18-Mar-2020 - Wacker Chemie AG

WACKER Makes Guidance For 2020 Conditional Due to Coronavirus

As already reported, Wacker Chemie AG's total sales for 2019 almost matched the prior-year level. On presenting its annual report, the Munich-based chemical company announced that Group sales came in at €4.93 billion in 2019 (2018: €4.98 billion). The slight decline of 1 percent was mainly due to lower prices, particularly for solar-grade polysilicon, but also for standard silicones. Sales were supported by generally higher volumes, product-mix effects and the year-over-year rise in the US dollar.

In 2019, EBITDA (earnings before interest, taxes, depreciation and amortization) totaled €783.4 million (2018: €930.0 million). That was 16 percent less than the year before and corresponded to an EBITDA margin of 15.9 percent (2018: 18.7 percent). Earnings were primarily dampened not only by markedly reduced average prices for solar-grade polysilicon and the related effects of inventory valuation adjustments, but also by lower standard-silicone prices and by the steep rise in Germany’s electricity prices. EBITDA included special income of €112.5 million in insurance compensation for damage due to the 2017 incident at Charleston. WACKER recognized this compensation under cost of goods sold.

Group EBIT (earnings before interest and taxes) totaled €-536.3 million last year (2018: €389.6 million). The EBITDA margin was -10.9 percent (2018: 7.8 percent). EBIT was negative primarily because of an impair-ment charge of €760.0 million on the carrying amount of WACKER’s polysilicon production facilities. The impairment reflects the company’s subdued expectations for the future trend in solar-grade polysilicon prices. Total depreciation amounted to €1.32 billion in 2019 (2018: €540.4 million). The net result was €-629.6 million (2018: €260.1 million).

For 2020, WACKER expects to grow slightly, despite challenging conditions. It aims to lift its sales by a low-single-digit percentage. The Group’s EBITDA is likely to decline compared with 2019. This is chiefly due to insurance compensation received in 2019 for the damage in-curred at the production site in Charleston (Tennessee, USA). Adjusted for this non-recurring effect, EBITDA is likely to decline by a mid-single-digit percentage versus last year. The Group’s net result for 2020 should rise significantly. This forecast, though, does not include the economic impact of a possible coronavirus pandemic.

During the first two months of this year, Group sales were somewhat lower compared with the same period last year. This is partly due to restrictions in China on shipping products to customers. The restrictions are dampening every division’s sales there. Overall, WACKER forecasts sales of some €1.2 billion for the first quarter of 2020 (Q1 2019: €1.24 billion). The Group expects EBITDA in Q1 2020 to be substantially above last year’s level (€142.0 million), with operational improvements in the polysilicon business having a positive influence.

“From today’s perspective, 2020 is going to be another very challenging year,” said CEO Rudolf Staudigl in Munich on Tuesday. “In our polysilicon business, we still face strong competition and price pressure. Trade conflicts and geopolitical crises harbor downside risks. In addition, the uncertainties arising from the coronavirus currently top all other risks. On the other hand, we are confident that we will grow sales at all divisions thanks to our outstanding products.”

Given this situation, Staudigl once again called for an industrial electri-city price of below 4 cents per kilowatt-hour for energy-intensive com-panies in Germany: “Our Chinese competitors pay less than 2 cents per kilowatt-hour thanks to state subsidies, and that electricity comes from environmentally harmful coal-fired power plants. If we had the same electricity prices as in China, WACKER would be by far the world’s most efficient producer of high-quality polysilicon.”

WACKER has launched an efficiency program to realign its organizational structure clearly with customer requirements and, thus, support the Group’s profitable growth. As already announced, the company expects to save €250 million a year by reducing material costs and in-house services and by creating a leaner company structure. With this program, more than 1,000 jobs are expected to go by the end of 2022. The job cuts will affect WACKER’s administrative departments and the indirect and non-operational functions of its business divisions. Most of the job losses – over 80 percent – will be at its German sites.

Capital Expenditures

In 2019, the Group’s capital expenditures amounted to €379.5 million (2018: €460.9 million), a year-over-year decline of 18 percent.

Investment activities last year continued to focus on capacity expansion at WACKER’s three chemical divisions. A new pyrogenic silica plant came on stream at Charleston (USA). In Ulsan (South Korea), WACKER now has a new spray dryer for dispersible polymer powders for construction applications. In Zhangjiagang (China), the company has built a new plant for solid silicone rubber to serve the Asian market. At Holla (Norway), a new silicon-metal production facility started up last year. The captive production of this key starting material makes WACKER more independent of price fluctuations on raw-material mar-kets and enhances its supply security during times of peak demand.

Employees

The number of Group employees rose by around 120 in 2019. As of December 31, 2019, WACKER had 14,658 employees worldwide (Dec. 31, 2018: 14,542). Its German sites had 10,356 employees (2018: 10,291) and its international sites 4,302 (2018: 4,251).

Net Cash Flow, Net Financial Debt and Equity Ratio

In 2019, WACKER generated cash inflow in the triple-digit millions. Net cash flow more than doubled to €184.4 million (2018: € 86.2 million). Aside from cash inflows from operating activities, the increase was due to the insurance compensation received for the incident at Charleston. A special payment into the Wacker Chemie VVaG pension fund had the opposite effect, reducing net cash flow by some €70 million.

The Group’s net financial debt rose year over year, totaling €713.7 mil-lion as of December 31, 2019 (Dec. 31, 2018: € 609.7 million). This 17-percent increase was due to the new IFRS 16 accounting standard, which stipulates that lease liabilities must now also be factored in when calculating financial liabilities.

WACKER’s total assets amounted to €6.49 billion as of December 31, 2019 (Dec. 31, 2018: €7.12 billion). This 9-percent decline chiefly stemmed from the drop in fixed assets due to the impairment charge on polysilicon facilities. In addition, Group equity contracted markedly because pension provisions rose amid lower discount rates. On the reporting date, equity amounted to €2.03 billion (Dec. 31, 2018: €3.15 billion). The corresponding equity ratio was 31.3 percent (Dec. 31, 2018: 44.2 percent).

Business Divisions

In 2019, WACKER SILICONES’ sales came in at €2.45 billion (2018: €2.50 billion). This decline of 2 percent was attributable to lower prices for standard silicones, and to volume and product-mix effects. EBITDA also declined year over year. It fell by 22 percent to €478.5 million (2018: €616.6 million)

At WACKER POLYMERS, sales for 2019 rose 3 percent, reaching €1.32 billion (2018: €1.28 billion). This increase was fueled by higher volumes for dispersions and dispersible polymer powders, and by positive exchange-rate effects. EBITDA of €194.2 million was 32 percent above the year-earlier level (2018: €147.7 million), benefiting from higher sales and the division’s good cost structure.

WACKER BIOSOLUTIONS lifted its 2019 sales by 7 percent to €243.0 million (2018: €227.0 million) amid higher volumes and positive exchange-rate effects. EBITDA of €31.1 million (2018: €23.5 million) was up 32 percent versus the year before. The increase was driven by volume growth and by higher plant utilization for biopharmaceuticals.

At WACKER POLYSILICON, sales decreased 5 percent in 2019, coming in at €780.0 million (2018: €823.5 million). The main factor here was markedly lower average prices for solar-grade polysilicon. Volume growth did not compensate for this. EBITDA of €56.9 million (2018: €72.4 million) fell 21 percent due to price effects. EBITDA included €112.5 million in insurance compensation for the damage from the 2017 incident at Charleston (USA).

Proposal on Appropriation of Profits

In 2019, Wacker Chemie AG posted a retained profit of €1,324.9 million under German Commercial Code accounting rules. The Executive and Supervisory Boards will propose a dividend of €0.50 per share at the Annual Shareholders’ Meeting. Based on the number of shares entitled to dividends on December 31, 2019, the total cash dividend corresponds to a payout of €24.8 million. Calculated in relation to WACKER’s average share price in 2019, the dividend yield is 0.7 percent.

Outlook

For 2020, economists expect global economic growth to be at last year’s level or below it. Trade conflicts and geopolitical crises harbor downside risks, as do the potential effects of the coronavirus on the global economy.

At its chemical divisions, WACKER sees good opportunities to grow sales and earnings this year. WACKER SILICONES and WACKER POLYMERS expect sales to climb by a low-single-digit percentage. At WACKER BIOSOLUTIONS, sales are likely to grow by a high-single-digit percentage.

EBITDA at WACKER SILICONES should be at last year's level due to lower average prices. The division forecasts a slight decline in its EBITDA margin. WACKER POLYMERS anticipates slightly higher EBITDA year over year amid higher volumes. The EBITDA margin should be slightly higher, too. WACKER BIOSOLUTIONS expects its EBITDA and EBITDA margin to be clearly higher than last year.

For its polysilicon business, WACKER predicts that sales will increase slightly by a low-single-digit percentage in 2020. Growth will be driven by an improved product-mix, which is shifting toward high-value products. Cost savings will offset low average polysilicon prices. When adjusted for the non-recurring effect of the insurance compensation received in 2019, the division expects EBITDA to be on par with last year.

WACKER’s forecast for the Group is that sales are likely to climb by a low single-digit percentage in 2020. Adjusted for the non-recurring effect of insurance compensation, EBITDA is expected to decline by a mid-single-digit percentage versus last year. The Group’s EBITDA margin is projected to be somewhat lower than a year ago. WACKER's guidance covers not only part of the economic uncertainty, but also the fact that the result from investments could be lower than last year. Due to the drastic developments since the end of February, though, WACKER rates the risk of a coronavirus pandemic as likely, with a potentially high impact (>€100 million) on its earnings and financial position. EBITDA, in consequence, could decline by a two-digit percentage versus last year. At around €350 million, capital expenditures will be below the prior-year level. Depreciation and amortization will come in at around €425 million, down significantly from last year. WACKER expects Group net income to rise significantly. Net cash flow is likely to be clearly positive and substantially higher than last year. Net financial debt will decline due to the positive cash flow.

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