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Edited Transcript of WCH.DE earnings conference call or presentation 1-Aug-19 2:00pm GMT

Q2 2019 Wacker Chemie AG Earnings Call

Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Wacker Chemie AG earnings conference call or presentation Thursday, August 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jörg Hoffmann

Wacker Chemie AG - Head of IR

* Rudolf Staudigl

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

* Tobias Ohler

Wacker Chemie AG - CFO & Member of the Executive Board

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Conference Call Participants

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* Ben Gorman

UBS Investment Bank, Research Division - Associate Analyst

* Chetan Udeshi

JP Morgan Chase & Co, Research Division - Research Analyst

* Laura Lopez Pineda

Baader-Helvea Equity Research - Analyst

* Martin Jungfleisch

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Raghav Bardalai

Exane BNP Paribas, Research Division - Analyst of Chemicals

* Sebastian Christian Bray

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* 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 conference call of Wacker Chemie. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Jörg Hoffmann, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

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

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Thank you, operator. Welcome to the Wacker Chemie AG conference call on our Q2 results. Dr. Rudolf Staudigl, our CEO; and Dr. Tobias Ohler, our CFO, will take you through our presentation in a minute. This presentation is available on our web page on the www.wacker.com under the caption Investor Relations. Before we begin, allow me to point you to our safe harbor statement, which you'll find at the beginning of the deck.

Dr. Staudigl?

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

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Ladies and gentlemen, welcome to our Q2 2019 conference call of Wacker Chemie. We reported today Q2 group sales of EUR 1.27 billion, lower than last year but higher than in the first quarter. The prime reason for the year-over-year sales decline was lower prices for our solar-grade polysilicon. Sales in chemicals, however, continued to grow year-over-year on higher volumes and some positive foreign exchange effects.

Group Q2 EBITDA of EUR 211 million at a 16.6% margin trailed last year but was significantly better than in the first quarter. This development is underpinned by a solid performance in chemicals but a still challenging situation in polysilicon.

Polymers performed well, seeing both sales and earnings grow year-over-year, benefiting from higher volumes and good cost performance. The tightness in silicones last year makes for difficult comparisons year-over-year as the industry returns to a more normal operating environment. We focused our own production on outputs during the tightness last year and are now optimizing working capital. Customers are also controlling their inventory much stronger. Demand for silicones overall is good with particular strength in electronics, home and personal care products. On the other side, we see some softness in auto, plastics and textiles.

Volumes at Polysilicon started to climb again after a weak April, while prices for solar materials slowed their decline over the quarter. As news come in from increasing solar installations around the world, the market awaits an end of the year rally in the Chinese market. Following the implementation of a new solar policy, analysts expect China to install 30 to 35 gigawatts in the final months of 2019. This takes 2019 global installations well into our expected range of 100 to 130 gigawatts. We believe that this additional demand will lead to price increases in polysilicon. Yet let me say that our overall results in Polysilicon are unsatisfactory at this time. Current price levels are too low and do not appear to be sustainable. As you know, this is due to subsidized overcapacities in China.

In this challenging environment, we are not passively waiting for higher prices. We actively address what we can control. We increase our shipments into the semiconductor industry. We focus on the fast-growing mono markets with higher quality requirements that other struggles to realize. And we further intensify our cost reduction efforts. We remain confident about good demand for our chemicals products and stronger volumes in polysilicon. With the global economy losing momentum and China solar market yet to revive, we now expect full year EBITDA to be closer to the bottom end of our projected range of 10% to 20% below prior year. On balance, though, the statements made in our 2018 annual report regarding our expectations for the year did not change in the reporting period.

Tobias will now walk you through the financials and segment performance. Tobias?

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

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Welcome. Starting with the P&L on Page 3. Higher sales in chemicals were not able to offset the challenging market conditions in polysilicon. Altogether, sales at the group level decreased by 5% year-over-year. Gross profit declined year-over-year by about EUR 62 million to EUR 189 million. The decrease is largely due to much lower polysilicon prices as well as lower prices for standard in silicones. Last year's tightness sets us up for difficult year-over-year comparisons in Silicones, while both Polymers and BioSolutions grow earnings.

Other operating income benefited from prepayments in Polysilicon totaling EUR 19 million. Reported tax rate climbed to 27% following a lower equity contribution. Net income during the quarter was EUR 37 million, equating to an EPS of EUR 0.68 versus EUR 1.59 last year.

Moving on to the balance sheet on Page 4. Receivables grew in line with higher volumes in chemicals as well as seasonal effects. Inventories are largely unchanged since the start of the year. Steps are underway to reduce stock in silicones, while at the same time, we maintain polysilicon stocks in our Asian hubs to better service our customers. Our total working capital is up. As we move through the second half of this year, we look to see some capital being released from here.

On the liability side, our equity position decreased, and the pension liabilities climbed on an all-time low discount rate of just 1.3%. These are effects from quantitative easing and negative returns on the 10-year bonds. As already communicated on the first quarter call, the application of IFRS 16 saw financial liabilities increase by EUR 133 million. This, as well as new debt facilities, led to an increase in financial liabilities.

Looking at Silicones on Page 5. We achieved last year's sales level of approximately EUR 650 million. Softer prices for standards and volume mix effects were offset by supportive foreign exchange. EBITDA decreased from EUR 177 million last year to EUR 120 million, equating to 18.4% margin. This is clearly lower than last year and follows the industry normalization that Rudi discussed. Reversing effects of our efforts to optimize output last year result now in intensified inventory control. In addition, we observed in the last 2 quarters similar inventory control actions at our customers, which lowered order intake below their own end market demand. These actions toward the value chain negatively affect mix and utilization rates of our production units and thus reduced EBITDA.

CapEx is focused on expanding our down and midstream capacities to strengthen our position in specialties. For 2019, we continue to see sales moving up at a low single-digit percentage. Overall, end user demand for silicones remains healthy, but pockets of weakness in various industries are evident. Industry normalization but also trade war-related spillover effects weigh on pricing in standards. We believe that good volume growth and better pricing in specialties should help us to achieve an EBITDA margin of around 20% for the full year in 2019.

In Polymers, shown on Page 6, sales increased by 3% year-over-year to EUR 353 million. Higher volumes, mainly in Europe and China, as well as solid pricing supported the trend. EBITDA increased to EUR 53 million, a 14.9% margin. Adjusting for last year's VAM turnaround, earnings growth outpaced sales on efficiency gains and lower raw material costs. CapEx is directed towards our new capacities in Asia to support the solid growth in the region.

For the full year 2019, we see a strong performance ahead. We expect a mid-single-digit percentage sales growth with volume growth and lower average raw material costs year-over-year. We see the full year EBITDA margin improving to around 14%.

BioSolutions makes good progress with the integration of its acquisitions. Strong growth in biopharmaceuticals supported a 6% year-over-year sales increase. The order book in biopharmaceuticals is filling nicely, promising good utilization of our Amsterdam site next year. Pharma and agro saw again a solid performance during the quarter. For the full year 2019, we expect a mid-single-digit percentage sales growth with an EBITDA of about EUR 30 million.

At Polysilicon, on Page 8, significant price decreases and softer volumes at the beginning of Q2 resulted in sales declines year-over-year and compared to the first quarter. EBITDA in the segment improved to about EUR 6 million. Excluding the effect of a prepayment from a nonperforming contract, we decreased the loss from a negative EUR 36 million in Q1 to about a negative EUR 30 million in the second quarter.

We are structurally improving our Polysilicon business with higher volumes for semiconductors, a leading offering for the fast-growing mono market and further cost reductions, leveraging our operational performance. Our guidance for the full year assumes demand flat, price increases later in this year. This would be then amplified by the reversal of inventory revaluations seen earlier this year.

Moving forward to the overall group financials again on Page 9. Gross cash flow was held back by reduced profitability and higher levels of working capital following higher business volumes and typical second quarter seasonality. Net debt increased to EUR 989 million at the end of the quarter. As said before, IFRS 16 resulted in net debt increasing by about EUR 130 million.

Looking at our detailed guidance for 2019 on Page 10, our expectation for the full year 2019 are unchanged, except for updates on the somewhat higher depreciation and tax rates.

With this, let me hand you back to Rudi.

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

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Thank you, Tobias. Ladies and gentlemen, looking at Q2, we see progress in every area of business. Specialty volumes in Silicones are back to full capacities after the force majeure situation held us back in Q1. Innovation is a key factor in keeping our specialties business strong. New and promising compounds will be presented at the upcoming K Fair in Düsseldorf.

One interesting innovation, our electro-active silicone laminates functioning as actuators that create movement as soon as electrical voltage is applied. In addition, they can also be used as sensors by measuring deformations electrically. At that fair, we will show a tablet display creating vibrations and haptic feedback, which simulates the shape of keys or control panels that can be operated blindly by touch.

Polymers keep moving on, benefiting from their strategic position and a deep understanding of binder technologies. We are looking to further leverage our position in VAE with the new mega-sized powder dryer in Ulsan, Korea.

In BioSolutions, our biopharmaceutical order book is filling, resulting in higher volumes and improving sales.

Pricing in Polysilicon is currently challenging. Facing the emerging success of higher conversion technologies, the demands on polysilicon increase. A significant part of the Polysilicon capacities, including some newly built facilities, however, do not meet the rising quality expectations as the rapid transition to mono continues. As a result, pricing is under pressure and significant amounts of capacity from competitors need to be discounted to be sellable. This puts pressure on the entire value chain.

Only recently, China changed the rules for grid access with solar projects in a technology-neutral way. The new rules essentially require solar projects to be competitive with power from coal. This will further amplify demand for high conversion efficiency, that means monocrystalline silicon-based products. Lower-performing technologies will essentially lose share. Our contributions to our customers is our strong support for higher efficiency technologies, namely in monocrystalline-Si and type applications.

While our current results in Polysilicon is unsatisfactory, our continued cost reductions show that we are on the right path. We work hard to further lower our costs despite a significant disadvantage in personnel and energy costs. We already run the most efficient operations with a leading energy usage per kilogram, resulting in by far the best carbon dioxide footprint in the industry.

While I am convinced about the position and strategies of our businesses, I also see clouds on the horizon. We've watched the recently major chemical competitors adjusting their guidance downward. Concerns about the macro economy persist as Brexit uncertainties and the effects of trade wars create global imbalances that can affect our businesses as well. The release of the new Chinese grid rules for solar took longer than anticipated. This now results in a later-than-expected recovery of Chinese installations towards the end of the year. This effectively delays the anticipated pickup in polysilicon demand, which we expect to support pricing. Following these delays, we now guide for more towards the low end of our range. The second quarter showed a solid performance in chemicals and operational improvements in Polysilicon.

Looking at our business in total, we are well positioned. Our efforts in cost reductions and our customer focus continuously increase our competitive edge. We work hard on supplying the right products into the right markets today. A constant stream of innovations help us to drive future growth in specialty content. All of this supports my confidence in our path ahead.

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Jörg Hoffmann, Wacker Chemie AG - Head of IR [6]

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This concludes the presentation today. We will now commence with the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Raghav Bardalai.

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Raghav Bardalai, Exane BNP Paribas, Research Division - Analyst of Chemicals [2]

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Could you just clarify on this inventory control issue if this was a one-off? Or do you see margins recovering in 3Q? Or how should we think about the sort of progression for the coming quarters, please? And then on Polysilicon, maybe just a quick question on the sort of mix within semiconductors. Could I please ask for some color on how the impact of semiconductor versus solar was in 2Q and how that may change into 3Q if you see the sort of anticipated demand pick up on solar?

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Tobias Ohler, Wacker Chemie AG - CFO & Member of the Executive Board [3]

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Raghav, your question on inventory control, what -- we see that after tightness in the year 2018, the industry now comes back to normalization. And that means that everybody tries to lower inventories again. So we did that, our customers did that. And this has an impact on order intake that we have seen the last 2 quarters. So in combination, this leads to lower utilization, and this weighs on EBITDA. And we see that in some regions like China where we have a lot of price volatility in standard prices that they are first signs that inventory control could be done. So the second half basically then depends on the end market development, and it really depends also whether that view that we have on China applies to other regions as well.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [4]

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On your question on semiconductor versus solar polysilicon, of course, the semiconductor polysilicon, all this is our preference because it's the highest-margin business, of course. And also, we are -- in this case, we are having longer-term contracts, so this is definitely the preference. So in other words, if demand for solar would pick up, this would not reduce the amount of silicon.. polysilicon that we sell.

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Operator [5]

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The next question received is from Chetan Udeshi from JPMorgan.

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Chetan Udeshi, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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Just coming back to Silicones where the margin was 18.5% roughly in second quarter. Usually, the second half margin tends to be lower than the second quarter on average. So how should we reconcile that with the guidance still of 20% for full year? So we have some one-off, et cetera, which sort of impacted Q2? Or are you expecting some sort of a price rebound in Silicones in the standard size? That's number one.

Number 2 question was on polysilicon pricing environment, it feels like the end demand in China probably has already started picking up just from some anecdotal evidence. What do you think is holding the inflection in the polysilicon pricing? Because the way I look at it, polysilicon is at least 1 to 2 months ahead of the sort of chain in terms of lead time to convert into panel and then installs. So I would have thought maybe the polysilicon should have already started seeing some recovery given the sort of -- the new regulations have been put in place from 1st of July.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [7]

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Maybe on the poly question. I mean the sort of increased demand for increased installations, I mean it's not much. It's really not much. And of course, on our customer side or the module producer side, there is also significant inventory in place. So that needs to be clear first. And this is why we don't see a significant movement of pricing in polysilicon yet.

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Tobias Ohler, Wacker Chemie AG - CFO & Member of the Executive Board [8]

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With respect to the silicones question. Yes, you are right, we assume a slightly better second half to the first half in our guidance. That stems from -- I mean we had a force majeure in the first quarter. We are at the inventory control now in the second quarter with a significant impact, but also we have additional capacities in the second half. So we expect the standard to continue with some volatility in prices. But overall, prices should be sequentially even lower. But we expect specialties of our firm with only some weak industries. So with some slight price declines also on the raw material side, put all together, we see that we can achieve about EUR 500 million EBITDA in Silicones, which is the 20% margin that we talked about.

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Operator [9]

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The next question received is from Ben Gorman from UBS.

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Ben Gorman, UBS Investment Bank, Research Division - Associate Analyst [10]

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Just 2 quick ones for me. In terms of the impact on pricing in semiconductor polysilicon, can you just give an idea of the sensitivity of that if we do start to see pricing recovering in the solar side? That's number one. And then number two, this special prepayment income. Any color as to the customer here? Was it Chinese or non-Chinese? And then just a very quick third one, on BioSolutions, quarterly EBITDA run rate still below -- around EUR 10 million, I think. So when should we expect to get back to this range or, in fact, higher given recent bolt-on?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [11]

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I hope you understand that we do not publish the name of the customer, that prepayment effect. On pricing on semiconductor polysilicon, it's definitely longer term than for solar polysilicon. And so that's about what we can publicly say there.

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Tobias Ohler, Wacker Chemie AG - CFO & Member of the Executive Board [12]

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And for the BioSolutions question, with this EUR 7 million EBITDA in the second quarter and EUR 6 million in the first quarter, total guidance is for around EUR 30 million. So we definitely see a slight improvement in the second half of the year for that.

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Ben Gorman, UBS Investment Bank, Research Division - Associate Analyst [13]

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Okay. So not even any guidance in terms of whether the customer was a Chinese or non-Chinese there? Just wondering about sort of the...

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [14]

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That's correct. You cannot see any guidance from our side. I hope you understand.

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Operator [15]

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The next question received is from Martin Jungfleisch of Kepler Cheuvreux.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [16]

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It's on polysilicon and the improvement in EBITDA compared to Q1. If you look at -- sales were down EUR 40 million quarter-on-quarter. Adjusted EBITDA was up EUR 22 million. If we assume that the inventory devaluation effect was something like EUR 15 million less in Q2 compared to Q1, there's still a more than EUR 5 million delta on absolute level. Is this because you've shipped more into inventory compared to Q1, which improves margins? Or it is strictly because of actually significantly better cost control? And also, could you comment on -- is the semi-grade volumes were down compared to the first quarter? And that's it on my side.

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Tobias Ohler, Wacker Chemie AG - CFO & Member of the Executive Board [17]

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Martin, if you take out the prepayment effect in Q2 polysilicon result, you have operating loss of EUR 30 million compared to EUR 36 million. So the difference is EUR 23 million. And the major reason for that is really the lower inventory valuation adjustments in Q2 compared to Q1. But in addition to that, we also continue to improve our costs, and we have efficiency gains. But this is not all quarters the same improvement, but the majority of the delta is from the inventory adjustments.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [18]

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Okay. Can you confirm if you shipped more into inventory in the second quarter compared to the first quarter?

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Tobias Ohler, Wacker Chemie AG - CFO & Member of the Executive Board [19]

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Yes, I can confirm. We continue to run all 3 plants at maximum possible capacity, and we still don't have enough inventory close to our customers in Asia. So the strategy is to build stock at market weakness and then have shortened lead time for the customers. And as we have shown in the past, we can quickly sell when the market turns up.

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Operator [20]

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And the next question we received is from Thomas Swoboda of Societe Generale.

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Thomas Swoboda, Societe Generale Cross Asset Research - Research Analyst [21]

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I have 2 questions left. First, on Silicones, if you could comment please on the standard prices outside of China. Did they already follow on the development in Asia and on a pre-bubble level, if I may call it? That would be helpful. And secondly, looking in -- towards the year-end, input costs like then, ethylene are coming down. Do you expect pressure from your customers to reduce prices because of raw materials? Or isn't that a question because your margin levels are still relatively modest in this product group?

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Tobias Ohler, Wacker Chemie AG - CFO & Member of the Executive Board [22]

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Thomas, on the standard prices in Silicones, they are down significantly year-over-year but also quarter-over-quarter. And as we said before, this is part of the normalization of the market after the shortage in 2018. China is always more extreme than other regions. So we expect there are still price pressure from China to the other regions. And sort of the prices are connected somehow, but they are not the same everywhere. So for that reason, the recent increase in P&C prices in China, which are really very volatile, they most likely won't have an effect on Q3 prices in the Western Hemisphere. And for that reason, our assumption is that we have to plan for lower overall standard prices sequentially.

The question on input costs in Polymers. As we always said, there is a number of contracts that are formula-based. And for those, we have, with the raw materials going down, also decreasing selling prices. And for the other portion of our contract portfolio, I think I would definitely defend our pricing as we have it today because as you rightly said, we still have a margin which is not at our target level. So we have definitely to recover from last year's big hit, and we are not there yet. So we hold back against any attempts from the customer side to lower prices.

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Operator [23]

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The next question received is from Sebastian Bray of Berenberg.

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Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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I would have 2, please. The first is on Polysilicon. This is quite an admirable job of taking out costs of a business. Am I right in saying that Wacker is placed to exceed the roughly 1/3 cost reduction target it set itself at the Capital Markets Day in 2017? That's my first question. I think the exact number was 30%. The second is an update on insurance. Apologies, I've just dialed in, so this may have already been dealt with. But has there been any news on the expected size of payment or its timing with regards to the Tennessee facility that had an accident towards the end of 2017?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [25]

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On the cost reduction of polysilicon, I mean you can be very sure that we strive to reduce our costs further than the 30% because the results right now, as I said, are not satisfactory at all. And we don't know what the future will hold. And this is why there is no let up. Well, actually, it's the opposite. There is more and more push to reduce costs even further.

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

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With respect to the question on the insurance. There's really no change at all to our assumptions. We always said that insurance is not included in our guidance. We are in the midst of the discussions right now. The insurance should make us whole. That's the principle of the contracts. So as we are talking big numbers, we also take our time. So there is no change to report.

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Sebastian Christian Bray, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [27]

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Quick follow-up. Could you talk a bit about the environment for German power prices at the moment and if this is a head or tail --or is it a headwind for the business or broadly neutral?

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

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The power prices compared to the first quarter and the end of last year are coming down, but still they are challenging. So there are several ways to optimize that, first, on the purchasing side and then reduction of electricity use, for example, per kilogram of polysilicon.

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Operator [29]

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The next question received is from Laura Lopez from Baader-Helvea.

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Laura Lopez Pineda, Baader-Helvea Equity Research - Analyst [30]

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I have one more question regarding the expansions on film silica in Tennessee and the silicon metal expansion. So is it right to assume that these 2 things will also help to improve the profitability of your Polysilicon division? The question more focused also on the silicon metal expansion as prices have also come down significantly. So I don't know how efficient you can run the plant, and let's say, if that also has a lower cost curve than the current prices in the market. That will be interesting to know.

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [31]

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Of course, we made these investments to improve our profitability. And the film silica by itself, of course, is a very important product. But yes, in Tennessee, it also helps to use up -- side products of the polysilicon production, so it's overall very positive when we started running that plant, and that's maximum a few weeks away. And similar in Norway, I mean using our own metallurgical silicon is certainly more efficient than buying it, so that's why we are investing significant capital in the increase of these productions.

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Laura Lopez Pineda, Baader-Helvea Equity Research - Analyst [32]

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And the silicon metal ramp-up, can you remind me when is that planned for?

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Rudolf Staudigl, Wacker Chemie AG - CEO, President & Member of Executive Board [33]

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Ramp-up by the end of this year.

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Operator [34]

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(Operator Instructions) As there are no further questions, I hand back to the speakers.

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Jörg Hoffmann, Wacker Chemie AG - Head of IR [35]

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Thank you, operator. Thank you all for joining us today and for your interest in Wacker Chemie. We're looking forward to further discussions with you as the quarter progresses. If you would like to meet us next time we're in the city, please send us a message directly or register your interest with our corporate access partner.

We will be back to a conference call on the Q3 results on October 24. Goodbye.

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Operator [36]

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