The WACKER Group's Prospects

The Group’s research and development work remains focused on key strategic projects. In 2013, WACKER is planning to allocate 25 percent (2012: 21 percent) of its R&D budget to such projects. The R&D budget planned for 2013 amounts to about €175 million. Our R&D priorities remain the highly promising fields of energy, catalysis, biotechnology, construction applications and semiconductors. We are devoting particular attention to energy storage and renewable energy generation.

In 2014, WACKER will partner with the Technical University of Berlin in organizing an international science convention. The 17th International Symposium on Silicon Chemistry (ISOS XVII) and the jointly organized 7th European Silicon Days in Berlin are expected to attract as many as 600 researchers from silicon and silicone chemistry. During the convention, WACKER will present the WACKER Silicone Award for outstanding achievements in this area of research for the 14th time.

Over the next two years, WACKER will bring additional production capacity on stream. The Nanjing site will start up a new WACKER POLYMERS’ plant for VAE dispersions in 2013 (annual capacity: 60,000 metric tons), and the WACKER BIOSOLUTIONS’ facility for PVAc solid resins will commence operation at the end of 2013 (annual capacity 20,000 metric tons). Once the Nanjing site has met the necessary requirements to qualify for food manufacturing, the old site in Wuxi will close. We will be stepping up existing production capacity for VAE dispersions at our American site in Calvert City by 30,000 metric tons.

At WACKER SILICONES, we are implementing smaller-scale projects and expansion measures for products such as silicone emulsions and vinyl polymers, with production expected to start over the next two years.

Due to the difficult solar-market situation, WACKER has extended the timeline for completing its production facilities in Tennessee. The site is now scheduled to start up in mid-2015, some 18 months later than originally planned.

We will press ahead with implementing the groupwide “Wacker Operating System” (WOS). Our aim is to realize further productivity gains by scrutinizing all the main productivity levers (raw-material and energy efficiency, capacities, and labor productivity). We will place the emphasis on key projects that have a high economic impact on costs and benefits.

Maintenance costs will remain at around €370 million in 2013, the same as the previous year.

Energy and raw-material procurement has an important bearing on WACKER’s profitability. In our case, energy and raw-material costs account for over one-third of the cost of goods sold. We expect to see some easing of raw-material costs in 2013. Our four key raw materials are subject to mixed price trends, even within individual regions. For silicon metal, prices are likely to continue their slight decline in 2013. We expect vinyl-acetate-monomer (VAM) prices to be a little lower in the Americas, but to edge up in Europe. Ethylene will cost slightly less, especially in the Americas. We anticipate price rises for methanol.

On the energy front, price movements are dominated by regulatory effects. Their influence is greater than any of the market fluctuations on power exchanges. Due to the increased levy on electricity consumers under Germany’s Renewable Energies Act (EEG), energy prices will rise in 2013 – even though electricity and gas prices are actually lower than in 2012. Energy costs for 2013 will be at the prior-year level.

Over the next two years, we do not anticipate any supply-side problems for raw materials or energy. The markets where we source our raw materials are sufficiently liquid for bottlenecks to be unlikely. We have largely secured the required volumes of our four main raw materials for 2013. A part of our 2013 energy requirements has been contractually secured, as well.

In our supplier contracts, we are focusing on greater flexibility, with a shift toward market-based price formulas and contractual escalator clauses covering purchase quantities. As a result, we can respond better, and in either direction, to strong market fluctuations. We will continue to work toward securing WACKER a broader-based portfolio of raw-material suppliers over the next two years. At the same time, we will keep an even closer and keener eye on the raw-material purchasing sources that are relevant to us, so that we can access new suppliers.

We have adopted the same approach for technical procurement. There, too, our aim is to systematically reduce our dependence on individual suppliers and to qualify new partners. Over the next two years, we will carry on expanding our global procurement network. We have two main priorities. For new projects in Asia, primarily China, we will systematically scout out suitable local suppliers for WACKER, according to a policy of “from the region and for the region.” At the same time, we will start to supply our production operations in the Americas and Europe with equipment from China, India and South Korea. To that end, we will also be improving our international procurement organization’s IT and communication networks. Areas of focus include the gradual internationalization of work on goods classes and regular information-sharing by the regional purchasing organizations.

On the logistics front, the creation of a link to Burghausen’s new public freight terminal (combined road/rail terminal) is an important development. As the operator, we are involved in its construction and the tendering process. Medium term, we will be adding a new freight gate to optimize the link to the combined road/rail terminal. At Nanjing and Zhangjiagang in China, we are adapting logistics infrastructures and processes to the growing needs of production lines. The master plans drawn up in recent years are now being successively implemented.

Over the next two years, we will be working on enhancing and expanding our sales and distribution network. We will steadily increase our share of e-business, so that this channel accounts for even more sales. WACKER’s calendar of events for 2013 features two key tradeshows: the European Coatings Show (ECS) in Nuremberg in March, followed by the Düsseldorf International Plastics Trade Fair (K 2013) in October. At the ECS, WACKER will showcase its latest products and solutions for applications in the paint, surface-coating, adhesive and construction industries. At K 2013, we will be presenting new silicone products for the automotive, electrical, medical, solar and plastics-processing sectors.

WACKER will adopt a conservative approach to hiring new employees. During 2013, restructuring at Siltronic will result in further job cuts in 150 mm wafer manufacturing. As previously practiced in 2012, the plan is to avoid involuntary layoffs. With a few exceptions, temporary employment contracts have not been extended beyond January 2013. Overall, we estimate that WACKER’s workforce will grow slightly in 2013 amid higher production volumes. We expect employee numbers to increase in 2014.

WACKER has set itself the goal of increasing the proportion of women in middle and senior management positions over the medium term. It is focusing on around 100 female employees who have the requisite potential for such tasks. We intend to extend the diverse flextime arrangements already in place by introducing a family care-time model in the next few years. Employees will be able to switch to part-time work schedules if they need to care for family members. For that period, their part-time salary will be topped up with a financial contribution from WACKER. This contribution is then effectively paid back in the form of working time after the care period. Under this model, employees will be able to cope better financially if they need to take time off to provide care.

In 2013, WACKER will launch another preventive healthcare project in partnership with the South German branch of the country’s statutory retirement plan (Deutsche Rentenversicherung Süd). The aim here is to promote the health of shift workers. During a healthy living week tailored specifically to this group of workers, participants will learn exercises designed to help them cope better with the pressures of shift work. The effectiveness of these measures will then be assessed six months later.

To enhance energy efficiency and reduce specific energy consumption (amount of energy per unit of net production output), the Executive Board has laid down energy targets for the Group. In doing so, we are also meeting a requirement for ISO 50001 certification. We already cut specific energy consumption by 22 percent between 2007 and 2012. A further reduction of 11 percent between 2013 and 2022 is now the target. Overall, by 2022, we will have brought our specific energy consumption down by one-third.

In 2012, we started to calculate our indirect greenhouse-gas emissions in accordance with Greenhouse Gas Protocol Scope 3. This covers all emissions generated along the entire supply chain.

During 2013, WACKER will include the Jincheon (South Korea) site in Group certification. German production sites are to be certified under OHSAS 18001 (occupational health) – and Wacker Chemie AG’s ISO 14001 (environmental protection) and OHSAS 18001 certificates are to be combined with those of Siltronic AG.

By 2015, we aim to have reduced our accident rate (the number of workplace accidents per million hours worked) to below 2.0, roughly halving it compared to 2010.

Under REACH legislation, we intend, by June 2013, to have sent the European Chemicals Agency (ECHA) 67 further dossiers on substances manufactured in quantities of between 100 and 1,000 metric tons annually.

European Chemicals Agency’s REACH Schedule: Deadlines for Submitting Dossiers

¹ New substances > 1 metric ton/year
² Phase-in substances > 1 metric ton/year
³ R50/53 substances: “highly toxic to aquatic organisms” and “may have long-term harmful effects in bodies of water”
⁴ CMR substances: carcinogenic, mutagenic, toxic to reproduction
⁵ Phase-in substances: predominantly old substances listed on the EINECS inventory (European Inventory of Existing Commercial Chemical Substances on the market before 1981)

In 2013, the sustainability management unit will finish installing a new platform for reporting key figures and use it on a regular basis for the first time. WACKER will furthermore publish its Sustainability Report for 2011/2012.

The main assumptions underlying WACKER’s plans relate to raw-material and energy costs, to personnel costs and to exchange rates. For 2013, we are planning on an exchange rate of US$1.35 and ¥120 to €1.

WACKER anticipates that volumes will increase at all divisions during 2013. In our planning assumptions, we expect silicon-wafer prices to be lower and polysilicon prices to remain at their Q4 2012 level. This is why we are forecasting Group sales at the prior-year level. Achieving this target will also depend on:

• The continued absence of trade barriers (punitive tariffs) between the main trading partners
• Semiconductor demand picking up in the second half of 2013

Economic uncertainties mean the actual performance of the WACKER Group and its divisions could depart from our assumptions, either positively or negatively.

From today’s perspective, the chemical divisions will see sales growth. In contrast, sales will decline at WACKER POLYSILICON and Siltronic. The greatest sales increase is expected in Asia. Compared with 2013, further sales growth is likely in 2014 – provided global economic expansion continues as predicted by the research institutes and there are no unforeseeable slumps in WACKER’s key regions and industries.

We anticipate that EBITDA for 2013 will fall short of the previous year’s level. The drop is primarily due to lower year-on-year polysilicon and silicon-wafer prices and to the assumption that there will be negative exchange-rate fluctuations between the euro and the dollar and between the euro and the yen. As for Group net income, we forecast slightly positive net income, with a year-on-year increase in depreciation and amortization, as well as a higher negative financial result.

We anticipate that the chemical divisions’ EBITDA will continue to rise compared to the prior year. WACKER POLYSILICON is expected to make a substantial contribution to EBITDA, though below the prior-year figure, based on our polysilicon-price estimates. From today’s viewpoint, we do not see any major improvement in EBITDA year on year at Siltronic.

At WACKER SILICONES, we anticipate higher 2013 sales, with no significant pressure from raw-material costs, though the price squeeze on standard products will remain. The division’s volume growth in percentage terms is likely to outstrip global GDP expansion. Growth will be generated mainly in Asia, where rising prosperity is prompting higher per-capita consumption of silicone products. Additionally, ever more stringent quality demands are accelerating the process of substituting simple products by value-added products that incorporate silicones. We expect personal-care products to grow at the fastest rate. Products for the electrical, electronics, medical-engineering and construction industries should also deliver increased sales. One strategic priority is to increase our business for higher-priced specialty products.

WACKER POLYMERS will stay on its growth path in 2013, amid slightly higher raw-material costs for ethylene and VAM. We have the production capacity to meet this growth – with capacities rising by 130,000 metric tons in 2013. We will be adding 30,000 metric tons of capacity at our American site in Calvert City, 40,000 metric tons at Ulsan (South Korea) and 60,000 metric tons at Nanjing. In the dispersions business, the main growth driver remains the shift away from styrene-butadiene toward VAE dispersions in the American packaging and carpet industries. In emerging economies, we expect to see further growth in construction applications, especially interior paints. The regions with the highest sales growth are likely to be China, India and the Americas. We anticipate only a slight sales improvement in Europe. We will continue to pursue market strategies tailored to individual regions in order to fully harness growth potential.

At WACKER BIOSOLUTIONS, we anticipate a further sales rise in 2013. With the start-up of the new production plant in Nanjing, we aim to expand our leading position for gumbase. The pharmaceutical/agricultural and food segments are likely to see improved sales, as well. Increased investment spending on innovations should improve the proportion of sales from new products in the medium term. We see the greatest growth opportunities in Asia, as before, and also in Germany.

In 2013, WACKER’s polysilicon business will remain difficult. The reasons are wide ranging. The consolidation process in the industry is not yet over, there is still overcapacity, the financial state of many customers is critical, and polysilicon prices remain low. Additionally, the market faces the burden of anti-dumping investigations by the European Union and the Chinese Ministry of Commerce. If both sides impose punitive tariffs, the global photovoltaic market could suffer. WACKER has already responded to this challenging situation. We have extended the schedule for completing the polysilicon site in Tennessee by 18 months – its start-up now planned for 2015. At Burghausen, short-time work was introduced in October 2012. In February 2013, we stopped short-time work there. To defend our cost leadership, we intend to launch an ambitious cost-cutting program designed to achieve another substantial reduction in polysilicon production costs. For 2013, we expect sales at WACKER POLYSILICON to be lower than a year earlier. The decline is partly due to the fact that sales from our salt business are now reported under “Other” and that product responsibility for pyrogenic silicas (HDK^®) has been transferred to WACKER SILICONES. These structural changes will reduce WACKER POLYSILICON’s total sales by some €100 million. We also expect sales from photovoltaic business to fall again. This is due to average polysilicon prices being lower than a year ago. Sales to semiconductor-industry customers will remain stable. Despite the difficult market situation, we are optimistic about the outlook for photovoltaics as an important energy source of the future. Photovoltaic systems have now reached a price level that will lead to further global-market growth. Overall, as the cost and quality leader, we expect to emerge from this consolidation process with renewed strength.

In the semiconductor sector, market researchers forecast growth, especially in the second half of 2013, although the year will get off to a sluggish start. We expect Siltronic’s sales to decline in 2013, amid persistent price pressures. Market growth will be driven mainly by 300 mm business. There will be moderate growth for 200 mm silicon wafers, There are no longer any financial burdens from the closure of Hikari and Portland. Overall, we anticipate slightly positive EBITDA in 2013.

WACKER started 2013 with a much higher debt level. Net financial liabilities will continue to rise throughout the year, to over €1 billion.

Net cash flow will remain negative, but a considerable year-on-year improvement is expected. Over the past years, we received advance payments from our polysilicon customers. Now, our deliveries to these customers are taking place. This, alone, will reduce our liquidity by about €200 million. By delaying the polysilicon-site start-up in Tennessee and by investing less, we are easing the burden on cash flow by a euro amount in the triple-digit-million range.

In 2013, IFRS 19 requires enterprises to report actuarial gains and losses as well as other changes in value immediately and fully in the other comprehensive income. This approach replaces the widely-used corridor method of not accounting for actuarial gains and losses immediately in the Income Statement. As a consequence, equity will decline appreciably upon first-time application of the new regulations.

WACKER’s policy on dividends is generally oriented toward distributing at least 25 percent of net income to shareholders, assuming the business situation allows this and the committees responsible agree.

Our financial policy remains in essence valid. Even if the debt level rises further in 2013, we are confident that we have a strong financial profile with a sound capital structure and healthy maturities for our debt. As of December 31, 2012, WACKER had some €1.63 billion in used and unused credit lines.