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Edited Transcript of WCH.DE earnings conference call or presentation 14-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Wacker Chemie AG Earnings Call

Mar 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Wacker Chemie AG earnings conference call or presentation Tuesday, March 14, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joerg Hoffmann

Wacker Chemie AG - SVP, IR

* Tobias Ohler

Wacker Chemie AG - CFO

* Rudolf Staudigl

Wacker Chemie AG - CEO

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Conference Call Participants

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* Andreas Heine

Mainfirst - Analyst

* Peter Mackey

Exane BNP Paribas - Analyst

* Oliver Schwarz

Warburg Research - Analyst

* Nizla Naizer

Deutsche Bank - Analyst

* Gurpreet Gujral

Macquarie Securities - Analyst

* Patrick Rafaisz

UBS - Analyst

* Andrew Benson

Citi - Analyst

* Mathew Hampshire-Waugh

Credit Suisse - Analyst

* Sean McLoughlin

HSBC - Analyst

* Chetan Udeshi

JPMorgan - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Wacker Chemie AG Full Results of 2016 telephone conference. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

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

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Joerg Hoffmann, Wacker Chemie AG - SVP, IR [2]

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Thank you, operator. Welcome to the Wacker Chemie AG full-year 2016 conference call. My name is Joerg Hoffmann and I'm 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 our presentation in a minute. The presentation is available on our webpage under www.wacker.com under the caption Investor Relations.

Before they begin, let me point you to our Safe Harbor statement, which you'll find at the beginning of the deck. With this, let me now hand you over to the Dr. Staudigl, our CEO. Dr. Staudigl?

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Rudolf Staudigl, Wacker Chemie AG - CEO [3]

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Ladies and gentlemen, welcome to our full-year 2016 conference call. 2016 was a year of records for us. Silicones went through the EUR2 billion sales level for the first time in history. Silicones' EBITDA contribution was at EUR360 million, the highest on record, testifying to the success of our combined specialty and cost focus strategy. Polymers alone contributed about as much EBITDA to the Group as polysilicon following another year of very strong demand for its products.

Our chemicals operations contributed 70% of Group EBITDA excluding Siltronic and special income. 2016 ended the year with a strong quarter. Strong demand for semi wafers, silicones, and for our polysilicon drove performance higher than we had expected at our last call. Current trading conditions such as, that these trends coupled with seasonal recovery in polymers will continue, but before we get there in detail, let's have a look at our results presentation.

Starting on page 2, 2016 sales came in at EUR5.4 billion, slightly over the prior year mainly driven by strong demand for our products. Full-year EBITDA excluding special income grew at 19% year-over-year, almost twice as fast as expected with the full-year results coming in at EUR1.08 billion. As I just said, our chemicals operations saw very strong volumes, especially in Silicones. Across all segments, we saw a very good cost performance last year also.

Page 3 then shows how the year shaped up against prior year and our last guidance. You can also see that our net cash flow increased substantially to EUR400 million as CapEx declined to EUR428 million. As outlined for the leverage phase of our growth path, we expect similar net cash flows in 2017. As you saw today, we have proposed a EUR2 per share dividend for 2016. This reflects about 53% of net earnings just over the level we have set as a new target at our last Capital Market Day in October.

Looking into the full-year 2017 for today, we are confident about our capabilities but also somewhat concerned about macroeconomic impacts and some pricing trends. We are seeing raw material inflation in methanol, vinyl acetate monomer, ethylene and acetic acid, which will affect our chemicals businesses. We now expect full-year 2017 sales to increase by mid-single digits over last year, with an EBITDA at the level of last year on a comparable basis. If current market conditions remain unchanged during the year, we definitely see additional upward potential for EBITDA over and above our present expectations.

Let me now hand over to Tobias for more details on our financials and then outlook into Q1.

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Tobias Ohler, Wacker Chemie AG - CFO [4]

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Looking at last year's P&L on page 4, sales are driven by volumes and overall performance was held back by price attrition. All segments show similar performance with the exception of Siltronic where price, volume and exchange rate were balanced year-over-year. The increase in depreciation from EUR575 million to EUR735 million had an impact on gross margins and operating result. As a result, gross profit was down despite a better performance in underlying volumes and a better cost performance than in the prior year. Over the next three years, we expect to see depreciation decline back to 2015 levels.

If you look at EBITDA performance and adjust for special income, EBITDA was up 19%. In light of top-line pressure from lower prices, this figure shows impressively our underlying volume and cost performance. EBIT was lower due to the increase in depreciation.

Other operating income improved by EUR62 million despite lower special income. In 2015, we still book pre-operational expenses and currency losses -- they're also higher in 2015 than in 2016. The net financial result decreased from minus EUR67 million to minus EUR101 million. The key factor in the change was the lack of capitalized interest as we completed the Tennessee plant during 2016; this has an impact of EUR17 million. Full-year tax rate came in as expected at just 28.5%. We suggest to model with 30% going forward.

Looking at our balance sheet on page 5, you see that non-current assets actually decreased over 2015 as we depreciated more than we added to assets. Pension liabilities are up year-by-year by about EUR500 million, to EUR2.11 billion as the pension discount rate declined from 2.75% for 2015 to 1.94% for 2016. However, compared to Q3 2016, our pension liability actually came down by about EUR460 million as the pension discount rate increased again towards year-end 2016 to 1.94% up from 1.38% at the end of Q3. In 2016, as announced, we advanced EUR50 million cash as a top-up into our pension schemes, which will be booked against pension liabilities in Q1 in 2017.

Prepayments decreased by EUR182 million, to EUR271 million as legacy contracts with prepayments are running out. For the next 12 months, we expect a decrease in these prepayment levels of about EUR100 million. Working capital increased year-over-year by 15.3%, to EUR1.25 billion. This reflects the strong operating performance in Q4, which drove up receivables combined with slightly higher inventories and lower payables.

And now moving to page 6 in the presentation. Silicones saw a strong demand for its product and benefited in the last weeks of 2016 from competitive outages. Demand was strong in all regions with an over-proportional increase in specialty products. Silicones exceeded EUR2 billion of sales for the first time in history.

EBITDA increased by 31% to EUR360 million following high plant loading, good cost performance and an improved product mix. The EBITDA margin, silicones increased from 14.2% to 18.1% in 2016.

Now looking into 2017, we expect a mid-single-digit increase in full-year sales and slightly higher EBITDA; headwinds come from sharply rising methanol costs.

On the next page sales in polymers, we are slightly up as price deflation nearly compensated strong volume growth. Sales reached about EUR1.2 billion, full-year EBITDA came in at EUR261 million, 17% up from last year. The biggest contributors to this increase were volume growth and the good cost performance including efficiency gains.

The 2016 EBITDA margin was a record of 21.8%. 2017 is going to become more difficult in polymers as VAM, ethylene and acetic acid costs rise. As a result, we expect a significant decrease in EBITDA, but despite this, full-year EBITDA margin in polymers should come in above our 16% long-term target for the chemicals segment with sales in polymers up mid-single digits.

On next page, polysilicon, polysilicon reported sales of EUR1.1 billion as volume growth only slightly overcompensated for lower price and mix effect. Reported EBITDA was down 29% year-over-year as special income decreased. We also incurred ramp-up costs and prices fluctuated substantially during the year. When adjusting for ramp-up cost and special income, EBITDA margin was 29% versus 33% in 2015. Shipments increased to 66 kilo tons in 2016 as all plants including Tennessee were utilized at their respective capacity limits throughout the year.

Looking into 2017, we expect sales at the level of 2016 and an EBITDA excluding special income slightly higher than in 2016. We expect volume growth year-over-year, yet the lower ASPs will largely compensate those gains.

Siltronic on next page, Siltronic reported the full-year results today. With sales at last year's level, EBITDA increased by 18%, to EUR146 million. Key contributors were high plant loading combined with the good cost performance and lower hedging costs. For 2017, Siltronic expect sales over EUR1 billion with an EBITDA margin of at least 20% if not significantly higher. For more detail, please contact Siltronic directly.

Net financial debt on page 11 decreased as guided to just under EUR1 billion as gross cash flows increased to EUR737 million and net cash flow came in at EUR400 million as cash outflow for investments decreased by about EUR300 million to EUR517 million. The difference between cash outflow for investments and 2016 CapEx is in the timing of the cash flows. So, some CapEx was booked in 2015 but the actual cash outflow happened shortly after the year-end 2015.

Looking into the first quarter on page 12, we see strong demand for our chemicals operations with order intake over the level of last year. By volumes look good, we are looking with some concern to the recent rise in raw materials, in particular to methanol and ethylene. Polysilicon operates at full utilization and Siltronic guided to a strong 2017. Overall, we expect Q1 Group sales at about EUR1.4 billion with an EBITDA clearly above Q1 2016.

With this, let me hand you back to Rudy.

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Rudolf Staudigl, Wacker Chemie AG - CEO [5]

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Thank you, Tobias. As you heard, we think we're in good shape. We see some challenges going forward, but our course is clearly set. For the full-year 2017 guidance on page 12, we expect a mid-single digit increase in sales and an EBITDA at the level of 2016 excluding special items. The CapEx discipline -- our CapEx should stay at about the level of last year, leading to a net cash flow of about EUR400 million.

That said, we believe that the coming year can bring upsides and downsides to this guidance. Should current end-market conditions persist however, we would look to improving our guidance as we move on through the year. This concludes the presentation today, ladies and gentlemen. Thank you for attention so far. We will now be happy to answer your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Andreas Heine, Mainfirst.

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Andreas Heine, Mainfirst - Analyst [2]

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First, I would like to understand a little bit more about your assumptions for polysilicon. You were addressing that the average selling price will be down year-on-year and you addressed also then that might be due to prepayments going down, so as the contract volume having a lower percentage there. Could you shed some light what you can see right now in Q1 that you see this already or is what we see on the spot market as current [night] price level, something we will see also see in higher earnings and price in the first quarter? And maybe anything what you can say to us, what you assume from today's point of view what's spot prices the only thing we can see from the outside you have put into your guidance assumption? That's on the polysilicon.

And on polymers, basically the only thing, but obviously a quite harsh impact comes from raw materials. Could you address how much of the raw material headwind you might be able to transfer by higher pricing, and as this is the only segment that you indicate that profits are going down, but that on Group level earnings might be flat, it means that the substantial decline of this segment should offset all of the increases (inaudible) others, which would highlight really quite significant decline. Could you shed some more light what your assumptions for this segment are?

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Rudolf Staudigl, Wacker Chemie AG - CEO [3]

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Andreas, let me talk first on the conditions of the polysilicon market. I think we have seen this last year, this up and down, which was represented by the PVinsights price fluctuation, and within the last few weeks, there was a little bit of a downward trend, and for the year, we simply assume decreasing prices just to be on the safe side we don't know what will happen, whether we will see something like last year or not. If conditions are getting good, of course, we see upside. It's just very difficult to read right now.

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Andreas Heine, Mainfirst - Analyst [4]

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But looking on Q1 is what we see in this PVinsights something which should come through in the sense of higher prices or is the lower percentage of contract volume offsetting this? So basically, if I look on what we have seen last year was around [EUR16] per kilogram in the first quarter, if my maths is right, and looking on what we see right now on the spot market is similar, but probably volume for the semiconductor industry has higher prices and your contract volumes also higher prices. So, what is a mix out of this, what you can -- should have clearly already seeing pocket for Q1, just to get the flavor how important this contract mix is?

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Tobias Ohler, Wacker Chemie AG - CFO [5]

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There's a lot going on, if you compare Q1 to the prior year, but also if you compare Q1 to Q4. I mean, we definitely see that increase in prices if you compare especially the first months of Q4 to the first months of Q1. But on the other hand, we also had, for example, a higher electricity prices in January. So, I would be a little cautious on just extrapolate that price index into our results. So, I think that is a simplification that many would love to use, but our result is basically coming from strong volume and then our continuous cost improvement. So, everything is going according to plan as we see it but the mathematics not entirely predict maybe what we see today.

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Andreas Heine, Mainfirst - Analyst [6]

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Okay, thanks.

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Tobias Ohler, Wacker Chemie AG - CFO [7]

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With respect to raw materials, your key question was how do we pass it on to our customers? As we continuously said, we do have in polymers roughly 25%, which is 50% of the liquid business, so 25% of the total business index, for this we pass it on. For the rest, it's more or less value-based pricing and then it very much depends on the competitive situation that we have. So, we assume overall for polymers, still this tight the formula pricing and overall slight price decline, but less than in 2016, but we see significant headwind in ethylene and VAM and also acetic acid. That's more or less comes from higher NAFTA pricing, which goes back to oil prices, but it also comes from higher coal prices which almost doubled since the trough that we had seen in 2016. And that's why we guide for a significantly lower absolute EBITDA, but we are very confident that we will be above our target margin of 16%.

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Operator [8]

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Peter Mackey, Exane BNP Paribas.

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Peter Mackey, Exane BNP Paribas - Analyst [9]

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A couple of questions, if I can, please. First, I wanted to ask some questions about the volume number in polysilicon. I was little bit surprised by the 66,000 tons that you suggest you shipped last year. I was sort of under the impression that at the nine-month stage, volumes were something in the low [40,000s tons] which suggest a very significant shipment in the fourth quarter above your production rate.

So, I wonder if you could just confirm that. And if so, and given the pricing points that we saw -- the shift in pricing in the fourth quarter and the fact that you had put inventory strategically into the system, I think during the third quarter. Just wonder about your thought process of effectively selling out or apparently selling out of those inventories at what were pretty low prices in the early point of the fourth quarter.

And the second question was on, just coming back to the pre-payments question. So, I note you're talking about prepayment amortization of around EUR100 million, presume I think around EUR20 million of that is Siltronic, so around EUR80 million for the polysilicon business. Should we read that basically as a lower for longer prepayment amortization program? So, you expect now to have some prepayment benefits or -- to pricing into 2018 and probably 2019 as well. Thanks very much.

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Tobias Ohler, Wacker Chemie AG - CFO [10]

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Peter, maybe I'll start with the first two, which are more or less, as I understand and linked. We reported that we had in September with the dry up in demand build some strategic inventory at our Asian hub (inaudible). So, for Q4, there was no big change in that. So, basically, we kept this strategic inventory, so our sales was, you could argue close to our production level and we ran Tennessee as high as we could close to the total capacity. And going forward, we see that, with the lead times that we have to our customer that we would take the opportunity to again build strategic inventory if prices are low. And that's what we have as clear intention.

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Peter Mackey, Exane BNP Paribas - Analyst [11]

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So, I want to -- could you -- apologies sir, I apologize for interrupting, but could you then confirm with volumes around 20,000 tons in the fourth quarter, as my assumption of the nine month was wrong?

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Tobias Ohler, Wacker Chemie AG - CFO [12]

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And as a matter of principle, we do not comment on quarterly volumes and so I can't help you on that, sorry.

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Peter Mackey, Exane BNP Paribas - Analyst [13]

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Okay. Thank you.

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Rudolf Staudigl, Wacker Chemie AG - CEO [14]

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Maybe on the prepayments, yes, there is some prolongation of the prepayments and there is even on certain contracts an inflow of prepayments, although on a much lower basis than in the past.

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Operator [15]

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Oliver Schwarz, Warburg Research.

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Oliver Schwarz, Warburg Research - Analyst [16]

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Thank you for taking my three questions in that case. Firstly, sorry to labor but back to polymers please. You're saying that you're looking for a volume increase in 2017, as well as maybe some price declines if I heard that correctly in spite of the higher raw material prices, but you're still looking to reach 16% EBITDA margin. So all in all, the pressure from pricing can't be too bad, and if we compare that to 2016 what we saw lower pricing, but favorable volume growth, leading to the growth that you just communicated, how can volume growth in 2017 be only in the mid-range of single-digit percentage if we will see a favorable volume growth and let's say will get slight movements in the price? That will be my first question.

Polysilicon just to verify what I've just heard. Is it true that you're basically sold out, and is that at the moment, currently selling basically what you produce without having sizable inventories that would enable you to give customers better trading conditions from their point of view so basically you are able to ship once, not only you have four weeks after the contract that's the customer has been placed.

And lastly, could you fill me in the gap between the cash flow from long- term investment activities before securities -- almost EUR517 million and the CapEx you highlighted EUR428 million. What is that related to? Thank you.

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Tobias Ohler, Wacker Chemie AG - CFO [17]

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So, three long lists, Oliver. I would love to start with the last one, I think the key difference between the CapEx and cash outflow is that we had some CapEx booked in 2015 which led to cash outflow in 2016. That's why there is slight deviation. It's typically if you have a large project at Tennessee, you run very high and intense on year-end and then you pay bills in the beginning of next year.

For polymers, as I just indicated, we guide for mid-single digit sales growth, but in that forecast it includes a slight price decline. But as I said, this price decline is actually lower than the price decline that we saw in 2016, and to give you a little bit flavor, it depends on how the market also develops. Just recently we have seen some price increases in China and also for the dispersible powder business in Europe is getting tighter.

So, we try to pass on any cost increase if it make sense to our customers and if the competitive situation allows us, and that's why we are really confident that we are above our target margin.

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Oliver Schwarz, Warburg Research - Analyst [18]

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May I chip in there, just to labor the point, is expected volume growth more or less on the level of 2016 for 2017, would that be a fair assumption?

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Tobias Ohler, Wacker Chemie AG - CFO [19]

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It's broadly right. I would say we assume a stronger year for dispersible powder as we had really a terrific year for dispersions last year. It could be the other way. So, dispersible powder stronger than dispersions.

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Rudolf Staudigl, Wacker Chemie AG - CEO [20]

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And maybe on the polysilicon, basically, we sell that we produce, but as Tobias already mentioned, we sort of reserve the right to put some material in inventory rather than selling it just to reduce the shipment time -- the future shipment time to some Asian customers.

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Operator [21]

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Gurpreet Gujral, Macquarie Securities.

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Gurpreet Gujral, Macquarie Securities - Analyst [22]

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I've got three questions. Firstly, how should we think about what is your stake in Siltronic? I know in the past you've indicated a complete exit at some point in time. Can you give us an update on the timing of this and I'll follow on after that please?

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Rudolf Staudigl, Wacker Chemie AG - CEO [23]

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Our strategy definitely is to reduce our stake to go to a minority position. And that's certainly the next step, which will follow at the right time.

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Gurpreet Gujral, Macquarie Securities - Analyst [24]

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Secondly, question on your slide two, your global PV forecast. I'm quite curious to know about your rest of the world forecast. It seems relatively large compared to previous years. Can you give us a bit more clarity on this line, please?

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Rudolf Staudigl, Wacker Chemie AG - CEO [25]

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Yes, I'm just looking it up. We do really extensive research on country basis and so the rest of the world -- basically, the biggest part of the rest of the world is South America and there are significant projects going on in South America.

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Gurpreet Gujral, Macquarie Securities - Analyst [26]

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And any specific countries within South America?

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Rudolf Staudigl, Wacker Chemie AG - CEO [27]

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There is Chile -- for example, Chile, Brazil.

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Gurpreet Gujral, Macquarie Securities - Analyst [28]

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And my final question is about the poly price right now. I would like to just get a bit more of an understanding on the differential between the spot price in China versus the international market and how you guys see that going forward. It is a spread wide now, I know from one of your competitors, they have talked about that spread widening. We just want to get a feel for what you think will happen in that dynamic this year?

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Rudolf Staudigl, Wacker Chemie AG - CEO [29]

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Well, certainly, you can see that on PVinsights price, the polysilicon price outside of China tends to be lower than in China, and this is due to the significant pressure outside of China because there are capacities that cannot be sold in China, that's the reason.

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Operator [30]

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(Operator Instructions) Nizla Naizer, Deutsche Bank.

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Nizla Naizer, Deutsche Bank - Analyst [31]

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Just a couple more around polysilicon. Could you just tell us what the competitive environment is like, are you seeing significant additions or capacity additions for polysilicon in markets such as China, which may impact your belief to sell there going forward?

And previously you mentioned us in 2017 you expect to sell volumes of around 80,000 metric tons. Is that kind of like guidance that we can look for 2017 in terms of the volumes you expect to sell? And also if you can give us an update on the preferential agreement you have with MOFCOM and how that sort of update is proceeding, that would be great.

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Rudolf Staudigl, Wacker Chemie AG - CEO [32]

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First of all, we did not say that we will sell 80,000 tons, we said our capacity this year is 80,000 tons -- just the 20,000 tons in the US and the 60,000 tons in Germany.

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Nizla Naizer, Deutsche Bank - Analyst [33]

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Sure.

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Rudolf Staudigl, Wacker Chemie AG - CEO [34]

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And of course the amount which we sell also depends on the product mix. There are some products that eat up a little bit more capacity than others, and this is why we cannot be more specific at this point in time. And in terms of capacity additions, there are several pieces of information that will come additional capacities over time, especially in China, and we are watching that and we'll see what's coming. But it does not give us sleepless nights at this point in time.

In terms of MOFCOM, I have to start with the European view first, as you probably know this trade dispute between China and Europe on modules and cells has been almost resolved. It's the so-called minimum import price for Chinese modules has been reduced by 20% beginning of the year for Chinese producers and so-called interim review has been started that takes about six to nine months, and then the intent of the European Commission is to consecutively reduce the minimum import price to ultimately get to world price level for modules and cells, and I think this is from our point of view, a great development.

We think that Europe made a mistake in putting up such high barriers, and it's not only our view, there is a whole industry here in Europe that shares that view. But since China always said they would mirror what Europe is doing would mirror that on polysilicon, our assumption at this point in time is that the import troubles for us would be reduced as well in China.

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Operator [35]

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Patrick Rafaisz, UBS.

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Patrick Rafaisz, UBS - Analyst [36]

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Three questions, please. First, again circling back to raw materials, I'm afraid in polymers, would you then agree that your total raw material bill, as you bought it today will increase by some something around 10% to 15% in 2017, based on the guidance you're giving?

And then similarly at silicones, you mentioned methanol being an issue, but I understand you also locked in some lower priced contracts for silicon metal, so how does that (inaudible) offset each other, what's the room to bill increase here year on year? And lastly on VAM, from memory, I thought you had a net long position in VAM and especially in US and China, wouldn't that mitigate the impact from increasing raw material costs for you or am I mistaken here? Thank you.

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Tobias Ohler, Wacker Chemie AG - CFO [37]

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I think your raw material assumption is polymers is sort of okay. I wouldn't debate that. There is a substantial increase in raw materials for polymers. For the second question methanol, methanol is largely traded at an index. So, there we see a substantial impact immediately on our bill if we procure the methanol based on the index with the discount. So, that is what we are seeing as significant impact to the silicones, but asking the question about silicon metal, you are right, given our contract structure, we also see at silicon metal price indices we see increases, but that is largely mitigated by our contract structure. So, the impact is mainly from methanol for the silicones business. And for the VAM, I think we are not long in VAM, but we are net buyer in VAM. So, we only have production capacity for our German demand and we procure VAM in addition to the capacity also in Europe, but to 100% in the Americas and Asia.

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Operator [38]

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Andrew Benson, Citi.

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Andrew Benson, Citi - Analyst [39]

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You talked about the European position. I was wondering if you give us an update on the US and whether you indicated historically the Tennessee would be part of the tariff regime and just how that panning out. And on the prepayments, you said that have changed and you said it actually starting to get some incoming. I wondered if you could give some more color on the prepayments and how you see that evolving over the medium term and how that could affect your volumes over the medium term as well? And what was the cause of the change in the (inaudible) for these versus prepayments? Thanks.

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Rudolf Staudigl, Wacker Chemie AG - CEO [40]

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On the tariff regime, yes, I mean as an American producer at this point in time, we cannot export to China, which I think is a problem for our Chinese customers because it's new and very high quality, very productive facility, but that's the fact. And so we're selling the material outside of China. In terms of the prepayments, as I said, there is only very little -- there is no prepayment incoming, but nothing compared to the times when heavy prepayments were paid in order to reserve capacities. But it just demonstrates that our high quality polysilicon is very -- there is a high demand for that and some very high quality customers want to make sure that they get enough of that material.

And then there is the fact that some of the prepayment contracts are prolonged into the future, so the existing prepayment sort of gets distributed over more years. And this all together determines the lower prepayment reduction within a year and that is distributed over more years.

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Andrew Benson, Citi - Analyst [41]

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And how much of your business -- just can you give us some color, why, what was a provocation for the change, is it customer led or is it --?

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Rudolf Staudigl, Wacker Chemie AG - CEO [42]

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Yes, it is individual customers, but I really want to emphasize that it's by far not to that extent as in the past. And as I always stressed even for a long time, basically polysilicon will be a normal chemical business and in a normal chemical business, you do not get the prepayments for future deliveries. Now, in some instances, you get it to make sure that customers -- or customers want to make sure that they really get enough quantity of high quality material. But you should not look at the polysilicon business globally as the business where there is a change in trend towards more prepayments again. These are very customer-specific issues.

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Andrew Benson, Citi - Analyst [43]

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And just one last question, am I right in thinking that it's simply you being cautious on what -- and I don't understand why does you are saying that -- what you're seeing currently is you don't believe will be trend that follow or you we are not prepared to assert but it's going to be a trend for the full year. Is that just natural conservatism among the part of Wacker?

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Rudolf Staudigl, Wacker Chemie AG - CEO [44]

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It might be part of it absolutely, but what we saw in polysilicon last year, there is a significant decline in demand and pricing mid of the year but certainly to an extent that nobody had expected throughout the first half of the year. And we just -- with our first guidance of the year, we just do not want to mislead anybody. So, it's just careful, I think it's the way we do business.

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Operator [45]

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Mathew Hampshire-Waugh, Credit Suisse.

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Mathew Hampshire-Waugh, Credit Suisse - Analyst [46]

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Just, sorry, one more on the polysilicon guidance. Can you just clarify, so you are guiding just flat sales with volumes up offset by lower prices and then somewhat higher EBITDA and then this also includes the EUR50 million lower costs, so you don't have the ramp-up costs for Tennessee, if I'm correct. So, the maths on this would imply that you're expecting volume growth of 5% or below, which seems pretty low to me. Is that correct or am I missing something? Thank you.

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Tobias Ohler, Wacker Chemie AG - CFO [47]

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Mathew, we're not commenting on the assumption of volume growth, but, overall, we do see volume growth as we already said, we do have the capacity available, but as we Rudy said, we also have the effect of demanding product mix, and if you take this together, lower ASP also coming from the product mix and maybe a cautious market price outlook. You see that the price effects go one-to-one into our profitability to the bottom line while adding volume just increases the contribution margin over your variable costs. What I also mentioned for other question on the first quarter, electricity prices were up. So, basically, as we see it today, it's a fair guidance for the segment. We see revenue at the level and EBITDA slightly above prior year, if you exclude the special effects from prepayments.

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Mathew Hampshire-Waugh, Credit Suisse - Analyst [48]

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Thank you.

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Rudolf Staudigl, Wacker Chemie AG - CEO [49]

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But of course we also do everything to reduce our costs as well over the year.

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Operator [50]

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Sean McLoughlin, HSBC.

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Sean McLoughlin, HSBC - Analyst [51]

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Two questions. Firstly, on Group CapEx. I notice this is slightly up year-on-year. You still have a number of large projects both at Charleston plant, Burghausen and Brazil. With 2016 CapEx trough, are we likely to stay on an upward trajectory, is my first question. Secondly, on polysilicon, just to clarify, are you confirming that 80,000 tons is not a production target for 2017?

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Rudolf Staudigl, Wacker Chemie AG - CEO [52]

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It is the production target, no question, but we do not comment on how much we sell, how much we put potentially in inventory. There is an influence of product mix, specifications, how much goes to semiconductor, how much goes into multi-crystalline solar wafers, how much goes into mono-crystalline solar wafers. So, there is this multitude of influences, and that's just very hard to predict at this time, but our nameplate capacity is 80,000 tons and we certainly always try to exceed that.

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Tobias Ohler, Wacker Chemie AG - CFO [53]

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And with respect to CapEx, I think the EUR450 million number that we have for 2017 -- there is no trend in comparison to prior year, but we always said that we would invest below depreciation, and so take a number of between EUR450 million to EUR500 million and we have sufficient CapEx also to have larger project as we announced. We have included fumed silica in Tennessee. We have included a silicon metal expansion in Norway. I think that's the level of CapEx that we see, and don't forget that depreciation will also come down over time. So, the peak that we had in last year was EUR735 million, we will see below EUR600 million, I would say in 2020. And EUR450 million per year is a lot to work with.

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Operator [54]

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Oliver Schwarz, Warburg Research.

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Oliver Schwarz, Warburg Research - Analyst [55]

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Thank you for taking my follow-on questions. Firstly, silicones, you are expecting a good product mix, some raw material price increases, but think you are still able to raise EBITDA. Firstly, your market position in silicones as you're number 2 in the market is weaker than in polymers. It seems like you're more successful passing on the higher raw material prices in silicones compared to your polymers franchise, [is that the case]?

Secondly in that context, good product mix we should see some higher prices which leaves little room for volume increases. Will that be a fair assumption? And lastly, just housekeeping number, the 80,000 tons or 80 kilo tons polysilicon is that as good as it gets for the time being although we see some more debottlenecking already in 2017. Thank you.

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Rudolf Staudigl, Wacker Chemie AG - CEO [56]

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We are always working on debottlenecking projects. This is very important for cost reduction, but we said the 80,000 ton is the nameplate capacity number, and we do not want to speculate on anything we achieved through debottlenecking. In polymers and silicones, the significant difference between the two is that the percentage of raw material influence on total polymers cost is much higher than on silicones, it's important to note. But in silicones the clear strategy and it's successful to go more and more into higher value-added products and with higher value-added products, the pricing power is also much better and, but on the other had our market position as you rightfully said in polymers is better, because we are number 1, and you can rest assured that we are trying to to pass on additional costs that we have as much as we can.

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Operator [57]

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Chetan Udeshi, JPMorgan.

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Chetan Udeshi, JPMorgan - Analyst [58]

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I had a couple a follow-up question on polymer business. I'm seeing your one of your major competitor announced multiple price increases over the last six months in products that they compete with you, and so I was just wondering why do you think your pricing will still be down or is it more a function of more competitive or the competitive environment becoming more fear or tougher this year versus say last year?

And the second question would be, historically if you've seen over the past 8 to 10 years, we've always seen a big volatility in your chemicals business margin because of raw materials, price changes or is that a way that you could lower that in the future by maybe structurally changing some of your selling prices, how do you define your contracts with pricing, et cetera. Thank you.

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Tobias Ohler, Wacker Chemie AG - CFO [59]

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To the question on the price increase of our competitors, you can rest assured that we have also increased prices in those products and in those regions. So, it always depends on the very specific competitive situation that you have. And as I mentioned in the previous answer, we do see price increases for example in China and we still see very strong demand and that's what's going on in the polymers. It really depends on which product and which region. And with respect to the volatility and passing on more of raw materials to our customers, as we said, we try to do that, but most of the business as we are a specialty chemicals company, we are value adding very much to the processes or to the product of our customers. So, with that we are always try to seek the best solutions, raw material price index contract for that is not so much coming in.

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Operator [60]

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Andreas Heine, MainFirst.

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Andreas Heine, Mainfirst - Analyst [61]

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Thank you for taking my follow-up questions, two I have. The first is the efficiency gains you mentioned you're striving for the polysilicon segment. Are they able from today's point of view to outstrip what you have at higher cost for electricity? That's the first question. And the second is on CapEx, you said EUR450 million is enough even to have gross projects and you've mentioned some. If Siltronics wants to go for capacity additions and then probably needs more than doubling what they spend right now, which is focused on maintenance only, would Wacker support this investment ideas going forward for Siltronics or is a EUR450 million budget more important?

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Rudolf Staudigl, Wacker Chemie AG - CEO [62]

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Well, I think within the EUR450 million, there is already significant budget for Siltronics, but of course there is no budget for an additional fab. But as you know Siltronics does not need an additional fab of our (inaudible) in case additional capacity is needed, they could do it within the existing buildings.

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Tobias Ohler, Wacker Chemie AG - CFO [63]

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With respect to the question on efficiency gains and the electricity cost increase, I would like to emphasize that the cost increase that we saw was in the beginning of the year. So, markets also seem to have normalized, and I would definitely assume that efficiency gains would be, yes, more than that what we see as a cost increase in the first quarter.

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Operator [64]

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Oliver Schwarz, Warburg Research.

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Oliver Schwarz, Warburg Research - Analyst [65]

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Thanks for having me again. And could you please -- is it possible to quantify the increase in the electricity price you're operating?

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Tobias Ohler, Wacker Chemie AG - CFO [66]

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No. I'm so sorry. We don't this on such a detailed levels. But, I would like to explain the rational why it increased. It really comes back to in January a situation where the coal price was very high, as I mentioned initially, and then suddenly you had Trench, which is typical producer of energy having their nuclear power plant down and have a very strong demand of electricity inventory. So, they needed to import electricity, which met coal-fired power plants run even higher. And added to this, we had some lower level of [lime] water and all this led to higher electricity prices in the beginning of the year.

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Joerg Hoffmann, Wacker Chemie AG - SVP, IR [67]

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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 the conference call on Q1 on April 27. Good-bye.

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Operator [68]

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