Wacker Chemie AG Conference Call on the Full Year 2010 March 16 th, 2011 Dr Staudigl, CEO Dr Rauhut, CFO Hoffmann, IR Hoffmann: Hello everybody and welcome to the Full Year 2010 conference call on Wacker Chemie AG. I am Joerg Hoffmann, Head of Investor Relations. We have Dr. Rudolf Staudigl, our CEO and Dr. Joachim Rauhut, our CFO on the call today. Before we start this call let me remind you that during this call we may make forward-looking statements based on current assumptions and estimates of WACKER's Executive Board. Although we assume that the expectations in these forward-looking statements are realistic, we cannot guarantee that they will prove to be correct. These assumptions may harbor risks and uncertainties that could cause actual results to differ considerably from 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, a press release, an excel file detailing our quarterly data and a short presentation to accompany this call. Please note that a written version of today s speeches will be available on our website about half an hour after the call. You will find all of this on our website www.wacker.com under the caption Investor Relations. In addition, a webcast of today s CEO speech at our annual press conference is available in the Media section of our website. Page 1 of 10 pages.
With this, let me hand the call over to our CEO, Dr Staudigl. Dr Staudigl: Ladies and Gentlemen, Before we start with our business report let me make a general comment: We are all still under the deep impression of the catastrophic events in Japan last Friday and all the developments within the last few days. While all our employees and their families have been safe, our thoughts are with the thousands of people that have experienced personal tragedy. At this point in time it is not yet possible to accurately assess the impact of theses events on our business. The production site of our Japanese silicone JV has suffered comparatively minor damage, which leads to a production outage of maybe one week. Our silicon wafer site in Hikari is so far away from the epicentre of the earthquake that almost no damage has occurred. Today we want to report on WACKER s performance in 2010 and give you some outlook for 2011. We are looking back to a very successful year 2010. We ended the full year with sales of 4.75 billion Euros and a record EBITDA of 1.195 billion Euros. Full year EBITDA margin increased to 25.2 per cent. So far, this has been the most successful year in our nearly 100 year history. This is also very much the success of all our employees whose ingenuity and determination helped to achieve such a record performance in 2010. A major driver of our success last year was our strong focus on customers and on productivity. Since our customer s success is the basis of our livelihood, we spent a lot of time over the last quarters interacting with our customers and finding additional ways to leverage our product portfolio into value-added solutions for their markets. As we continue to grow inside our existing markets, we have been approaching and nurturing new ones. China, Brazil and India are beginning to add significantly to the strong demand dynamic we are experiencing in our more established markets. In a number of cases this has by now been supported with capital investments. China is a case in point. We have just Page 2 of 10 pages.
started siloxane production out of the Joint Venture with Dow Corning in Zhangjiagang, China. We then compound locally into a range of silicones products that cater mainly to the Chinese domestic demand. You will find an example of how we approach these emerging markets in the presentation pack that was published before the call. We are seeing a similar move in our POLYMERS business in China, where we first brought know-how to the market and helped our customers to develop advanced building products. We are now producing and shipping core products for this offering grow within the country. We also note that the highly competitive markets in the BRIC regions typically start developing with less complex products and lower profitability. The good news, however, is that once we are firmly implanted in these markets, a great potential to upgrade products becomes available. Greater China has also become our largest market for hyper-pure polysilicon. Shipments into this region have grown by a factor of 20 since 2005. Since then our overall annual production of polysilicon has grown by a factor of 6 from 5,000 tons to over 30,000 tons last year. You have seen our latest announcement, which effectively brings our production target for the Burghausen and Nünchritz sites up to over 50,000 tons already by 2013. As you know we are adding on top of this a facility in Tennessee with a planned capacity of 15,000 tons in a first stage. Each of our production sites will have complete closed loop capabilities. Obviously, opening new sites requires significant one-time infrastructure investments, however subsequent growth steps at every of our three sites will have very competitive cost positions. Overall these three platforms have enough room to hold up to 150,000 tons of capacity, should global demand require such an expansion. In our view, the benefit of having three platforms instead of one giving us a lower operating risk. The latest 10,000 ton production boost in our two German sites supports that position. As you have heard previously from us, we are passionate about productivity and cost reduction in POLYSILICON. These new 10,000 tons represent essentially a capital enhanced productivity gain as we experienced solid volume increases from productivity improvements and now have to fund debottlenecking efforts with 130 million Euros. You should note that we continue to focus on productivity and cost. Page 3 of 10 pages.
We like to do all of this because the market for hyper-pure polysilicon remains very strong for us. We have by now basically sold all available volumes through the year 2014; though this does not yet include all of the latest capacity additions. Even beyond 2014 we have a large order backlog with prepayments from our customers. Net prepayments in our balance sheet now amount to over 1 billion Euros again. As the solar market becomes even more competitive on costs, we expect this dynamic to continue as our customers gain a better understanding on how our high quality products enable them to lower their costs and at the same time turn out a premier product. At Siltronic, overall market conditions remain the same since we last spoke. We have been successful in stabilizing the business despite a difficult 300mm market. As our results show, we have made good progress on cost reductions and we will stay on course for further productivity improvements and cost decreases. In line with demand growth, we have agreed with Samsung our JV partner to expand our 300mm capacity in Singapore over the coming two years. Before I hand over to Joachim for a more detailed view on our segments, financials and guidance definition let me say that we actively approach challenges and opportunities. On the top of the list are our customers, whose success we support with our broad portfolio of highly specialized products. While innovation, cost and productivity define how we look at our operations, we keep our eyes firmly on the development of our markets. Overall, I am very optimistic for 2011. The first few weeks have seen the economic rebound continuing a good sign for business throughout the year. On the downside, the robust recovery is pushing up raw-material and energy costs. Although it won t be easy to compensate for these accelerating costs, we are confident that we can increase sales and achieve a very good operating result in 2011. Joachim? Dr Rauhut: Thank you, Rudy. I will discuss the development of our segments in the fourth quarter, our full year financials and will provide some guidance for 2011. Page 4 of 10 pages.
WACKER SILICONES reported a strong fourth quarter. At 386 million Euros, sales came in only 9 per cent below the strong Q3 performance and 19 per cent above last year s ending quarter. All regions reported strong gains over Q4 2009. EBITDA came in at 17 million Euros, below prior year and substantially lower than in Q3. However, the fourth quarter saw a special charge of 52 million Euros relating to the Siloxane Joint Venture in China. There was also a 19 million Euro benefit from the sale of Planar Solutions. On balance and excluding these effects, the fourth quarter showed a strong performance reflecting the good demand for our products even in a typically seasonally slow quarter. The special charge of 52 million Euros is in line with our accounting practices, anticipating future potential losses under IFRS. A root cause for this is increased transfer pricing from the Siloxane JV, which will lead to loss positions in our Chinese silicones companies. Higher than planned investments in the joint venture, start-up related costs and charges for financing and repayment for loans in the joint venture drive transfer pricing to higher than previously anticipated levels. Going forward for the near term, these high transfer prices as well as the product mix in China will result in a lower profitability of our Chinese silicones operations compared to the remaining business. While our growing degree of backward integration and contractual arrangements dampened the effect in Q4, raw material inflation namely in silicon metal and methanol continue to drive up our costs. The industry responds to this with price increases. We are confident that this will mitigate the effects of rising raw materials. We have a good historical track record of coping with these events through productivity measures and price increases, but the response always comes with a lag. A seasonally weak business, as expected resulted at WACKER POLYMERS in Q4 sales of 189 million Euros. The segment achieved a 25 million Euro EBITDA in the quarter, corresponding to a good 13 per cent EBITDA margin. Looking forward, we continue to expect volume growth in this business despite rising prices. Raw materials are also an issue in this segment, where the price of acetic acid and ethylene has gone up considerably through the last quarter. WACKER BIOSOLUTIONS reported a strong fourth quarter with sales of 33 million Euros and an EBITDA margin of 21 per cent. This improvement year over year reflects growth in the gum-base business and progress in the sales of biotechnologically engineered products. Page 5 of 10 pages.
Overall, our Chemicals business performed well in 2010. Driven by strong demand sales from recovering economies and emerging markets in the combined segment grew by 21 per cent over 2009. Despite multiple challenges from raw materials the Chemicals EBITDA rose by 33 per cent over the same period resulting in an overall margin of over 15 per cent. Now, let s move on to POLYSILICON. As Rudy already said, we are facing a very strong increase in demand as the solar industry gains a good understanding of the cost saving potential hyper-pure material offers. The segment produced about 30,500 tons of hyper-pure polysilicon for both the resurging electronics and the fast growing solar industries. In the fourth quarter, this resulted in sales of 374 million Euros and an EBITDA of 211 million Euros. The positive development resulted mainly from productivity increases. Seasonally strong sales of road de-icing salt supported sales. In total, we have seen a sharp decline in average sales prices between 2009 and 2010. The major difference was that in 2009 we sold a larger part of our material under short term contract, which were priced higher than our long-term agreements. Calculated at 2009 average sales prices, we should have seen 300 million Euros higher sales in 2010. When excluding the effects of our solar wafer retreat, you will see that our operating margins actually increased despite this price decline. All of this is a function of our improving cost position in polysilicon. We completed our Poly 8 expansion in Burghausen in 2010. This and other smaller projects helped to achieve the large output increase. As Rudy talked about, we are adding another 5,000 tons of capacity at each of our two sites in Germany from debottlenecking activities with first production out in 2012. Some of you have asked us to provide some degree of guidance on our expected production volume development going forward. I assume that you all are fully aware of our expansion programs in Nünchritz. This project began as a 10,000 ton project, ramping late in 2011 and now grows to 15,000 tons fully available at the end of 2012. In addition, we have the Tennessee project, scheduled for 15,000 tons after 2014. Page 6 of 10 pages.
So, all in all, in 2011 we expect to ship at least 33,000 tons, in 2012 at least 45,000 tons, in 2013 more than 50,000 tons. In addition, at the end of 2013 we start to ramp the facility in Tennessee. In 2014 we will see the first product out of our new Tennessee facility. However, at this point it is too early to come up with a good estimate how much we will be able to produce in the first year. You should understand that we will continue to expand our capacities depending on market demand and will continue to grow with the global market. We continue to receive prepayments for future poly deliveries. We are now essentially sold out through 2014 with overall stable pricing. Prepayments reached a year-end level of over 1 billion Euros, resulting in a comfortable cash position at year-end. Since year-end, we have collected even more prepayments. As we speak, our treasury department has the challenge to manage almost a billion Euros in liquidity until they are invested or paid out as dividends. In a difficult environment for 300mm wafers, Siltronic maintained its market share while stabilizing the results. Q4 saw sales at 269 million Euros, 4 per cent below the stronger third quarter, but 46 per cent higher than prior year Q4. EBITDA increased 17 per cent quarter over quarter to 37 million Euros, about 60 million higher than Q4 2009. While the sequential decline in sales is largely a function of currency fluctuation, profitability benefited from positive pricing trends in smaller diameters as 300mm ASPs remained unchanged quarter over quarter. Utilization rates remain higher in epi than in polished. Our performance in this business through last year shows good progress on our cost reduction efforts as we continue our underlying improvement programs. Going forward, most analysts expect further momentum in 300mm volumes in the second half of the year, when our customers are expected to ramp new capacities mainly in NAND as well as foundry. The adoption of NAND flash-based solid drives for smartphones and tablets is expected to have a positive effect on the 300mm market. As Rudy already said, we will expand our Joint Venture with Samsung for 300mm wafers in Singapore stepping the fab capacity in line with overall market growth. You will remember that at the inception the fab was designed for 300 kilo wafers per month. As our productivity has improved significantly, however, the joint venture fab can actually produce to a larger capacity. As you can imagine, the associated ramp and expansion costs will currently not contribute to Siltronic results. Page 7 of 10 pages.
Full year 2010 sales reached 4.75 billion Euros, with our gross profit margin increasing to 28 per cent, slightly below the first nine months as our chemicals businesses experienced their regular seasonality. SG&A stayed at 8 per cent of sales, while R&D costs investments stayed flat at 165 million Euros. While full year other operating income and expenses improved by about 180 million Euros year over year reflecting impairments incurred in 2009, the quarter on quarter comparison improved by about 18 million as a result of the sale of Planar Solutions. Through the year 2010 income from associates improved considerably as the new siloxane joint venture in China neared completion. Our financial result largely reflects the effects of a higher indebtedness as we took out long-term loans for investment projects in China and accessed the first 200 million Euro installment of a long-term investment loan from the European Investment bank. Balancing this, we repaid 150 million Euros of the so called Schuldscheindarlehen. You will note that income taxes increased during the fourth quarter, this is mainly because the siloxane transfer price provision of 52 million Euros is not tax deductible. Full year tax rate reached 32 per cent, as guided throughout the year. In the full year 2010 the group achieved a net income of nearly 497 million Euros, which computes as 9.88 Euros per share. The board of directors and the supervisory board have agreed to share our success with shareholders by proposing a 3.20 Euro dividend per share, payable on the day after our Annual Shareholder Meeting in May. Please note that this distribution at a pay out ratio of 32 per cent is higher than the communicated structural pay out ratio of at least 25 per cent. This is due to the success of 2010 as well as due to our low financial debt. As you will have noted, we carry economically no debt on our books, as our large liquidity positions compensate our long-term debt in China and from the EIB. As this raises questions on our long-term leverage targets, we are planning to have a more thorough discussion on our financing and capital structure targets at our upcoming Capital Market Day in late May. Quarter over quarter our equity ratio stayed at about 45 per cent. Securities, cash and liquidity for the full year came in at a total of nearly Page 8 of 10 pages.
800 million Euros. Working capital for the December ending period actually decreased quarter over quarter by about 8 per cent to 792 million Euros. Overall, we ended the full year with a negative net financial debt balance of 264 million Euros. Net cash flow for the full year was 422 million Euros after net capital expenditures of 690 million Euros including acquisitions and was supported by an inflow of 283 million Euros in prepayments received during 2010. In today s press conference, Q1 2011 shows a strong performance. We now expect to report for Q1 more than 1.2 billion Euros in sales with an EBITDA higher than 300 million Euros. This would imply a good 25 per cent EBITDA margin in the first quarter. The result will be supported by a good performance in Silicones as we still benefit in the quarter from lower market silicon costs. Polysilicon will see higher sales than in Q4, but will show a lower margin from ramp costs and some increases in electricity costs. Our Chemicals businesses experience strong order intake across the board, despite some seasonal slowness in a few products. While we see strong volume and sales growth, raw material cost inflation will mount pressure on margins. For POLYSILICON, 2011 will be defined by the ramp of our Nünchritz production platform. Results in the segment will be somewhat burdened by higher electricity and silicon metal costs. In addition, ramp expenses relating to the start of the Nünchritz facility will weigh on results later in the year. With a production target of at least 33,000 tons in 2011, it is our target to get close to an EBITDA margin of 50 per cent. Siltronic is experiencing a somewhat similar demand for 300mm in the first quarter compared to Q4. Overall visibility remains structurally low. Price developments for the second half are difficult to forecast, although we expect 300mm volume to increase in the second half. As a side remark, due to the disaster in Japan Siltronic receives additional demand for wafers. Overall, with strong demand for our products and despite rising challenges from raw materials and ramp up costs, we are confident that we can Page 9 of 10 pages.
increase sales above 5 billion Euros and achieve a very good operating result in 2011. Page 10 of 10 pages.