Wacker Chemie Ag Ord

conference call on our second quarter 2020 results. Dr. Christian Hartl, our CEO, and Dr. Tobias Hohler, our CFO, will take you through our prepared slides in a minute. The presentation is available on our webpage under the caption, Investor Relations. Please note that mentioned comments during this call will include forward-looking statements that involve risks and uncertainties. I encourage you to review the safe harbor statement in today's press release, the presentation, and any report regarding risk factors. All documents mentioned are available on the website. Thank you, Jörg.

Welcome, everyone. Q2 was another very strong quarter, with solid demand in all of our segments. We reported sales of 2.2 billion euros in Q2, which is up 45% year over year. EBDA was at 626 million euros, reflecting a strong performance across the entire portfolio. Silicones and polymers again saw strong demand and delivered both year-over-year and consecutive sales growth. Both divisions exhibited strong pricing power, enabling earnings growth despite unprecedented raw material and energy headwinds. Tobias will tell you more about that. Polysilicon stayed tight and benefited from higher prices, but earnings were held back by higher energy and silicon metal costs compared to the previous quarter. After a fourth measure in BioSolutions at the start of the year, we are now back to full operations. We successfully closed the Seco transaction during the quarter, which we announced last year. The joint venture is an important step in our strategy to expand the share of high-margin specialties in our silicones business worldwide. SICO Performance Materials operates very profitably. It closes the technological gap in our specialty silicones portfolio. The acquisition also helps to drive regionalization of our business in fast-growing markets. We welcome our new 500 employees to the silicones division at WACKER. WACKER has formulated new diversity targets. By 2030, women should hold one in three management positions. We are accelerating our growth outside of Germany, focusing on serving our customers in the regions. Therefore, we will have more international managers to ensure that we have the right local experts. WACKER plans to have every second management position outside of Germany. We are convinced that diversity makes us more flexible, makes us more creative, makes us more successful and creates an even stronger team than today. Looking at page three. The ongoing war on Ukraine has triggered a geopolitical crisis. Uncertainties around the gas supply from Russia dominate the political agenda and are a reason for concern for the European chemical industry. Gas supply disruptions have triggered the second level of the German gas emergency plan. Our production and our energy hedges are unaffected. However, the effects on the market prices for electricity and gas have been dramatic, as seen in the charts on the left-hand side of the slide. WACKER is prepared. We are prepared. We have a long-standing energy hedging policy in place. which has shielded us so far from some market tribunals. In February, we set up a task force team to examine operational and technical issues and to come up with solutions for various scenarios. Natural gas is critical to our chemical plants, which are used to produce both steam and electricity in our highly efficient cogeneration plants. Should there be a gas shortage, we would reduce our gas consumption by only producing steel, not electricity. We could offset the lower electricity production with higher purchases from the grid. Now, please note that the grid regulator considers our gas turbine in Burghausen as system relevant for the stability of the regional high-voltage power grid. Even if the gas shortage were to escalate, we expect to maintain the system relevance and receive sufficient gas to run our power plant. If there is a further necessity to reduce our gas consumption, we could use alternative fuels for steam production. So, we do have some opportunities to compensate for the consequences of potentially lower gas supplies. But it's also true, as with many other industrial companies, If there were to be a major supply restriction for natural gas, this would have an impact on our production. Now, as a precautionary measure, or a measure of prudence, if you want, we therefore included an additional charge of 200 to 250 million euros at the lower end of our EBTA forecast, in addition to the price increases already expected for energy and raw materials. Now coming back to business again. We had a strong first half year 2022 with new best marks, sales and earnings. Going forward, we remain optimistic despite the obvious challenges. Therefore, we are increasing our full year guidance substantially. Our new group guidance for 2022 now looks for sales between 8 and 8.5 billion euros. For EBITDA, we expect a range between 2 and 2.3 billion euros based on our own operational performance. Including the provisional charge for energy, the precautionary measure, and the raw material inflation in case of natural gas curtailment, the lower range of the guidance would be at 1.8 billion euros. So, overall EBITDA guidance up to 1.8 to 2.3. Now let's look beyond today and focus on how we see our future shaping up. We have shown an outstanding performance this year and we are delivering towards our strategic targets despite adverse conditions. Let me quickly recap our strategy and targets as presented at our last CMD in March. We want to grow our business beyond sales of 10 billion euros with an EBITDA margin of over 20%. We are focused on profitable growth and ROSI should be two times our cost of capital. We will focus on chemical facilities delivering high value for our customers. We will expand our biotechnological capabilities, growing sales in this area with earnings above the group average. In polysilicon, we focus on high quality applications in the semiconductor and high efficiency solar markets. Our recent CMD was about accelerating WACKER. In the past month, we made good progress towards our new 23 chargers. In silicones, we opened a new production site in India, close to Calcutta, and we are expanding our capacities in Germany. In biosolutions, we broke ground on an mRNA competence center in Halle, and on a dedicated research center for our biotechnology R&D activities in Munich. In Ann Arbor, we opened a new regional headquarter and innovation center. Here, we will develop future silicone and biotech specialties. And in polymers, we are doubling our capacities in Nanjing. Beyond these milestone projects, we have launched some highly promising projects. We have started a feasibility study to expand low-carbon silicon metal production capacity at our Norwegian site in Holland. And we are looking to expand our site in Charleston for a silicon specialties production complex. We will keep you posted on how these and other exciting projects are developing. These projects will allow us to strengthen our position in key markets and service our customers even better. I invite you to look at the appendix to today's presentation. It will give some additional details on a few of these milestones. Now, before I pass on to Tobias, let me provide another perspective. Sustainability is a very important pillar of our strategy. The massive inflation in power and gas costs has accelerated the drive for energy savings, smart construction, electrification, and power generation from renewables. These are all sectors where WACKER provides essential materials and is a leading solution provider. Now looking only to renewables, Europe now targets to increase PV solar installations to 600 gigawatts by 2030, requiring some 50 gigawatts per year. This is a step change, representing more than twice the level installed on average in the last three years in Europe. The current natural gas crisis has certainly increased the importance of energy independence in Europe and abroad. I am absolutely convinced that the response to the current crisis will trigger significant demand growth for our products today and into the future, supporting our ambitious 2030 targets. But in the very short term, the coming months may be challenging. Rising raw material and energy costs and stressed supply chains are already playing out. Potential demand uncertainty from inflation is expected by everyone, but hasn't really materialized yet. All of this puts a heavy strain on the global economy and will probably also demand a lot from us at WACKER. But we are convinced that with our strong WACKER team, our new sustainability and growth goals, and our demonstrated pricing power, we have found good long-term and viable answers to these challenges. Tobias?

Thank you, Chris. Welcome. I will now walk you through our Q2 performance and provide an outlook on the full year end on Q3. Let's begin with the P&L on page 5. Group sales increased by 45% over Q2 last year. Price was the single largest driver. Continued volume and mix improvements and the stronger U.S. dollar supported the positive sales trend. Cross-profit increased year-over-year to 646 million euros. The cross-profit margin came in at about 30%, reflecting firm pricing. The operating result increased to 507 million euros, more than twice as high as last year's. EBITDA was 626 million euros, Net income from the period was €391 million. Earnings per share amounted to €7.67. Moving on to page 6, the balance sheet. Our balance sheet came in with a higher equity ratio of over 50%. Shareholder's equity is now at €4.6 billion, up from €3.1 billion at the end of last year. This was primarily due to the strong earnings and the significantly lower pension deficit following a higher discount rate. Working capital increased due to high sales volumes and raw materials to 1.9 billion euros. On page 7, you see the significant change in our pension deficit. Our pension liabilities are now at 664 million euros. This is roughly 2 billion euros lower than what we saw at the end of 2020 and about 1.1 billion euros lower than at the end of 2021. Since the end of last year, our pension liability saw a decrease of over 23 euros per share. This is really significant and you may want to recognize this change in your valuation models. continued the strong performance shown in Q1. Q2 sales were 936 million euros, about 44% higher than last year. Sales were supported by strong specialty pricing. Silicon's EVTA in Q2 was 277 million euros, resulting in a 29.5% margin. We saw the strongest increases in health and care and consumer applications. The Q2 results include SICO, consolidated since May 1, contributing €23 million to sales and €8 million to EBITDA. Overall, H1 sales came in at over €1.8 million and EBITDA at about €560 million. Looking into G3, we continue to see pricing and volumes largely stable for specialties. However, some segments like construction or textiles see slowing demand. Given the strong performance in G2 and strong volumes and specialties, we now update our guidance for the full year. We now see sales at about 3.5 billion euros with an EBITDA between 900 million and 1 billion euros. Polymers achieved Q2 sales of €553 million, 37% over last year. We protected our margins with over 10 pricing rounds since the first quarter of 2021. EBITDA came in at €91 million, benefiting from a good cost performance, strong demand and our pricing efforts. Looking at H1, Polymers came in with sales of close to 1.1 billion euros and an EBITDA of about 180 million euros. Today, we see some signs of weakening demand, particularly in Europe and China, as well as some destocking at our customers. Despite this, we keep our guidance for polymers unchanged. We see sales at 2.1 billion euros with margins at last year's level. Polymers benefit from higher volumes in oil reach. Polymers will continue to raise prices matching input cost inflation, as demonstrated last year. Please note that the third quarter performance will be held back by a scheduled turnaround at our plant in Burghausen. BioSolutions reported sales of 84 million euros with sales in bio-infrared accelerating EBITDA came in at 8 million euros, with the fourth major situation holding us back through May. BioSolutions achieved 161 million euros in H1, with an EBITDA of 8 million euros. For the full year, our BioSolutions forecast needs adjustments. We continue to see a low double-digit percentage increase in sales, Segment EBTA will now be significantly lower at about 25 million euros. Here we adjust our last guidance for a customer not servicing its contractual obligations. Polycylicon reported Q2 sales of 568 million euros or 60% higher than last year. Prices through the quarter sequentially were higher with very strong demand in both solar and semi. Q2 EBITDA came in at 240 million euros. Results were held back by substantially higher energy and silicon metal costs. In H1, policies can achieve sales of about 1.1 billion euros and EBITDA of about 440 million euros. Solar pricing is firmer for longer than initially expected. With continued strong demand for solar and semiconductor products, we update our forecast for polysilicon. We now expect sales of about 2.1 billion euros. Given the strong pricing into Q3 and with higher energy and silicon metal costs, we guide to an EBITDA between 700 and 850 million euros. Moving on to the net financial position on page 12. We recorded a net financial asset of €119 million at the end of June. Gross cash flow year-over-year was somewhat lower as working capital decreased. Cash flow for long-term investing activities reduced our cash balance by about €340 million, reflecting our strategy of investing in growth and mix improvements. This position also includes a payout of €165 million for 60% of FICO performance materials and our share in their working capital. Please bear in mind that M&A comes on top of our full-year capex guidance. A significant factor in cash outflows in the quarter was our dividend payment of €8 per share. This reduced our cash balance by about 400 million euros. These liabilities increased as we opened our new regional headquarter innovation center in North America. On page 13, our updated group guidance for 2022. First, let's recap our energy hedging and raw material situation. We have a long-standing policy in place. We typically hedge our energy exposure on a rolling-forward basis for the next 36 months with a decreasing coverage for this period. Today, we are largely hedged for the remainder of 2022. For 2023, we are about two-thirds covered, and for 2024, about a quarter. Last year, we spent about 7% of sales on gas and electricity, which was about 450 million euros. In 2022, we now expect our energy bill to slightly more than double. Adding the raw material cost increases, we now expect our total raw material and energy bill to increase in the order of 1.5 billion euros over last year. This is incorporated into our full-year guidance. Let me repeat what Chris said about our guidance. We see full-year sales between 8 and 8.5 billion euros. Following a strong operational performance, we expect to reach 2 to 2.3 billion euros in EBITDA before any potential gas shortages, which we estimate could have an impact in the range of 200 to 250 million euros. Taking also this into consideration, our full year EBITDA guidance range is 1.8 to 2.3 billion euros. Other changes to our guidance are on the net income, which we now see clearly above last year, and on the EBITDA margin. The margin is now expected to be on par with last year. Looking at Q3, we see our businesses largely continuing their performance into Q4. of Q2. In silicones, we are seeing some slowdown in demand and in certain segments, especially in construction and textile. Pricing is firm in specialties and we have a strong order hook for specialties. Polymers report some signs of weakening demand in Europe and China and some destocking at our customers. The teams continue with their pricing strategy, effectively sharing cost inflation. Polysilicon continues to move ahead with very strong demand from both its key end markets, semiconductor and solar. BioSolutions makes good progress in bio-ingredients and bio-pharma. So putting all this together on Q3, we see a strong performance in July and expect a good Q3. Looking to our balance sheet, we are soundly financed. Our businesses are highly cash-generated, and our capex drives growth and value. We have shown with the Biopharma and SICO transactions that we can move swiftly and decisively on selected M&A opportunities, and we continue to stream such vote-on opportunities. Summarizing, we have leading market positions great technologies and the right strategies to convert these strengths into better service for our customers. We continue to do our homework, and we are well prepared to address near-term challenges and to reach our aspiring targets for 2030.

With that, operator, we're ready to take questions.

Thank you. So we will now begin our question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question is answered before it is your turn to speak, you can dial 0 and 2 to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Matthew Yates of Bank of America. The line is now open.

Hey, good afternoon, everyone. A couple of questions then, please. Firstly, another exceptionally strong quarter in your silicones business. Perhaps you heard some of the comments from Dow expecting a slightly softer Q3 due to some supply additions in China and weaker demand generally in Europe. I know you've worked very hard over recent years to improve the mix of the portfolio into more specialty products. But as you look at the back half of the year and what seems to be a broad economic slowdown, how do you think about the resilience of your specialty products, both from a volume and a price perspective? And my second question on polysilicon, not sure if you and the team have had the chance to read all 700 pages of the bill proposed by the US Senate overnight. But is your interpretation that WACA will now be getting a $3 per kilogram tax credit on its domestic production? And if so, does that make you think in any way about extra capex investments to expand capacity? Or would you stick really with the strategy of just allocating capital on those areas where you've got fundamentally good market shares and pricing power? Thank you.

Matthew, Tobias here on your first question on silicon. As I said, we are seeing a strong continuation into July. And yes, we also see some slower order entry, also for specialty. But especially there, we have a very strong order book. And we have, yeah, largely a rollover of pricing into Q3. So I think we will continue to benefit from megatrends that silicones play a critical role in. But we would see some softening, and it very much depends on that softening in overall demand. But for the time being, we are working from a very strong order book, and prices are firm.

Okay, and Matthew, I will answer the second question you asked on polysilicon. Well, I haven't read all the 700 pages, but rest assured that our team there, of course, are heavily into that. Well, in general, I would say it's a positive message if the solar supply chain gets additional support regional-wise. You also know that a program in the EU, Repower Europe, is a similar thing. What both have in common is I think we are at a preliminary stage at the moment. So it's really hard to judge. It's not yet a law. It's not yet in place. So we have to very diligently look onto this. The trend of reshoring, definitely we see that. But I think what the challenge might be for the market is that today wafering, especially, and the ingots are made in China. And I don't think it's a quick fix to bring them to Europe and also to the US. So again, in a nutshell, it's an interesting opportunity to also look at it. At the current stage, would that change anything in our investment strategy? No, definitely not. And as you said, we keep focusing on projects where we have a high market share and a good return and a high power of pricing.

Thanks, Christian. Thanks, Tobias.

The next question is from JD Pandya of On Food Research. The line is now open.

Thanks. The first question really is around the whole energy debate in Europe. Chris, when you're discussing with the governments in Europe, how aware are they of the situation in the solar value chain, which is basically a repeat potentially of the gas situation where Europe or other rest of the world is very heavily dependent on China. And so how willing are they to sort of provide you with support and the solar industry rather with support on whether it is tech subsidies or whether it is, you know, whatever carbon credits or what have you to really ensure that the elaborate solar plan that they have actually materializes and they're not importing everything just from China. The second question I have related to this is we're seeing a lot of vertical integration in China with investments in silicon metal for all, you know, non-silicon metal players. Is your view structurally that in the longer run, silicon metal is going to be a bottleneck for the solar, polysilicon and silicon business? And then the third question really is on biosolutions. Could you provide us with sort of more 2023, 2024 pipeline update in terms of what you expect from GenoPIS, you know, in terms of contribution from the, you know, German government and the WACKER pipeline, excluding all of this. So, you know, should biosolutions go towards the 75, 80 million level in EVDA on a 12- to 18-month view, or is there something blocking that? Thanks a lot.

Okay, Sandeep, thank you for your questions. Let me start with the first one on the energy debate in Europe, and I mentioned this program on Repower Europe. So, yes, so we want to take an active role, and also we talked to the government, and you know our message is, you know, in the solar supply chain, we are already here. So if you talk to us, you talk to the guys that already have capacities in the ground. So I think the German government is well aware that the reshoring debate is getting difficult if you don't have the right setup or conditions. And we have been lobbying for many, many years about a competitive industry power price. And I think that is still, for me, the essential part if you want to reshore the solar supply chain into Europe. The positive message is that, you know, in the program of the German government, the current German government, you see that industry power price has been taken up as a measure. And we also got reconfirmation from the government that in the fall of this year, there will be some industrial power prices, I think they call it, industry contracts which they want to develop for different industries. We haven't seen more details on that but we keep a close touch on that definitely. Then your second question was on the China and silicon metal. Will that be a bottleneck going forward? I mean what we see is that there are different projects on silicon metal taking place both in China but also globally. And the key is, of course, having competitive power pricing. There are some inventions also in Indonesia, which we have seen lately. We published that we closely look into options for expanding our Holla site. So from that perspective, I don't think that the world will be running out of silicon metal. But again, it needs the right setup. competitive power is the key driver for that. Then your third question that was on the BIOS solutions pipeline update, CDMO, I think specifically also PD&A. Well, I cannot disclose any details on these projects, but I can tell you we do have a good pipeline filling up with projects from different stages for clinical trials. And that also the team, the new team in San Diego, which is on board since the beginning of the year, is very strong in acquiring new projects. But you also know in the pharmaceutical industry, not every project is successful and it takes some time. And so we will definitely keep you updated if there are progress to report. In many cases also, Our customers, other ones, do not want us to speak about specific projects.

All right. Thank you.

The next question is from Chita Nodeshi of J.P. Morgan. Your line is now open. Yeah, hi.

Sorry. Yeah, sorry. Just a few questions. I'm just looking at the slide number six. of the presentation, which gives the sales bridge. And I see there, you know, there is a 538 million price benefit, but then on the bullet upstairs, you talk about 600 million of cost increase. So it suggests the net pricing is negative, which I don't think is the case. So can you help us understand that bridge and the raw material number that you have provided? That's the first question. The second question was just around the hedging impact. Clearly, in this environment, having that long-term hedging is proving beneficial. Can you help us understand what is the average hedging rate that you have for 2022, both for gas and electricity in Germany? And as we think about rolling it forward into 2023 and 2024, What is the average rate that you think we should be using for next year? Thanks.

Peter, on your first question on the page with the bridge in our price increase by 538 million euros in comparison to the 600 million euros in raw material energy input inflation, this Number 600 is for the first half of the year, not for the quarter. And in the bridge, you see just the second quarter. So we definitely have a net pricing benefit in the second quarter. And the 600 million first half, I mean, we also talked at the last conference call about trading effects from some beneficial costs from the last year that were rolled into the first half. I mean, this would go away in the second half, obviously. And we have a total number on input cost inflation in the magnitude of 1.5 billion. So approximately 1.5 billion means 600 in the first half, so some 50% more in the second half. And this is also an idea how we come to our guidance. On the second question, hedging, We have this hedging policy in place for many years and we do it in a rolling manner. And for the remainder of the year 2022 we are largely hedged, which is good news. I mean we have some open business still, but I think it's at a very high level. And for the next year, we are hedged at about two-thirds of our energy requirements. And for 2024, at a quarter. I cannot provide you with the prices that we fixed, but I think you can come up with an idea from us doing this on a rolling basis. I think this is a good way to think about it.

Thank you.

The next question is from Thomas Swoboda of Societe Generale. Your line is now open.

Yes, good afternoon. I have two questions, please. Firstly, coming back, or two questions actually on the energy situation. Coming back on the issue of increasing prices, there is apparently a decision in Germany on SAR charges on gas prices from October. Could you give us an indication what headwind this decision would mean to you for the remainder of the year and if possible for next year? And the second question is I simply would like to understand what is in your buffer of 200 to 250 million you included at the low end of your EBITDA guidance. If I understood you correctly, in case of gas rationing in Bokhausen, you would basically just need to pay up for the electricity, whatever the price will be. Am I getting this right? And secondly, I was missing Nuncreds. So what would happen to Nuncreds in such a case, in rough terms, obviously? And is this included in the 200 to 250 million? Thank you.

Thomas, on the headwind of a potential surcharge for gas that was discussed, I think I will come back to the 250 million question that you also had, the second one. This would be part of that scenario. And the order of magnitude is about 15 to 25 euro megawatt hour that would be rolled on all gas customers. So also on us and also on us from the high hedging level that we have. And if you take our total consumption of gas, which is about four terawatt hour a year, take this maybe for the remainder of the year, this is a one terawatt hour, and multiply it by 20, you come to 20 million euros. So this is the amount that you can calculate, and if you take it for the full year, it's obviously four times that number.

And Thomas, let me make a general remark again before we talk more in detail on the 200 to 250 million buffer. And, you know, to be very clear, we included that as a precautionary matter, as a matter of prudence. The key point is that our biggest site, which is Burghausen, with their co-gen plants, this is regarded as system relevant for supporting the high power voltage grid in that region. And we have clear signs that this also will be the case in in a situation of gas curtailment. Nevertheless, as I said, if there's a gas shortage, we could use gas consumption and not produce electricity or less electricity, and as you rightly said, we would buy it from the grid. But again, this is not the scenario which we would consider as the most likely. So we did this calculation, and Tobias can give you some more light into that. Thomas, we did a calculation.

And thinking through potential scenarios of gas contaminants, you came up with many different ones. And we tried to pick one and use some assumptions. For example, we assumed that there is a true gas contaminant also for vodka, in contrast to what Chris just said, of 20 to 25%. starting from September, September 1st, so four months of the year, and then we did the calculation. We said, okay, we would then, as Chris said, we would produce less electricity with our own power plant and purchase more, definitely at a much higher price. We have assumed price escalation because we are in a situation of true containment of gas, which goes beyond today's price levels. But I would not disclose those because it's just numbers. And the majority of the impact is definitely from this additional cost and price escalation. And the majority of the impact is from workhousing, but NynCRIP is also included in that calculation. And we also included about 20 million surcharge that could happen in the gas market. I think it is definitely a cost estimate for a serious situation, but it's not worth case. And it's really hard to assess because no one can really foresee what a gas containment would mean to customer demand and all the network effects. It's such a complicated model. And what we also did not include in that, I mean, we are working with a strong team on preparing countermeasures. We do have something in place also to mitigate potential gas containment, but we assumed in that calculation that maybe it doesn't work from the first day, because we already started in September 1st with the scenario calculation. So it is definitely that There's many open questions. I think I would strongly argue against, yeah, using that number and taking it by three, times three, because it's four months, and then you extrapolate it to 12 months, because no one really talks about a gas content of 20 to 25% for industrial users for a full year. And I think in such a situation, you would definitely also have to include much better network effects on the supply side and on the demand side. And I think no one can really do this today.

So again, this is a measure of prudence, this scenario which we calculated. It is not the most likely scenario, definitely not. And also for both sides, Nynseth and Hochhausen, as Tobias pointed out, the task force teams are working on also using alternative fuels for speed production. So that's another option which we obviously also include and evaluate.

This is all very helpful. Thank you very much.

The next question is from Sebastian Brey of Vorenberg. Your line is now open.

Hello, good afternoon and thank you for taking my questions. I have three, please. The first one is on the other segment. Is there something going on here in quarter two that wasn't just to do with Siltronic? The reason that I ask is that if I take the Siltronic pro-rater income for WACA, the underlying result appears to have been more favorable for WACA than in previous quarters. My second question is just to clarify a number of the statements that have been made related to power costs and other figures for WACKER. Can I confirm that the 450 million euro mentioned for 2021 refers to the global natural gas and power cost and not just the component as it relates to Germany that would be at risk if the gas is cut off? And finally, a quick question on following on from Matt's earlier on the potential solar tax credit legislation in the U.S. I appreciate it's early days, but my understanding is that a large portion of the volume at Tennessee goes to the semiconductor industry. Would the credit, as it stands, apply to everything, semi and solar, or just solar? Thank you.

Sebastian, the first question on the others I think it's mainly systemic, but there is another effect, and it is also connected to energy. We do have our own hydro power plant in Germany, and this runs at market prices. And as we had a strong deviation between plant prices and market prices, it showed up. In the quarter, I'm actually not sure whether this gets rolled into the divisions as energy consumers at the year end, but this is an uplift in the second quarter and first half. To your second question, the €450 million in energy costs, this is truly a global number. It's not just Germany. Bear in mind that we have also Norway, where we run on hydropower for our silicon metal production, and we have Tennessee, where we also have significant power consumption for our polysilicon production.

And your third question was on the polysilicon credit in the US. So my understanding of that program is that it is currently focused on solar. Although the U.S. government, I think, is also trying to bring in more semiconductor stuff in the industry, but so far from our understanding, early stage, is that this is focused on solar.

That is helpful. Thank you. Just to follow up on the points of clarification, the €450 million refers to global natural gas and energy consumption. Does the one terawatt hour refer to global or German natural gas consumption on an annual basis?

That was, I mean, it's mostly Germany. I mean, there's not so much gas consumption outside because we operate here in Borkhausen, our co-gen plant producing electricity and steam. In interest, we produce steam. As we don't have any silicon upstream production outside of Germany, besides our joint venture in China, that one terawatt hour is mainly Germany.

That's understood. Thank you for taking my questions, and congratulations on a good set of results. Thank you.

The next question is from Jeff Hale of UBS. Your line is now open.

Hi. Good afternoon. I apologize for going back to energy again. Could I just clarify, the 1.5 billion that you're saying energy will cost for and raw materials will cost for 2022, does that include the 200 to 250 million that you're putting in as a buffer? And then secondly, No, it doesn't.

No, John. As we described, the 250 is a scenario which really goes beyond to what we see today. It means that there would be 20 to 25% actual containment to the industry also affecting bucker. We do not believe that with our position of our cogen plant for the grid stability that it would hit us, but we just made the number in order to also give you a hint what magnitude would be expected.

Okay, thanks. And then could I just ask, obviously the mitigating exercise, so the mitigating points that you'd make if gas was curtailed. Do you expect that to increase your cost base as well and is that captured in the number?

No, it wouldn't increase our cost necessarily. Mitigating measures are mainly running our steam production on other fuels, which is basically oil and right now oil is even at a lower price than gas if you take it by a megawatt hour. But it would also move in such a scenario you could expect also oil prices going up as a substitute fuel. But on the other hand, there's not so much additional demand if you consider the overall oil market that this should have a, yeah, I mean, there's a moderating effect because not everything can go from gas to oil.

Okay, thank you.

The next question is from Andreas Heiner of CISO. Your line is now open.

Yeah, the first question is on silicon in the first place. Thanks for the promising guidance for this segment. Usually, we always underestimate this, and this sounds not really promising. Thanks for that. Looking into the silicones on the sales bridge you have, if I add the volume impact in the first and second quarter on this level, that's just $100 million, and the price increase is $1 billion, and that's probably not much different for silicone, so that volume is not the main driver, but prices. And here, specifically the specialties you mentioned as being a driver for earnings increases. As they have increased that much, is it possible that if you see a softening, then this volume impact, again, it was not the driver, that the price effect reverses and that you see a normalization in these specialty margins as well? Or is that too negative for you on this? And second, for the silicon only on Q3, if I look on the prices, we can follow every week. And having in mind what the U.S. dollar did, being so strong, you will see a quite tremendous increase in polysilicon prices from Q2 to Q3. Is what you expect as electricity price increase what you have anyhow hedged really that high, that that will all offset of this price and FX increase, or is that some caution you have put in there for, let's say, the last months of prices you might not see from today's perspective. These were my two questions.

I go first for the silicones, and then I'll start with photos again. Chris might want to add something. We see our especially pricing firm into the quarter, so And we will do everything, as we have increased prices successfully, to hold them. And until there's really an ease on the demand side and also an ease on the input side, we want to defend that position. In our guidance, we have assumed two things. first half of the year had the benefit of trading raw material effects. These go away into the codes. And so this will not be repeated in the second half. And then second, yes, we have assumed a slower fourth quarter. And although we are 85% specialties, and this is where we focus on, we have a 15% business which might get affected also by lower pricing. So it's a combination of volume and price, but definitely we would continue to defend our specialty margins. For policy again, I think similar question. Again, here the trading effect helped the first half. We now see sequentially higher costs. a little bit on silicon metal, but also on electricity, even including our hedging. And then we have some open volume. We are not entirely hedged. This will come in at higher prices. And here also, again, we have assumed some moderation in the fourth quarter. And depending on the view, everyone can have an opinion on that. If it goes straight and if it even increases further, I mean, you could come to higher numbers. But right now, I mean, we see a strong supply-demand. We don't see any signs of change. So if you want to have that view that it goes in a straight line, feel free to do it.

Thanks.

There's not much more to add from my side, Andreas. So coming right to your question, do we think it will completely offset? No, we don't see that at the moment. And that's the reason why we have the guidance where it is 50-700 to 850 because of less trailing effect and higher raw materials per second.

Just take a little bit of a deduction from the 440 that we had in the first time here for the trailing effect. And then if, I mean, you are at... At a similar level in the second half, if you go to the upper end of the guidance, you have the benefit of potentially higher prices, but also you have higher input costs. And I think that's how those numbers make sense.

Makes sense. Thanks.

The next question is from Markus Meyer of Baader Bank. Your line is now open.

Good afternoon, gentlemen. And also two questions on polysilicon and one on biosolutions. On polysilicon, you also mentioned in the press release that the semi-grade polysilicon, there have been price increases. I know there are mainly long-term contracts, but for the contracts which have been renewed, was the price increase similar than for the PV polysilicon? and also what should they expect then, how this delayed effect of price increases should be, is this then something that we should expect the polysilicon, semi-grade polysilicon prices to have the same price level in, or have catched up the price level in 2023, compared to the solar grid that was the first question. And my second question is more a long-term question, also on the semi part of polysilicon. I saw an article and basically a research article from the MIT and also the University of Houston who are asking it as a competitive product for polysilicon for the semi industry. This is something which varies through long-term as the semi part should grow further in the portfolio. And then my last question would be on buyer solutions. Here you mentioned the former customer not servicing their contractual obligations. In this respect, I wanted to ask, have you already received the payment of COVAX or is this still outstanding?

Michael, I start with the first one on your questions around simming pricing for our policy. Fundamentally, this is a different business. This is a specialty business which we focus on highest quality standards, and that's why we also have in this business long-term contracts also with firm pricing. Nevertheless, we see significantly higher prices um because uh also in this area we are sharing cost inflation with our customers um and we are also with a new contract that come in because we're increasing in volume we just go at a higher price and for if we have very limited additional volume that we can uh um yeah supply to our customers we can set at a higher price but it is by far not the same dynamic as the solar market. So for that question, I mean, you should not try to mimic the semi-business with the solar e-business right now. We are in that business for very good reasons. Every second ship in the world runs on VAKA products. We are investing there also to the benefit of our customers. but we are not tracing the solar PV market as the reference for our semiconductors.

Okay, then, Markus, I would go for the second question. You asked for competing technologies for semiconductor, right?

Yeah, exactly.

Actually, the answer is pretty similar if you would have asked for PV. I mean, yes, we definitely look at these technologies and what they bring to the market. But I think both PV, solar, and semiconductor is relying today so much on the technology based on silicon, hydropure silicon, that all new applications, whatever it will be in PV, we talked, I think, last time also about periscopes or thin film, these will be niche applications. And they will not replace the main technology, which is based on silicon. And I think we heard about these technologies, what you're referring to, which might lead to some benefits, e.g. in the automotive sector, I think. But for me, it will only be an addition. And also keep in mind how much capacities there are already there in the market for these existing capacities. I mean, there are billions and billions invested in these capacities, and you cannot just only switch them. And they have very efficient production processes and supply chains. So for us, silicon will be the industry workforce for the next decades or maybe even more than decades or century to come. Your third question was on BioSolutions. If the customer not playing with the rules and not paying the contracts, As you know, we don't disclose name of customers or suppliers unless we both sides agree on publishing something on that. So I cannot disclose the name here, but I can tell you it was a substantial contract that is involved here.

Okay, thank you so much. The last question. This customer is not yet in Chapter 11 or any kind of where you then expect not to get finally the money you deserve. Is this correct?

So we don't expect to get money this year, but we are working hard on also the process of arbitration. And we think that it might be settled then in the beginning of next year or middle of next year.

Okay, perfect. Thank you.

The next question is from Charlie Webb of Morgan Stanley. Your line is now open.

Brilliant. Afternoon, everyone. Thank you for taking my questions. I know we're running up against time. Maybe just two quick ones. So first, just off on polymers, you obviously note some signs of weakening demand in Europe and in China, some destocking from customers. Can you just kind of provide a little bit of color kind of where you're seeing that um and and what you know is there any pressure on on pricing so you put through lots of surcharges and done a fantastic job recovering you know very sharp raw material inflation just wondering if there's any kind of you know kind of reversal of that as your customers look to destock or do you still see a you know still a pretty supportive environment even with a bit of destocking um and then just seconds on on silicon metal um obviously kind of going into q3 we saw a kind of very tight situation in China with kind of power availability issues for the Chinese producers. And I know we've obviously had capacity closures also here in Europe, given where the costs sit in Spain and some off-boarding, I think, in France as well. So any kind of sense on whether there's a risk that we get a similar situation in silicon metal kind of heading into the winter period in China and how we should think about that for possible further inflation availability of silicon metal into the end of the year, start of next year.

Charlie, on polymers, as we mentioned, we see a slowdown in order entry from some customers, especially in Europe and China. And as this business is linked to construction, I think it's obvious that there's a bit of uncertainty in construction right now, but there's also overstocking from our customers apparently they tried to correct and it is construction and the coatings industry. But there is no pricing discussion. We are successful in rolling the input inflation to our customers and we are firm on that.

Charlie, on the second question, on the silicon metal, do we see a shortage going at the end of the year I think I mean in general you know it's based on the most abundant or second most abundant element on the planet so I don't think from that perspective there shouldn't be there shouldn't be a shortage the main driver is more electricity but you also mentioned this we don't see signs currently that there should be a shortage of power and I think you specifically referred to China so From that perspective, we do not see running into a shortage of silicon metal at the end of the year.

No, I guess more the question is last year, we saw kind of extreme moves in the silicon metal price. We obviously had some concern around availability or procurement into Q4 didn't end up materializing, right? It was fine. Capacity ramped up a bit more. And I know there were obviously CO2 targets and other things on a local basis that kind of led to some of that. But I'm just trying to say, is there any sense that we get a similar kind of a replay again this year? And I guess the only difference this time around is, you know, maybe some of the other capacities are out, you know, or multiple in the West, and that could lead to a more tricky situation. But yeah, that was more the kind of direction of the question.

Yeah, of course, very good question. Would the same thing repeat again this year? So far, we do not see any signs of that. And And keep in mind, I think the power volatility last year in China was mainly driven more by a regulatory act of some provincial governments. And we have no sign that this will repeat this year. But of course, I cannot speak for the Chinese provinces. But we don't see that at the moment.

Okay. That's helpful. Okay. Thank you.

You're welcome.

The next question is from JD Padilla of Onsuit Research. Your line is now open again.

Yes. Oh, thank you for allowing me to follow up. It's really on polysilicon. And it's a bit of a philosophical question, really. But I mean, you guys have 80 kT capacity, or rather 65 in solar in the Western world. And your biggest customer is China, which you're shipping around 50 kT annually. You know, if Europe and the U.S. actually become serious on reshoring and you're encouraged to keep these capacities in the Western world, how concerned are your Chinese customers that, you know, N-Type, which is the next generation product, which you, Tongwei, and Daku are probably the only ones that can manufacture right now. They're difficult to sort of get hands-on for the next three years. And in the same light, how much incoming are you getting from your big way for customers to actually think about expansions and you know talk about good old days of pre-payments so just because there's a lot of news flow around this team in asia right now so just wanted to check your views on this well i mean you you're talking on the um what he started our talk with on on repower europe and also solar initiatives in the us and the topic of reshoring and and

My statement was that I think we will see something on that. We believe this could also be a positive opportunity for us. Our message always has been we are on the ground already with the capacities that you just mentioned. Do we need to expand our capacities? Well, I think we have also been very clear on that. We will consider expanding our capacities if there is good business case behind it. And that means there are attractive conditions, especially on power and on raw material, and also attractive on a contractual basis so that we would be able to have a good margin and cover our costs going forward. And that's also what we tell our customers all over the world.

So should I understand or should we understand that from the customer side there's a lot of demand because even you know likes of OCI which are smaller players and on the upper end of the cost curve are increasing capacity whereas you guys are on an overall basis not so should we understand that from the customer side you have a lot of demand but you really are waiting for support from you know getting attractive power price to actually make that decision to invest more in polysilicon well it's both it's both it's the customer it's customer pull

and the right frame conditions that we would need. And that could also, as you mentioned, include some prepayments. And I can tell you that we have really weekly calls of people that want to buy material from us. But again, we are there. We are happy to talk about contracts. We wait for the good combination of having a good contract and the good frame conditions for even considering expansion of our capacities.

Thank you. And just one small final follow-up. In Q2, there was a lot of logistics issues with regards to shipments from Germany to China on polysilicon. Imports were down. Do you expect a rebound in Q3 and Q4? Or actually, you did not see what the Silicon Association in China was sort of suggesting, where imports actually on a country level were down?

had challenges in logistics and our teams have done, made everything possible. And there's a little bit of a rush over the month end, but I think I would not imply any impact on the import statistics from our side. So we are sold out. Our inventory is at zero. and we ship everything with all the challenges to our customers.

Thanks a lot for the opportunity.

If there are no further questions, I am back for the conclusion.

Thank you for joining us today. Our next public conference call is scheduled for October 28th, so in three months. don't hesitate to contact the AR department if you have further questions. Thank you.

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