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Edited Transcript of WCH.DE earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Wacker Chemie AG Earnings Call

May 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Wacker Chemie AG earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jorg Hoffmann

Wacker Chemie AG - Head of IR

* Rudolf Staudigl

Wacker Chemie AG - CEO, President and Member of Executive Board

* Tobias Ohler

Wacker Chemie AG - CFO and Member of the Executive Board

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Conference Call Participants

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* Andreas Heine

MainFirst Bank AG, Research Division - Research Analyst

* Andrew Jonathan Fortrey Heap

Berenberg, Research Division - Analyst

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Erkan Aycicek

Landesbank Baden-Wurttemberg, Research Division - Investment Analyst

* Gurpreet Singh Gujral

Macquarie Research - Alternative Energy Analyst

* Martin Jungfleisch

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Mathew Hampshire-Waugh

Credit Suisse AG, Research Division - VP

* Oliver Schwarz

Warburg Research GmbH - Research Analyst

* Patrick Rafaisz

UBS Investment Bank, Research Division - Director and Chemical Research Analyst

* Paul Richard Walsh

Morgan Stanley, Research Division - MD

* Sean D. McLoughlin

HSBC, Research Division - Associate Director of Clean Technology

* Thomas Swoboda

Societe Generale Cross Asset Research - Research Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the interim report on the first quarter of 2017 of Wacker Chemie. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Jorg Hoffmann, who will lead you for this conference. Please go ahead, sir.

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Jorg Hoffmann, Wacker Chemie AG - Head of IR [2]

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Thank you, operator. Welcome to the Wacker Chemie AG Q1 2017 Conference Call. My name is Jorg Hoffmann, and I'm the head of Investor Relations at WACKER. With me are Dr. Rudolf Staudigl, our CEO; and Dr. Tobias Ohler, our CFO, who will take you through the presentation in a minute.

The presentation is available on our webpage under www.wacker.com, under the caption Investor Relations.

Before we begin, please have a look at the safe harbor statement, which you'll find at the beginning of the deck.

With this, let me now hand you over to Dr. Staudigl, CEO. Dr. Staudigl?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [3]

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Ladies and gentlemen, welcome to our Q1 2017 conference call. Today's quarterly report represents an important step in the history of our company since the IPO in 2006. We are now in a minority position at Siltronic. This is the result of a process that began with the Siltronic IPO in 2015. Since then, we have worked towards the change in our portfolio, leveraging the improving valuation of Siltronic. Today, deconsolidated accounts show our resolve in following our strategic intent of concentration in our chemical operations in the so-called (inaudible) operating systems that is our foundation.

WACKER is now less cyclical, less capital intensive and more focused on our core competencies in chemical materials and application development than before. We have world-leading positions in all our businesses. Our business is geared towards sustainability and capital efficiency. Our capital intensity stays low over the next year, and we expect strong cash flow generation. And on top of this, we continue to grow faster than the chemical industry.

In Q1 2017, we reported Siltronic as discontinued operations. As you know, we reduced our stake to 30.8%. For the time being, we intend to hold the shares and continue to participate in Siltronic's growth.

Excluding Siltronic, we reported sales in Q1 of EUR 1.2 billion, 7.6% over last year on a comparable basis. Our EBITDA improved even more by 12% to EUR 229 million. This was mainly driven by the improvement in our chemicals businesses and the lack of ramp costs in polysilicon, which we incurred last year.

CapEx for the quarter was EUR 47 million or about half of what we spent last year in Q1.

In the course of the Siltronic share sales, we recorded cash proceeds of EUR 438 million. These contributed to the decrease in our net financial debt to EUR 687 million.

Before we get the question, let me say here that the dividend for the 2017 financial year will be decided at the Annual General Meeting next year.

As Tobias will discuss in more detail, we have seen a very strong performance in silicones and good volumes in polymers. Both have announced price increases in light of rising raw material costs. Polysilicon produces at full rate, but we have added to our strategic inventory position in Asia. As we have previously communicated, we intend to set up a virtual presence in Asia with this, closer to our customers and with shorter lead times for deliveries of polysilicon.

Expectations for our business segments in polymers, biosolutions and polysilicon, remain unchanged compared to guidance given on the last call. However, we now believe that silicones might be even a bit better than last guided.

Adjusting for special income, we see full year EBITDA for the group decreasing by mid-single percentage as compared to last year and excluding special income. This confirms our last guidance given at the full year conference call.

Tobias, please.

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [4]

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Thank you, Rudi. Let me start with the Siltronic transaction and the main points regarding the deconsolidation of the business. Please note that under the accounting standard of IFRS 5, we have restated the P&L and cash flow but not the balance sheet for 2016.

Before we go into actual results, let me quickly point you to the main changes. Since we no longer meet the control hypotheses under IFRS, we now consolidate our share in Siltronic as equity. The key effect is that our P&L no longer contains Siltronic items in all lines but 2. Going forward, our quarterly share of Siltronic's net income and other effects relating to this position are as shown as results for investments in joint ventures and associates and are part of EBITDA and EBIT. Giving guidance on this line item, however, is a bit premature as we have not concluded the purchase price allocation. I expect to be able to provide some more clarity in our next call on this.

However, this quarter is different. Because the transaction that triggered the consolidation change happened in Q1, we are showing a new line: income from discontinued operations. This position includes the net sum of the proceeds plus revaluation effects on the remaining stake minus the net asset value of Siltronic.

While our balance sheet for 2015 is not restated under IFRS 5, the balance sheet for Q1 2017 and beyond no longer includes assets and liabilities attributable to Siltronic. New is the equity asset that reflect our remaining share at Siltronic at the last transaction values. Therefore, including the proceeds, total assets did not see much of a change.

The net debt effect is straightforward. The accumulative inflow of proceeds from the 2 share transactions is partially offset by the deconsolidation of Siltronic's net cash position. We have summarized the key changes on Page 4. I understand that the numbers might feel somewhat confusing at first sight, but it is going to become simpler going forward. If you have more questions on this, please touch-base with our IR team.

If you now take a look at our today's reported P&L on Page 5, we see that sales grew by 7.6% following strong volume growth in all segments and price decline. Despite the higher depreciation and increasing raw material costs, volume growth led to a higher gross margin.

Profit before tax in the quarter increased by 26% to about EUR 50 million. Contributing to this was a higher gross result.

The income from discontinued operations in Q1 was EUR 635 million. Contributing to this gain were: number one, all of Siltronic's net earnings in Q1; number two, the difference between the net sales proceeds and book value for the 21% stake sold; and number three, the revaluation of the remaining 30.8% stake held by WACKER. This line in the P&L remains unchanged now and vanishes in 2018.

Going forward, the contribution from Siltronic will be included in the line, results from investment in joint ventures and associates, but for Q1, there is still no effect here.

Our tax rate in the quarter came in at 37%, reflecting a low pretax result and non-tax deductible losses in some subsidiaries. For the full year, we are looking at a 30% tax rate.

The tax effect on the sale of the Siltronic shares was insignificant at about EUR 1 million.

Our balance sheet on Page 6 shows now a position of EUR 590 million in noncurrent assets, representing our 30.8% share in Siltronic.

Pension liabilities are down to EUR 1.6 billion. This was mainly due to the deconsolidation of Siltronic, with pension liabilities of EUR 371 million. The smaller effect was the increase in the discount rate to 2.07% in the first quarter.

Prepayments related to polysilicon contracts decreased from EUR 245 million to EUR 223 million.

And now, moving to Page 7 in the presentation and start discussing segment performance and outlook. As indicated previously, silicones saw a good comp performance in Q1 based on strong demand in all regions and continued mix shift towards specialties. Demand was such that we saw tightness in some product groups.

Silicones recorded EUR 556 million of sales in Q1, up 13% over last year. EBITDA increased by 22% to EUR 107 million, resulting from high plant loading, good comp performance and an improved product mix.

The EBITDA margin in silicone was increase from 17.9% to 19.3% in Q1.

Our outlook for the full year has improved. We now expect the high single-digit(sic-see presentation slides "mid single-digit") increase in full year sales and EBITDA. We expect to continue to benefit from a good product mix and comp performance. The business has announced price increase to face rising input cost in methanol and silicon methylene.

Polymers saw strong growth in volume as prices further declined. Sales were up 7% to EUR 307 million, with very strong demand in polymers. EBITDA contracted to EUR 52 million, representing a 17% margin. While volume growth supports results, the big headwinds come from raw material prices.

Our view into 2017 for polymers is unchanged. We continue to see mid-single-digit sales growth for the full year, with typical seasonality and earnings, held back by raw material cost inflation, especially as VAM, ethylene and acidic asset costs rise.

To counter these effects, the business has announced price increases and dispersions as competitors made similar announcements. We confirm our previous guidance of the significant decrease in EBITDA, with full year EBITDA margins in polymers over our 16% long-term target for the chemical segments.

Biosolutions saw sales growth to EUR 51 million, an increase of 4%. With some products operating at capacity levels, the Q1 result was supported by a good performance from pharma/agro campaigns and good demand from nutrition products.

EBITDA was essentially at last year's level of EUR 11 million.

For the full year, we continue to expect here an EBITDA contribution of about EUR 30 million, with integration costs from the acquisition in Spain expected later in the year.

Polysilicon saw Q1 sales of EUR 268 million. We shipped less in Q1 this year than last year, adding into inventory.

Reported EBITDA was up 79% to EUR 71 million year-over-year, but down sequentially. Bear in mind that in Q1 2016, results included ramp costs of EUR 30 million, while the Q4 2016 result included special income of EUR 13 million.

Solar ASPs came in actually higher than last year and was sequentially over Q4.

Our outlook for 2017 here is unchanged. We still see EBITDA, excluding special income, somewhat over 2016 as we continue to focus on cost-reduction efforts.

Despite our efforts to reduce lead times to our customers by adding inventories, we expect sales volume growth year-over-year if the lower ASPs will largely compensate those gains.

And moving now on to Page 11. Our net financial debt changed substantially following the deconsolidation of Siltronic and the strong operating cash flow in Q1 to a level of EUR 687 million.

After cash flow from investing activities of EUR 59 million, net cash flow changed from minus EUR 10 million in Q1 last year to EUR 53 million in Q1 2017.

Adjusting for Siltronic, working capital for continuing operations increased by EUR 190 million to EUR 1.2 billion in Q1, largely following the seasonality of accounts receivables.

Page 12 summarizes our updated guidance for the full year 2017. We essentially keep our guidance at the level of our last call but are seeing some upside in silicones. Looking into Q2, we see a number of effects in place.

Overall, we expect to maintain volume momentum in chemicals. Polysilicon should pick up as our inventory build slows. We see raw materials up, most pronounced in polymers, but also, in silicones.

With this, let me hand you back to Rudi.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [5]

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Thanks, Tobias. We moved into a minority position in Siltronic this quarter, as we explained. Now we can focus on our chemical loop (inaudible) manufacturing systems and power of our portfolio, operating integrated silicon sites and increasingly looking for synergies between polymers and silicones that combine organic and inorganic chemistries in unique ways to benefit our customers.

Looking into current trading, our portfolio shows significant strengths. Silicones see very high utilization and managed product tightness in some areas. Polymers look to increase prices amid strong demand and rapidly rising raw material prices. Biosolutions see strong demand for its pharmaceutical products and works to integrate the new site in Spain. Polysilicon, on the other hand, benefits from the solar market's increasing orientation towards high efficiency but pricing stays under pressure. We continue to focus here on the high-quality segment and look to further decrease our costs.

Our cost efficiency evolves continuously with very good progress in Tennessee and the great position in our German plants.

Looking into the full year, our guidance is overall unchanged, except for the upgrade in silicones.

We're confident about our market position in all divisions as well as our capabilities, including our cost-reduction potentials. We now see a full year EBITDA at the mid-single-digit percentage, lower than last year's comparable number, with mid-digit sales growth to grow faster than the industry as we generate substantial cash in line with our strategy. Thank you.

Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Andreas Heine with MainFirst Bank.

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Andreas Heine, MainFirst Bank AG, Research Division - Research Analyst [2]

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I would like to ask someone the Polysilicon. Looking on the sequential view from Q4 to Q1, so obviously, volume is quite significantly down and it seems that also the average sales price is down. So to come up with these earnings you have published and the unit cost have declined considerably. Is it only due to these accounting issues that you have built up inventories or is there also some efficiency gains -- considerable efficiency gains behind this? And then, to understand the price movement from Q4 to Q1, which I expect to be rather flat, if you look on the spot prices in China, they obviously have increased sequentially quite a bit, which is not reflected -- or seems not to reflect it into your numbers. Can you give some flavor what the moving parts were from one quarter to the other, at least in qualitative terms that we haven't seen this price increase? And you have already elucidated that the volume in the second quarter will be higher than first quarter. Are you done with what you intended to do in building up strategic inventories in China? Or is that just due to the fact that demand is now so strong that you have to deliver this and cannot anymore increase inventories? And then, a little puzzling -- and the last question, I'm afraid of -- on the EBITDA. So if you have increased the EBITDA in absolute terms on a like-for-like basis by EUR 25 million and your outlook suggests that it goes down in absolute terms by EUR 45 million, so that means a EUR 70 million decline from where we are now, so for the coming 3 quarters. Could you make a little bit a bridge from the increase you have in the first quarter to the decline on a full year number, please?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [3]

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Andreas, thanks for the question. Let me start with the volume or with the inventory build. Just as last year, when prices were down, we also increased volumes and inventories in Asia in order to be much more flexible in servicing our customers with materials. It's a voluntary decision from our side and, of course, we always planned to use times of lower prices to build this inventory because, of course, when prices are high, we want to sell at those prices. But to make it very clear, we could have sold old material. It's not that we were forced to build inventory. Our material is sought after. And I think the strategic decision to do that in order to be more flexible in customer service. Are we done yet? I would say not quite. But it certainly depends on the development of the market and the pricing, but we still could use some more inventory in (inaudible). Your question was whether there were efficiency gains? Yes, of course, there were efficiency gains. We are working on improvement every day, every minute. That's certainly a good thing and then the benefit is something we're benefiting from. In terms of pricing, yes, I mean, it's -- prices develop positively in -- over the time. If you compare with the fourth quarter and -- but you always have to keep in mind that because of the long lead time, there are some delays in applicable pricing.

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [4]

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Andreas, your question on the full year guidance. Basically, what changes over the course of the year is that the raw material price increases will kick in later, especially for silicones where we have not seen big increases yet in the first quarter. And also, for polymers, where we have seen substantial raw material price pressure, already in the first quarter, we see more increases over the course of the year.

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Operator [5]

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Our next question is from Patrick Rafaisz of UBS.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [6]

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First, on the inventories you built in polysilicon. Does that in any way impact your margin if you sell down these inventories? How do I have to think about accounting perspectives maybe from selling these inventories? Then secondly, you mentioned for polysilicon, ongoing cost reduction. Some of your Chinese peers are talking about another $2 per kilo cost reduction potential for their own production. How big would you quantify your reduction potential on a per-kilo or per-ton basis? And then, on polymers, you just mentioned that actually the -- you haven't seen the full impact from raw materials yet. When would say you'd expect to see the worst quarter, whether 3 is maximum, with you now actually already implementing price increases? Was that Q1 or will it maybe be more Q2 or Q3?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [7]

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Patrick, to start with the last question, polymers. From what we see today, third quarter was not the quarter with the highest price pressure in raw materials for polymers, so we expect second quarter to be higher. With respect to the margin effect of the inventory build in polysilicon, yes, it's -- for sure, it's slightly positive, because if you just do the calculus, you don't show the sales. And that's why it typically slightly improves the margin if you build inventory in a specific quarter.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [8]

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Which means that once you sell down the inventories, you'll have the weaker margin in Q2?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [9]

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Yes, that is -- I mean, in one quarter, if you add, you have a higher margin in the quarter. When you sell from the inventory, you have a lower margin. That's how it works.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [10]

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On the cost-reduction potential, of course, there is always this talk about we reduced such and such, we reduced such and such. We have never really participated in this contest, but we have really succeeded in cost reduction. And what we do is -- I mean, there are many ways you approach this. First, of course, you want to improve personnel productivity, for example, through improved process controls. You want to reduce maintenance costs, you're working on supply costs, then you work on all various process, parts from saline synthesis via purification all the way the position and conversion. And there are continuous efforts ongoing. We have -- the new ideas every day to simplify the processes, and we have a program in place called the WACKER operating system that is a very systematic approach to cost-reduction, not only in polysilicon, but also in the chemical segment. And I think we have really gained a lot from these efforts. And of course, there's one additional method or effect that one can also keep in mind. It is the effect of the chemical loop systems. And certainly now, polysilicon plans are part of this (foreign language) or chemical loop system. Polysilicon production is connected to the silicones. For example, is connected to the fumed silicon production and sometimes we have improvements in these connected processes parts that also lead to improvements in polysilicon. But it's a very complex task, which is approached everyday, and this is why we're very confident that we stay on the absolute forefront of the cost curve.

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Operator [11]

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Next question is from Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [12]

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I had a question. You mentioned you've started raising prices, but when do we see the impact of that in your numbers? Is it more second half loaded or could we see some impact from that even in the second quarter of this year? And then, how would you see the demand situation at the moment in short term? Have you seen any destocking activity? Or did you believe there was any -- or there is any destocking at the moment which could result in some short-term correction later into the year?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [13]

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So the price development in chemicals, we have announced price increases for both silicones and polymers in March. So it is a fair assumption that those effects will be more in the latter part of the year, not in Q2 yet. With respect to the order entries, we feel very strong in both silicones and polymers still in the second quarter, so a very good momentum. But I think, if you look at it from a broader perspective, all chemical companies report very high volume growth in the first quarter, so I believe, there is some restocking in general going on in the industry because end markets cannot grow that strong across the entire year. But that's nothing specific to Wacker. That is across the entire industry.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [14]

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Understood. Can I just follow-up with one question on polysilicon? Does that company have any plan B on that business? Because you guys have hoped for EBITDA margin in this business of more than 30%, but unfortunately, the pricing dynamic only comes -- becomes worse every year. So do you have any plan B for investors on what you could do to sort of bring this business back into profitability? Because eventually, it's still a loss-making business in EBIT level.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [15]

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Well, I think this is a wrong assumption, that is, we'll be a continuously loss-making business. I think it isn't. I think the demand for polysilicon will grow continuously with the application of renewable energies, solar energies. And right now, we even see the application of suitable [tykes] even without all the positive effects of energy storage. So I think there is a future. Of course, we certainly saw some overinvestment in some parts of the world, but this will not -- it cannot continue in the long run. I mean, we saw similar effects in the silicon wafer business. At a certain point, these investments stopped and then -- we always said it will be a normal chemical business. And I think, this is a good chemical business for WACKER to be in because with all the connections with our -- other chemistries. So at this point, I do not see a need for a plan B, whatever that might be.

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Operator [16]

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The next question is from Andrew Heap with Berenberg.

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Andrew Jonathan Fortrey Heap, Berenberg, Research Division - Analyst [17]

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Firstly, could you just clarify, on your full year EBITDA guidance declining mid-single-digit, is that including any contribution from Siltronic as equity investment for the remaining 9 months? Secondly, could you give some comment on the utilization rates you're running at in your business, especially given the very strong volume growth we're seeing right now? And also on that topic, with polysilicon, if the demand doesn't come back, will you reach a point where you don't feel comfortable building any more inventory?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [18]

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With respect to your first question Andrew, the Siltronic contribution from the equity result is not yet included in the guidance for the full year because, as I said, we've not done the purchase price allocation on the Siltronic business. And I will provide some update of this in the next conference call. So as this process is still ongoing, so it's excluding any effect from Siltronic. The second question, on the utilization rates. We are basically running at the limit in polysilicon and silicones, and we are running also very high utilization, but still have some buffer for adjusting also to the seasonality of the business in polymers. So very strong utilization across the board, I would say.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [19]

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On polysilicon inventories, so first, there is sort of a natural limit to the inventory, and this is what's needed to cover a -- basically up to 2 months delivery time to Asia. And to build such an inventory in case really goes so high. It would not worry us because the material does not deteriorate if it's properly stored. So there is another lifetime on the material. Of course, I mean, we are always careful with the inventory, of course, because it's an allocation of capital. But I think, we have to weigh the benefit of having a low inventory, use less capital, and the benefit on the other side to improve our [customers].

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Andrew Jonathan Fortrey Heap, Berenberg, Research Division - Analyst [20]

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Okay. So can I just ask one quick follow-up question? Could you give any comments -- I know it's coming around, that time of year again, with the decision with MOFCOM on yourself, and also give any thoughts on the relationship with MOFCOM and the South Korean polysilicon as well?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [21]

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Our relationship with MOFCOM is very good. And as I said last time, we do not expect any change in our opportunity to supply our Chinese customers with excellent material.

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Operator [22]

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The next question is from Gurpreet Gujral with Macquarie Research.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [23]

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A couple of questions from me. So firstly, the polysilicon ASP's obviously fallen quite dramatically since you guided us on the 2017 outlook at the time of your full year results. Okay, so the polysilicon ASP has fallen quite dramatically since you last guided us at the time of your full year results, but guidance in the polysilicon division has remained unchanged. Are you expecting a correction in the spot price in the coming -- in the short term? Or was this reduction in the price something that you already factored in your full year results? That's my first question, and perhaps, I'll follow up afterwards.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [24]

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Well, I mean, even last time, I think, we were careful with the guidance. Some of you have even published that we are too conservative, but I think we were careful because of potential pricing effects in polysilicon. In the meantime, as of this week, actually, we saw even a little bit of uptick of the so-called PV insights spot price index. And we expect demand to be fairly strong over the year, and so -- and we have seen these cycles in pricing in the last 2, 3 years. And -- I mean, these cycles could go on. These are -- I always call them micro cycles, and this is not unusual in a still immature industry. And we try to keep that in mind when we formulated our first guidance in March.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [25]

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Okay. All right. Second question is on your net cash flow guidance. This time around, your outlook is substantially lower than last year, EUR 361 million. And I think, last time around you were guiding to flat year-on-year move at EUR 400 million. Is the difference all Siltronic or something else?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [26]

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The difference is basically Siltronic, which is, I think, published also today and what's guiding for very strong cash flow. And then, it's what we already have forecasted for the polysilicon that we would strategically build some inventory close to our customers. And so it's a little bit more working capital, but our guidance for CapEx is consistent. So it's at the level of EUR 360 million, well below depreciation, which is at EUR 600 million.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [27]

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Okay. So just to confirm, the net cash flow figure that you show on Slide 12 of EUR 361 million in 2016 does not include Siltronic or it does?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [28]

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The EUR 360 million does not include Siltronic.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [29]

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Okay. Okay. So you got (inaudible)

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [30]

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Yes. (inaudible) number.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [31]

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On a like-for-like basis, you're guiding lower number now for cash flow?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [32]

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Yes.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [33]

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Okay. And my final question is on FX. If you could give an update on...

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [34]

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Yes, yes, it's because we build inventory.

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [35]

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Yes.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [36]

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That's a fair implication.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [37]

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Okay. Final question's on FX. Could you give us an update on your U.S. dollar exposure? And how much of the recent move in the euro strengthening is a headwind for this year?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [38]

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I wouldn't say that there's a headwind from the recent move. I mean, if you compare year-over-year, the U.S. dollar still is a bit stronger. And yes, with respect to the sensitivity of the change for that deconsolidation is that WACKER as a group is less sensitive than before. Our sensitivity is by $0.01 change in U.S. dollar. It's roughly EUR 10 million in revenue and EUR 2 million in EBITDA.

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Gurpreet Singh Gujral, Macquarie Research - Alternative Energy Analyst [39]

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Okay. But the euro has strengthened against the dollar since you must have formed -- when you were formulating guidance in 2017 -- for 2017. The euro certainly strengthened. Has that changed your -- that clearly had an impact on your guidance. I'm just curious to know what your thoughts are out there in terms of the currency.

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [40]

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I think it's not significant. In our forecast for the exchange rate that we apply, it's 1 10. So we are still below that.

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Operator [41]

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The next question is from Sean McLoughlin of HSBC.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [42]

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One remaining question. It's on silicones. I'm just trying to understand, with the price increases you're putting through, yet the pricing pressure that's coming from the higher raw materials. Can we expect for that effectively a margin squeeze in Q2? Secondly, on the demand side, how much of the incremental growth are you seeing through market share gains? Or how much of that is, just latching back for further question, is driven by restocking?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [43]

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To the first question, silicones actually would see substantially higher raw material prices in the second quarter from the spike in the methanol prices. And as I previous -- before that, the price increases that we announced for the business will be more in the second half of the year. So from that perspective, we will see a net squeeze in margins of the raw materials.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [44]

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And in terms of market share increase, within one year, normally, do not gain a lot of market share. Market share inches up a little bit all the time when you do a good job, and we're trying to do a good job in servicing our customers and providing excellent material in silicones. We have certainly gained quite some market share over the last few years, but market share gain is not a significant contributor into our guidance for this year.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [45]

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So if I could just explore that further, so it sounds to me that you are aware or thinking that there's an increasing level of restocking among your customers that is driving the higher outlook.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [46]

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Yes. I mean, restocking certainly plays a significant role, as Tobias said, but I think there is the potential for price increases this year, as we explained. This is because some base material shortage that occurred because capacities at some competitors were decreased or shut down, and these offers opportunities to come to pricing levels in silicones as they were in the past. This is the effect.

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [47]

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And in addition to that, volume growth in silicones, I mean, it's typically about GDP and -- as the overall economic environment slightly improves. And also emerging markets, yes, are in better shape in this year than last year's, I mean, this all can have a triggering effect on silicon consumption. So we see very strong demand in Asia, but also in Europe and in the Americas.

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Operator [48]

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The next question is from Thomas Swoboda of Societe Generale.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [49]

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Three questions, if I may. First, a very quick one. Your Siltronic's stake, you have always said you want to exit in the midterm. Is there any change to that? Or should we expect further decreases of your stake this year? If you could specify that, that would be helpful. Secondly, polymers. If I take the midpoint of your group guidance and the midpoints of the segment guidance, as you have given, and assuming that Siltronic is not in the guidance yet, polymers EBITDA for the year could be some EUR 200 million, EUR 210 million EBITDA. You say Q2 should be down on Q1. Should we then assume it -- we see a stronger recovery in H2? Does this make sense? And on polysilicon, a little bit more strategic one. In the past, you have mentioned you should be able to achieve 30% margin in this business. Not really sure if you said in every year over the cycle. Anyhow, my question is, what -- would you need to achieve this margin? Obviously, you won't this year. You haven't last year. Do you need Tennessee just ramp up completely and -- or the potential from this plant in terms of volume leverage, cost efficiency achieved? Or you actually would need higher prices than we see for polysilicon right now?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [50]

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On the last question, it's certainly our goal. Beyond 30%, we cannot promise that for this year. What do we need? We need, let's say, reasonable pricing and further cost reductions. And this is what we're working on. You can achieve reasonable pricing through focus on the high-quality applications, and yes, through further cost reductions. These are ongoing efforts, and I think we will be successful there.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [51]

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Right. But you were saying in the current price environment, the 30%, very, very difficult to achieve.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [52]

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Well, I mean, it depends on how the pricing on the average develops this year, and that's is extremely hard to predict. I'm not either able nor willing to predict. And for Siltronic, certainly, do not expect a further decrease in our share this year.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [53]

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Right. That's very clear. And on polymers?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [54]

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On Polymers, you also need to take into account that this business has a little bit of seasonality. It was just typically stronger second and third quarters. But you have to factor in, as you already mentioned, that the pressure from raw material prices is strong and our compensation in increasing our own prices will be in the second half of the year.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [55]

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Right. But you do make this 100, 200 roundabout. Does it make sense or is it too high?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [56]

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No, we keep our guidance. As we communicated that we say it will be substantially below last year. And that we will see a margin over the margin target of 16%.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [57]

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Right, right. I mean, the calculation is fairly simple, unless there is something I'm not factoring in, but I will follow up with IR.

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Operator [58]

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The next question is from Paul Walsh of Morgan Stanley.

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Paul Richard Walsh, Morgan Stanley, Research Division - MD [59]

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I'll frame the -- taking all your other guidance into account equation slightly differently and look at the polysilicon business. If I could run your guidance divisionally across the chemical activities, I'm backing out something like 250 implied for poly EBITDA this year, which is a run rate of about 60 for the remaining 3 quarters. Just wanted to know if that's roughly in the right ballpark. Secondly, just on polymers and pricing. It's just an observation really. It's a good business, polymers, and I'm surprised by the lack of pricing power that you seem have to have in that business right now. I wasn't aware that it was a market that was so fragmented, where pricing couldn't be managed with raw materials going on. So could you just help me understand exactly why we've not been able to price for raw materials and polymers, where virtually every chemical company is doing quite well on pricing it (inaudible). And just my final question, and this is not meant to be provocative, it's just to help me understand. In terms of the risk of a writedown only on the poly business, I'm assuming that's not on the cards, but the rates of return are clearly lower than I think you would have anticipated. So could you just put my mind at rest around that as well?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [60]

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You can put your mind at rest (inaudible) for the last question on writedowns on polysilicon. If I move backwards to the polymers question, on pricing power, we have -- 25% of the business based on price index that moves with the raw material, but the rest is more or less value based. And then it depends very much on the supply/demand situation because we bring value to our customers. It depends on how high the market is. We have announced price increases in the spreadsheets, as our competitors, and that signaled that we see some pricing power. But other contracts are -- yes, based on return. So we have semi-annual or annual contracts, and only in very rare situations we pull the hardship clause of the contact to renegotiate pricings because it also goes the other way. So we see prices increase in the second half of the year, and we also have lowered our assumption for price decline in polymers. In silicones, we previously talked about slightly declining prices, and now, we're seeing slightly increasing prices. So there is pricing power for our chemicals. And as for your polysilicon question, we stick to the guidance that we say we should see a slight increase in EBITDA, excluding specials, over last year.

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Operator [61]

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The next question is from Oliver Schwarz of with Warburg Research.

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Oliver Schwarz, Warburg Research GmbH - Research Analyst [62]

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Firstly, with the deconsolidation of Siltronic, the internal sales to Siltronic became external sales. Could you give an indication of the impact of that regarding sales and EBIT when it comes to the polysilicon segment just to gauge whether that is the reason for the improvement in results anticipated for 2017 or whether there is an additional factor in there? And secondly, coming back to the question on inventory, what would be -- from your point of view, what would be an, let's say, optimal level of inventory that you would consider to be of, let's say, in perhaps weeks of production, what you consider to be the one you would like to have over the cycle?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [63]

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Oliver, the internal sales actually turned external sales, that's right, but there's no effect explaining our growth against prior year because we restated the numbers of last year. And if you really would love to dig deeper into that and try to figure it out, you should compare it to the consolidation effect of the non-restated account that we published in last year. And we do not give any details on the result impact for that.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [64]

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In terms of inventory, of course, what -- disregarding interest costs on the capital, you would want to have inventory that covers about 2 months of delivery time to Asia, but I'm not saying that we are trying to achieve exactly that. I think we have to put balance it with all this effect.

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Operator [65]

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The next question is from Martin Jungfleisch of Kepler Cheuvreux.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [66]

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Just 2 follow-up questions on polysilicon. The first one is on the monocyte. I understood that you will focus now a bit more on the production of this higher-quality monocyte, but -- that this move will have an impact on total polysilicon output or volume and it takes more capacity. So I guess, my question is what volume we should be modeling for 2017? Or in other words, if you would produce 100% monocyte polysilicon, what would be your total output at 100% utilization rates? And then secondly, on the semiconductor polysilicon, could you give us an indication of where prices have moved recently, whether you see the market moving as we have seen strong demand from the semiconductor business? And if you could possibly increase the share of this higher-ASP semiconductor polysilicon sales mix going forward?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [67]

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For competitive reasons, we do not talk about pricing in polysilicon neither for solar nor for semiconductor. I hope you understand. And on focusing more on the monocyte, should have and has very little impact on capacity. Our nameplate capacity of 80,000 tons still remains. I mean, the key is, of course, to continuously improve the quality in all of its aspects without reduction in capacity.

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Operator [68]

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(Operator Instructions) The next question is from Erkan Aycicek of LBBW.

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Erkan Aycicek, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [69]

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Two questions from my side. The first question's relating to your disposal proceeds. In 2016, you had a payout ratio of roughly 50%. Can I apply a similar ratio for you for disposal proceeds? That's my first question.

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [70]

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No. The clear answer is that we will decide on our dividend at the next -- or we will make proposals for the dividend for 2017 at the next shareholder meeting in 2018.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [71]

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So there are no specific plans yet.

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Erkan Aycicek, Landesbank Baden-Wurttemberg, Research Division - Investment Analyst [72]

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Okay. And my second question is relating to our financial result. You posted a financial result of roughly minus EUR 24 million in Q1. Can we calculate a similar run rate in the next 3 quarters?

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Tobias Ohler, Wacker Chemie AG - CFO and Member of the Executive Board [73]

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Yes, that's absolutely fair to assume the same number and ticket turns for the year.

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Operator [74]

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The next question is from Mathew Hampshire-Waugh of Credit Suisse.

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Mathew Hampshire-Waugh, Credit Suisse AG, Research Division - VP [75]

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Just following up on that question, actually. Can you just give us an idea of how you want to use the balance sheet over the coming years? Just given that your CapEx requirements are now relatively low and you're rapidly deleveraging, please.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President and Member of Executive Board [76]

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You know, we updated our financial targets at our last capital market in 2016, and I would just like to reiterate the most relevant targets, to answer your question. We are purposely extended our leverage phase to at least 2020. That means investments below depreciation. And we raised our dividend level to 50% of net income, and we set out our targets for net financial debt at below 1x EBITDA. And the net effect of the Siltronic deconsolidation on our net debt is a reduction of the net debt by EUR 230 million -- EUR 232 million to just below EUR 700 million. This is where we are. And that means we are at the target range of below 1x EBITDA, taking into account also our lower EBITDA without Siltronic. And as we said for the Annual General Meeting in 2017, we have made our proposal, and this proposal was been before we consummated the Siltronic transactions. And we will now take the time to review our financial position in the new group structure, and I think, we demonstrated in the past that we adjust our financial targets quite timely to our overall financial situation and the business strategy. But it's premature to speculate already today about any changes to our financial targets. There's is no reason for that, not at all. But let me also reiterate here that we have no intention whatsoever to change our investment strategy for the coming years. The leverage phase will continue through at least 2020, as we focus on less capital-intensive downstream investments in support of our specialty strategy. And we also always said, and I would like to reiterate that as well, if there are opportunities for, let's say, small-scale acquisitions, just like we did in the past, in the range of, I don't know, EUR 10 million to EUR 50 million, we are always able to do that. Our balance sheet allows us to do it. And so this is, let's say, our financial strategy.

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Operator [77]

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There are no further questions. I hand back to the speakers.

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Jorg Hoffmann, Wacker Chemie AG - Head of IR [78]

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Thank you, operator.

This concludes today's conference call. Thank you for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses. We will be back again with a conference call in the future, July 28, 2017. Goodbye.

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Operator [79]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.