that reduces inventories in the value chain. In addition, of course, we have seen this closure of the Pasadena plant for granular polysilicon from San Edison. We have seen closures of smaller plants in China. But and so I think it was a good supply demand balance ultimately, especially with the growth of demand. And we are seeing that, of course, customers are more and more aware of the advantages putting in higher quality material into their lines. And on Tennessee, yes, we expect full run rate at least by the end of the third quarter. And that means lower production costs, certainly significantly lower production costs, especially in the next year. Will we be at the lowest possible cash cost next year? That's a good question. There are certainly still some improvements to be made, but we definitely will see a significant improvement compared to this year. And on your question respect to the financial results, I think to take the Q1 number as run rate would lead to a too high number for the full year. If you compare it to last year when we had €74,000,000 in financial results. I mean that was a little bit lower from our capitalized interest on the investment. And if you take that out, you come to a number which is still below €100,000,000 for the full year. This is very helpful. Thank you, gentlemen. Operator, the next question is from Mr. Jean Francois from Emandi. Hi, again. Just a quick one. On your full year presentations, you were saying you were aiming at 5% top line growth in silicones and same in polymers roughly, if I remember correctly. And let's say, especially in polymers, we are markedly below that. Can you comment on how you expect the year to progress? And can you reconfirm these top line growth ambitions for both divisions? Jean Francois, the number you said, I mean, might be a little bit too high. I mean, we said we are growing mid single digit. But as you know, that is a range. And as we have started, as you said, with 3.5% in silicones and 0.5% in polymers, to be really at the midpoint of the range would be maybe a little bit too ambitious in that overall global macroeconomic environment. What's your ambition, let's say, three? Yes, you're doing the model. That's exactly why I'm asking. But you can expect growth. Thank you. Operator, the next question is from Mr. Andrew Benson at Citi. Thanks very much. A few points. You mentioned on Slide seven softer pricing in some areas in polymers. I may have missed the explanation behind that. If you could just give it to me again. Polysilicon pricing, how far do you think pricing can go before it starts to damage demand because it does seem to require high price elasticity? Related to that, I may be completely wrong here, but there appears to be a bit of a bottleneck at the ingot phase the production process. And if there is and like me if I'm just making this up, then to refill the tonne dish and to improve production rates, the pure of the polysilicon, the better and you could probably get more productivity out of if that's true, could imply a greater premium for high purity product. So I was wondering if you are we're seeing some capacity constraints among your ingot customers and whether that could allow you to command a slightly higher premium? And lastly, on the tax rate, when do you think it's going to normalize? Andrew, I would start with the first question on polymers prices, where are the areas of softer prices? As we said, part of 50% of our dispersion business has contracts with raw material price formulas. And in that area, if raw material prices go down that has an immediate or with a time lag that has a one to one effect on our sales prices. That's what we are referring to when we are talking about the areas of price reduction. The rest of the business is more driven value based more on an annual negotiation. And with respect to your last question on tax rate, we are still guiding for around 40% in 2016 for the full year. We started a little bit higher. That always has something to do with the level of result. And so you should see that decline especially in the second half starting, so that we should come to an average of about 40%. So I was just wondering when you're going to get back to the I guess normalized charge will be about 30% low 30%. We didn't give explicit guidance beyond 16%, but I mean that is what we are heading to after. To normalize tax rate of 30%, but maybe not in 2017 already, but that should be the level midterm. So, sorry, from 2018, could it be then? I'm sorry, can you please repeat that? Will it be 2018, you get to 30%? Maybe in 2018. Yes, okay. On the polyp pricing, as you know, we are not making explicit forecasts, I said. And this is good to see right now that the price trend is in the right direction. I'm not 100% sure whether we should already call it a bottleneck of or polysilicon being a bottleneck for ingot production, because of course you can use polysilicon of many suppliers to produce ingots, But it's certainly a fact, and we see that also in our semiconductor production, that with high purity material, the so called dip in time is lower when you start production of ingots. The dislocation rate is much lower. So the quality or the productivity is enhanced through improved quality of polysilicon and the capacity utilization of the ingot equipment can be driven up through higher quality polysilicon. Therefore, we see a significant demand on that side. And yes, there is a higher premium for such kind of material because it really delivers better performance and advantages for the customers. I wasn't implying there was a bottleneck on the availability of polysilicon. What I've read is that there could be this year a bottleneck at the ingot phase. So there could be constraint on the availability of ingotting. What you're saying about you get better capacity utilization is what I'm thinking. Could it be that higher purity product could see a wider a bigger premium during the course of this year if that ingot constraint or product constraint production of ingotation is there or do you just not see that as an issue? Do you think there's plenty of ingotation capacity? I would not rule that out for this year. It could happen. Thanks very much. Operator, the next question is from Patrick Rafaisz from UBS. Just one question really. I was wondering, can you shed some light on your new product rate going into 2016 in the Chemicals businesses? And was that also part of the improving product mix and margins for these segments? I think I mean, there is no I mean, as we measure new products, which are products that are younger than five years, I think you won't see a quarterly leap in those ratios. What we have communicated at the Chemical Day was that we have a new product revenue rate of around 10% in chemicals. But we have seen a very strong specialty growth, but that can also be products much older than five years, but new to some applications, new to some markets, to some customers. And that was the performance we were alluding to in the first quarter of silicones. Thank you. Thank you. Operator, the next question is from Peter Spengler from TD Bank. Hey, good afternoon, gentlemen. Two of my questions have already been answered, so to your left. First is on the CapEx development in polysilicon in the first quarter. So is this a run rate? Is this already a normalized CapEx level that we can model for the next quarters to come? Or is it still higher? And what can we expect for the second quarter and so on? And then for Siltronic, could you tell us the share of the sales share of Poly going to Siltronic currently roughly compared to the solar industry? We have never spelled out detailed numbers, as you know. By far, the most polysilicon is going into solar. Okay. And on CapEx development, I think Q1 with all the final work at the Tennessee side is not a good indicator for the run rate for polysilicon. So it's lower. And overall CapEx for the group should be at around €425,000,000 for the full year. So can we expect a similar CapEx number in the second quarter then? And then in third quarter lower? Yes, think overall polysilicon should be at the full year below €130,000,000 So it should be become lower quarter over quarter. Thank you. Great. There seem to be no more questions in the queue. There are no more questions. Thank you, everybody. Thank you for joining us today and for your interest in Vaxxer and me. We're looking forward to further discussions with you as this quarter progresses. We expect we will be back again on the July 28, sorry, in one time and publish our Q2 results. Until then, if have any further questions or so, please