Wacker Chemie's (WKCMF) CEO Rudolf Staudigl on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Wacker Chemie (WKCMF)

Wacker Chemie AG (OTC:WKCMF) Q2 2014 Earnings Conference Call August 1, 2014 9:00 AM ET

Executives

Joerg Hoffmann - IR

Rudolf Staudigl - CEO

Joachim Rauhut - CFO

Analysts

Jean-Francois Meymandi - UBS

Thomas Swoboda - MainFirst Bank

Alexander Karnick - Deutsche Bank

Laurent Favre - Bank of America Merrill Lynch

Christian Rath - HSBC

James Curran - Nomura

Nils-Peter Fitzl - Hauck & Aufhäuser

Operator

Good afternoon, ladies and gentlemen, and welcome to the Wacker Chemie AG Conference Call regarding the Q2 Results 2014. (Operator Instructions). Let me now hand the floor over to Mr. Joerg Hoffmann.

Joerg Hoffmann

Thank you, operator. Welcome to the Q2 2014 conference call on Wacker Chemie AG. My name is Joerg Hoffmann, Head of Investor Relations. As usual, we have Dr. Rudolf Staudigl, our CEO and Dr. Joachim Rauhut, our CFO with us on the call.

Please note that during this call we may make statements which contain predictions, estimates or other information with our forward-looking statements. These statements are based on current expectations and certain assumptions, and are therefore subject to certain risks and uncertainties.

Some of these risks and uncertainties are beyond Wacker's control and could cause the actual results to differ materially from results, performances or achievements that maybe expressed or implied in such forward-looking statements. Wacker may not update those risk factors or the forward-looking statements made during this call nor does it assume any obligation to do so.

We published today our annual report, press release on our numbers and an Excel file detailing our data. A written version of today's prepared speeches will be posted on our website about half an hour after this call. You will find all of this on our website, www.wacker.com under the caption Investor Relations. Staudigl?

Rudolf Staudigl

Ladies and gentlemen, Welcome to our second quarter 2014 conference call. WACKER saw a strong second quarter on the back of robust demand for our products, leading to sales of €1.24 billion. This is 8% over last year and 7.4% better than in Q1. In terms or EBITDA margins chemicals lagged somewhat behind last year. Both POLYSILICON and Siltronic delivered good results. Q2 EBITDA came in at €230 million, 22% better than in 2013. Given that this Q2 saw no special effects, this performance compares favorably against Q1 this year, showing a 34% improvement in underlying EBITDA. Contributing to this progress was mainly POLYSILICON, which saw high capacity utilization through the quarter and price appreciation as demand for high purity material increased.

In addition, we are making good progress on our cost roadmap. Overall, demand for solar products continues to be healthy. Reported installation numbers for the first half of the year were lower than originally expected, especially in the Chinese solar market. Globally, solar gains versus other sources of power due to declining cost per watt of solar systems. We are seeing strong demand in the U.S. supported by net metering in many states, despite still higher system costs compared to other regions.

In other places governmental support, such as in China drives growth. In line with other market observers, we still expect global PV installations for the full year in the range of 44 to 50 gigawatts. A source of uncertainty, however, comes from various trade disputes, which could potentially have disturbing effects on demand.

Technology improvements support the long-term trend in solar PV installations growth. In our prepared slides, you will find an assumption on technology migration towards higher conversion efficiency cells and modules. It is our strategy to compete in all these market segments with our material, thereby addressing 100% of the total market opportunity. This also explains our focus on quality while maintaining an industry leading cost position. In addition, we strive to maintain our market share in this fast growing environment.

To this end, we add capacity at our new site in Tennessee and utilize debottlenecking opportunities in our German plants. All these activities should lead to capacities of at least 80

kilotons in line with market growth. Operationally, we continue to focus on increasing reactor output and on further cost reductions. Siltronic saw strong demand and good progress on cost reductions as well. For the first time PC and tablet sales as a major source of demand did not decline quarter over quarter.

With this, 300 millimeters wafers grew as much as 9% in the same period. Industry shipments reached about 4.7 million wafers per month. This is a level very close to industry equipment capacity. Pricing for 300 millimeters wafers, however, reached historic lows in Q2. Many market observers report that in their view prices should go up in 2015. We would certainly welcome that, but we focus on our cost reductions to remain in place.

Our Chemicals businesses were impacted partially by raw material cost inflation in Q2. Particularly VAM, Vinyl Acetate Monomer has seen significant cost increases since the end of the first quarter. In response, our polymers division announced and implemented price increases. Price adjustments are possible, but their scope is limited by competitive forces. Silicon metal has seen spot price increases over the last weeks, as power shortages in Brazil and pollution control efforts in China reduced global supply. Given our partial backward integration into silicon metal and our focus on long-term supply relations, there should be only a minor impact from this on our silicones results in H2.

Methanol supply on the other hand relaxed considerably since the end of March this year, with spot prices going back to average 2013 levels. Overall, raw materials will have no negative cumulative effects on our silicones results in the second half of this year. As you saw, we increased guidance for the Group now to over €900 million in EBITDA for the full year 2014, which means at least one-third higher than last year’s number.

Jochen will give you more detail on risks and opportunities embedded in this guidance. There is certainly a big contribution from non-operational factors such as damage payments and retained prepayments, but it also reflects a substantial improvement in underlying operational performance over last year. Some of this comes from better market conditions, but we also see the results of our group wide efforts to reduce costs and continuously improve operational excellence. While we maintain some conservative assumptions in our outlook, I am optimistic about our results for the full year. Joachim?

Joachim Rauhut

I will discuss our Q2 performance and try to provide you with some detail on segment guidance. Please understand that I will focus in discussing Siltronic and Group results mainly on quarter over quarter developments, due to the change in consolidation scope. Group sales were 7% over Q1. Year over year, volume contributed to sales growth with 10%, price was flat and currency had a negative effect. EBITDA in Q2 was €230 million, €55 million less than in Q1, which contained a €114 million special effect. The quarterly result in Q2 contained no special effects.

Excluding special effects in Q1 EBITDA improved sequentially by 34% from Q1 to Q2. Better pricing in POLYSILICON compensated weaker pricing in Siltronic and in Chemicals.

Sales in Chemicals improved by 10% quarter over quarter to €773 million, about 3% better than last year. EBITDA in the chemicals segments amounted to €109 million, behind the record level last year, but 23% better than Q1.

Silicones reports Q2 sales at €441 million and an EBITDA of €58 million. Despite currency headwinds, sales were higher in Q2 than both in Q1 and prior year. Strong volumes in fumed silica, industrial and automotive applications supported this and compensated softer shipments in personal care, paper and power applications. Effects from plant turnaround, currency and pricing, however, masked the underlying operational performance and volume improvement. SILICONES kept its utilization high during the quarter at about 85%, despite the turnaround in Nünchritz.

We continue to pursue the announced price increases, especially in standards. Looking forward to the full year, our guidance remains unchanged from last quarter. We continue to expect a full year mid-single digits sales growth in line with our targets and a full year EBITDA slightly below 2013. Effectively, we guide for an EBITDA around the level of last year, but adjusted for the €13.7 million relating to the reversal of loss provisions for Siloxane booked in Q4 2013.

Polymers saw a significant rebound in Q2 sales to €286 million, up 20% quarter-over-quarter and about 4% better than last year. polymers reported higher volumes both quarter-over-quarter and over last year. Included in this is volume growth at powders in excess of 10%.

Despite the volume increase, polymers EBITDA stayed at the level of last year’s Q2 at €43 million. This result was influenced by higher raw material costs, VAM, and partially adverse currency effects. Selling prices started to move up, beginning to compensate the profitability impact of VAM tightness. For the full year, we continue to expect a full year EBITDA slightly below last year, due to higher VAM prices despite good sales volumes.

Q2 sales at BIOSOLUTIONS were €47 million, about 15% higher than last year and quarter. Segment EBITDA was €8.1 million, supported by consolidation effects, good demand for gumbase and cyclodextrins. For the full year, we expect some sales growth with an EBITDA at the level of 2013. Following strong demand and high utilizations, POLYSILICON achieved €273 million in sales, supported by better ASPs versus prior quarter and last year. This is 34% better than last year and 4% over Q1. Segment EBITDA was 88 million, and this translates into a 32% EBITDA margin.

This is significantly better than Q1, which saw a 25% EBITDA margin when adjusting results for Q1 special effects. Better pricing, good utilization rates and ongoing cost reductions support this. As you have heard, we will record positive special effects of about €90 million from retained prepayments and damages in Q3. All of these relate to cases where customers either went out of business or decided to adjust their volumes down, as their original solar growth projections did not materialize. Full year operational EBITDA in POLYSILICON should be significantly better than last year.

Sales at Siltronic improved quarter-over-quarter by 3%. Progress on our cost roadmap and positive effects from the Singapore integration compensated for declining ASP’s and adverse currency effects. Supported by utilization rates between 75% and 90% depending on the diameter, Siltronic EBITDA was €28 million. This is better than in Q1, considering also costs relating to the JV integration.

As Rudy said, the industry saw good demand for 300 millimeters wafers, yet prices for 300 millimeters could be better. Given stable or good demand for small diameters and 200 millimeters wafers, and an industry drive for 300 millimeters we expect high utilization through Q3. We expect EBITDA for the third quarter to continue on the current run rate.

In summary, this is a very positive development for our certainly challenging wafer business.

OTHERS reported sales of €40 million with an EBITDA of €4 million. Overall, we expect the result in OTHERS to be neutral. Full depreciation will be at about €600 million, of which about €80 million relate to the Singapore Joint Venture. Depreciation next year should stay at about €600 million, as our depreciation in Singapore declines and new assets in Tennessee start depreciating.

Our investments this year will be about €550 million with next year at about the same level. Most of these are towards our new Tennessee site. After investments of €101 million, mainly for the Tennessee plant, net cash flow in Q2 amounted to €50 million. Please note that our investments will accelerate in the second half of the year to reach the €500 million. For the full year, we expect a positive net cash flow, but due to smaller working capital effects and higher investments somewhat lower than last year. Net debt at year-end 2014 should be about €300 million higher than at the end of last year, with the increase relating to the integration of the Singapore joint venture and reduction of prepayments.

Overall Prepayments were at €843 million at the end of Q2. Our tax rate expectation remains for the full year at over 50%, as non-tax deductible losses in foreign operations weigh on Profit before tax.

As stated in our message on July 22nd, we now expect to exceed last years reported EBITDA by at least one third and including about €90 million in Q3 special effects from retained prepayments and damages. Adjusting for special effects this implies an improvement in operational performance by at least 20%. While this projection looks conservative to some of you, we should keep in mind the risks from potential inventory swings in some of our industries and trade disputes on some of the markets we serve. Nevertheless, we are making good progress on our cost roadmap and the overall market environment is supportive.

Operator we’re ready to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Jean-Francois Meymandi at UBS.

Jean-Francois Meymandi - UBS

The first one is on the price increases that you announced here in Q1 and Q2 in silicones and polymers. How did that get realized in Q2 and if you managed to increase your prices how do this tick? The second question is in POLYSILICON, you announced at the Q1 conference call the higher prices in POLYSILICON quarter-over-quarter, did that kick in and if so did that kick in at the beginning of the quarter or more towards to the end of the quarter? And the third one quickly on your pension which is up this quarter, do you plan on some specific measures in Q4 in special top ups like you did in 2010-2011 in Q4. Thank you very much.

Rudolf Staudigl

Let’s start with the last one which is the easiest one. We see that interest and therefore discount rates in our pension calculation gets lower but our pension fund is very fairly with returns. So I don’t foresee any need that we have got further injections in our pension fund at the end of the year.

With respect to your question concerning pricing in POLYSILICON, you’re right, we announced that we anticipate that we announced that we anticipate higher prices in the second quarter and you could see really that this effect moved in the first month of the second quarter. So the major push was and then we continued to operate on this favorable price level.

Jean-Francois Meymandi - UBS

So in Q3 I shouldn’t anticipate any catch up effect on EBITDA or your full price increase has been realized in Q2?

Rudolf Staudigl

If that’s your question, I would certainly work with this assumption. Now with respect to the chemical business, now I will comment quarter-over-quarter. We have -- in the polymers business we achieved some price increases coming from Q1 to Q2 and so we were able to capture partly the announced price increases but as I said in my speech not sufficient that we could really keep the EBITDA margin. And there we expect that we can put this raw material inflation through but in any case with sometime delay.

In silicones there was not really a significant price movement between Q1 and Q2, but there we expect that also some raw material inflation on the past not so much for the current month but we expect that we are successful to have large or small price increases in the second half.

Jean-Francois Meymandi - UBS

Okay just a quick housekeeping one that your maintenance shutdown, how much did that contribute negatively to your EBITDA in the quarter?

Joachim Rauhut

It contributed high single digit number.

Operator

The next question is from Mr. Thomas Swoboda, MainFirst Bank.

Thomas Swoboda - MainFirst Bank

I have just one question around the PV demand development. I think that is one of the market concerns how we will proceed in the second half of this year and especially in 2015. Could you please describe your thoughts on the demand development in China? Do you think they will catch up this year or do you rather expecting that there will be a demand overhang into 2015?

In terms of your expectations for 2015 in general do you see any new risk factors to your expectations? Thank you.

Joachim Rauhut

On the catch up in China, we believe that the catch up will be played and as we said we expect the solar installation worldwide between 44 and 50 that means for China above 13 gigawatts to 14.5 gigawatts. I think -- this represents what we expect. We will certainly follow the developments but so far our experts think that this level is certainly achievable and for 2015 we think it will be somewhat between 49 and 55 which is certainly wide range and it certainly depends on the lot of measures that are taken in various countries and we expressed some potential risk factors but on overall I think PV demand or power for photovoltaics, from solar, will be in demand and because it's becoming less and less costly and simply easy to use.

I mean this is in-line with what we expected from that industry mid and long term and this is and we don’t see any reasons why there should be a reduction of that installation or demand for PV.

Operator

The next question is from Alexander Karnick, Deutsche Bank.

Alexander Karnick - Deutsche Bank

Two if I may, you mentioned a continuous high utilizations in Siltronic. PC and tablet demand was mentioned, what sort of risk do you see from let’s say little bit less favorable development in the mobile segment. We have seen some profit warning yesterday on the back of weak handsets. Just wanted to put this into relationship with that pretty, let’s say strong message on Q3 for Siltronic and also a question on Q3 but related to POLYSILICON. July is nearly through now, what sort of feedback or feeling or whatever you want to call it. Do you have with respect to any impact from this U.S. trade cases on let’s say installations in the U.S. and there was obviously more relevant for us and for you on the demand for Wacker POLYSILICON. Thank you very much.

Joachim Rauhut

Maybe in regard to the POLYSILICON at this point in time we do not see any major impact of that so far at least.

Rudolf Staudigl

With respect to the visibility for Q3 in Siltronic we don’t see an easing of volume if I read to Samsung report clearly, they were not so much talking about volume demand they were much more talking about the pricing which hurt them and therefore we feel quite comfortable with what we said that we should operate Q3 in Siltronic at the level of Q2.

Operator

The next question is from Laurent Favre with Bank of America Merrill Lynch.

Laurent Favre - Bank of America Merrill Lynch

Just one question left on silicones, I was wondering if you could tell us if you have had, you were saying that sequentially, you have no impact from pricing in the second quarter and some of that would come in the second half. Given that methanol prices have been more or less flat since the end of March, I was wondering if you had during Q2 old impact from the lower cost or if more of that cost deflation on the feedstock side would come in the third quarter. I was wondering if you could quantify that or put that into a context of the margin development.

Rudolf Staudigl

We don’t as you may recall from previous conference call, we don’t comment single impact on raw material cost. We only give some guidance with respect to how in total the raw material inflation will affect the quarter for example year-over-year or quarter-over-quarter. So, for the silicone business as we said if some inflation in silicone metal we’re not very much hurt by that but overall you’ve to understand that silicone metal is the most important raw material for the silicones division and there is some relief from the methanol prices. Methanol price relief didn’t play a major role in the second quarter.

Operator

The next question is from Christian Rath at HSBC.

Christian Rath - HSBC

Three quick questions, maybe the lower sales in Germany you reported was it only due to lower solar sales or what was the reason behind that? And the second one for Q3, can we include any benefits from the bottlenecking or should volumes remain stable in POLYSILICON? And the last one in your presentation on the supply demand balance, you’ve increased I believe the active capacities for the (indiscernible) and also for next year.

Could you comment it, but probably which treatments [ph] where you see more demand from which competitors and is it -- at what time you expect the ramp up there? Thank you.

Rudolf Staudigl

I would like to answer your first two questions and we still looked the right answer for the last question as we have (indiscernible) here. With respect to the sales development in Germany, this was not so favorable due to two facts, first of all a very, very poor business in Germany is our salt business which affected and the second one is that in the powder business, in the polymers business we have a very strong Q2 last year after a very strong winter which very bad performance -- a very low demand in polymers powders in Germany.

So the basis was very strong last year for Q2, now this year the opposite was -- we had a very warm and mild spring first quarter which accelerated the sales in Germany for powder and which then therefore has some powder sales back because it was already sold in the first quarter.

So I think these two effects are the explanation for our sales development in Germany in the second quarter compared to the previous year. With respect to your question on the bottlenecking, the bottlenecking efforts in Germany which we are pursuing and they will come which require small investments they will come up in the next year so there is no major impact off this year.

Joachim Rauhut

I think you also asked a question on who is adding capacity and I mean we have the same information as you have, there is a Chinese competitor that adds capacity and there is a slight capacity in addition from Korean competitors and I everybody is trying to squeeze as much as possible out of their existing facilities and there is well-known additions for the granular POLYSILICON projects, the two major granular POLYSILICON projects in Asia.

Operator

The next question is from James Curran at Nomura.

James Curran - Nomura

Just two questions for myself, the first one just on POLYSILICON, obviously a significant step up in margins quarter-on-quarter on add pricing is pretty much clear to us. I was just wondering if you can confirm if operating rates had also increased quarter-on-quarter and also provide any flavor around the cost savings you’ve made be that whether around energy costs or so on, any flavor would be helpful and then my second question was just in respect of polymers. Obviously Q2 was strong particularly on construction demand. We have seen a few negative comments this morning on the outlook for construction particularly in Europe in the second half of this year. Is that something you’re seeing as yet or anything to that would be appreciated. Thank you.

Rudolf Staudigl

Yes your first question was on the operation performed in POLYSILICON in the second quarter compared to the first quarter. We had two effects; we had high utilization in most quarters, or highest utilization you could say. And we also were able to reduce further cost if I compare Q1 versus Q2 and our energy tariffs is no payment of renewable energy systems [ph] didn’t play a major role on this. So it was operational performance which brought our cost down and utilization was also not a very important factor because utilization in both quarters were high. So it was various success at a lot of cost items.

Joachim Rauhut

Including labor productivity, that’s always especially here in Germany a very important cost factor to look at. On construction demand it was favorable and still is favorable especially in Eastern Europe but Germany is doing quite well.

Operator

The next question is from Jean-Francois Meymandi from UBS.

Jean-Francois Meymandi - UBS

Just one follow-up on Siltronic there, you mentioned in your press release that you don’t exclude price down, you write in the presentation that there is scope for price improvements in some products. Can you elaborate a bit on that how you see the mix going forward in Siltronic, that is the first one. The second one on POLYSILICON because we speak about price a lot. On mix do you see customers getting more product from you for efficiency reasons or do you grow risk demand [ph] you think at the moment?

Rudolf Staudigl

POLYSILICON, I think efficiency plays a significant role with our customers. I mean they appreciate the quality of the material and they need it. And some of them use it 100% and some mix in some other materials but I mean we specifically know from our customers that they appreciate and meet the quality.

Joachim Rauhut

And with respect to the price momentum in Siltronic, overall there is still some -- there is still price pressure although in some product we have got positive momentum has started I would say. But overall the expectation for the next quarter is that we still have negative impact by prices but on a lower level and getting smaller and as I said in 300 millimeters capacity is high. As industry analyst say the potential for price increases particularly in the next year is there.

Jean-Francois Meymandi - UBS

And in relation to that I would like come back to your implicit guidance on Siltronic at the end of Q1, you said it should be below last year’s level including the consolidation of Samsung JV. If I just mathematically add the same EBITDA in Q3 as you just realized now in your EBITDA in Q1 it would call for disaster in Q4 not too much the prior year level so I’m just thinking -- is this guidance still valid or you turned it a bit more positive on Siltronic?

Rudolf Staudigl

The guidance is still valid because we are for specific reasons little bit cautious on Q4.

Jean-Francois Meymandi - UBS

Can you develop on that or?

Rudolf Staudigl

No.

Jean-Francois Meymandi - UBS

Okay.

Rudolf Staudigl

We will get it to you later.

Jean-Francois Meymandi - UBS

Okay.

Rudolf Staudigl

Okay we have couple more questions in the queue -- coming to the close of the call. The next question is from Alexander Karnick at Deutsche Bank.

Alexander Karnick - Deutsche Bank

Just a small question and small division, BIOSOLUTIONS, strong margins, strong revenue level in Q2 yet sort of a guidance sort of had prior year’s level EBITDA. Was there anything special in Q2 that would lead us come to the conclusion that these 18 percentage levels in margins and the 15% growth level is not the right way to look at subsequent quarters.

Joachim Rauhut

No there was nothing special but I mean if you look for specials, I look for amount higher than 5 million and this is too small but there are small amounts which move so I think can be that the EBITDA will be higher at the year-end but this is not the most important area when we do the forecast.

Rudolf Staudigl

On the other hand, I would like to add here that this is a business that is developing very nicely especially the biopharmaceutical part of the cyclodextrins. There are significant new business opportunities but of course in relation to the total sales of company. This is still small, the risk certainly is there are also because of the VAM price increase but overall this division is going in the right direction.

Operator

The next question is from Nils-Peter Fitzl, Hauck & Aufhäuser.

Nils-Peter Fitzl - Hauck & Aufhäuser

I’ve one last in relation to the POLYSILICON segment and the development quarter-over-quarter in sales. Just to understand correctly you achieved 4% sales growth and I assume that the utilization rate should have been the same in both quarters close to a 100% and therefore this increase of 4% in sales should mainly probably only relate to price increases. Is this assumption correct?

Rudolf Staudigl

Well the assumption is not correct because as we have outlined before we improved our operational performance significantly.

Nils-Peter Fitzl - Hauck & Aufhäuser

So it's a mix of price and volume so therefore price increases were less than 4%?

Joachim Rauhut

The price was the major factor in this -- I think you should not only look to utilization and production because we have some inventories. So if you look on a volume basis, the Q1 was slightly ahead but only slightly ahead compared to Q2.

Rudolf Staudigl

Production was running at full capacity in both quarters. And when you run production in full capacity additionally made some operational improvements then this is what you get.

Operator

The next question is the queue is from Christian Rath from HSBC.

Christian Rath - HSBC

Just on POLYSILICON again if I understood that correctly. Between Q1 and Q2 the electricity costs were stable so you didn’t had any provision of whatever in Q1 for higher or EEG surcharge or whatever for example, is that correct?

Joachim Rauhut

Well the electricity cost was more or less stable because the benefit of reduced EEG surcharge we already had in Q1 so there was no difference between Q1 and Q2. Does this answer your question?

Christian Rath - HSBC

Yes. Thank you.

Rudolf Staudigl

Okay. Well this concludes our call today. Thank you very much for your interest in Wacker Chemie. We come back on October 30 with our Q3 numbers. If you’ve additional questions, please don’t hesitate to contact our Wacker IR Department. Thank you very much for your interest.

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