Management Report of Wacker Chemie AG

(Additional Information as per the German Commercial Code)

The management report of Wacker Chemie AG and the Group management report for fiscal 2017 are combined in accordance with Section 315 (5) of the German Commercial Code (HGB) in connection with Section 298 (2) HGB. The annual financial statements of Wacker Chemie AG, prepared in accordance with HGB, and the combined management report are published simultaneously in the the electronic version of Germany’s Federal Gazette (Elektronischer Bundesanzeiger).

As required by German law, the combined management report includes a separate section covering all mandatory reporting elements pertaining to Wacker Chemie AG. Further to our report on the WACKER Group, we explain developments at Wacker Chemie AG.

Wacker Chemie AG is the parent company of the WACKER Group and is headquartered in Munich, Germany. The parent company operates through four business divisions – WACKER SILICONES, WACKER POLYMERS, WACKER BIOSOLUTIONS and WACKER POLYSILICON – which generate a substantial portion of the Group’s sales. Wacker Chemie AG’s directly and indirectly held subsidiaries and investments located in Germany and abroad have a strong influence on its business. The assets and liabilities of Wacker-Chemie Dritte Venture GmbH, Munich, were merged into Wacker Chemie AG effective January 1, 2017. Wacker-Chemie Dritte Venture GmbH held a 49.5-percent stake in Siltronic AG on January 1, 2017. From late January through early February 2017, Wacker Chemie AG sold 6 percent of its stake in Siltronic AG. In March 2017, it reduced its stake by a further 21 percent to 30.8 percent by means of a bookbuilding offering to institutional investors. Wacker Chemie AG has a total of 51 subsidiaries, joint ventures and associated companies, and also provides the Group with corporate functions. Wacker Chemie AG’s Executive Board exercises key leadership functions for the Group as a whole, which include determining the Group’s strategy, allocating resources (such as funds for investment), and bearing responsibility for managing executive personnel and corporate finances. Wacker Chemie AG’s Executive Board also oversees communication with important target groups, especially capital markets and shareholders.

Key performance indicators used in the management decision-making process are applied in all of the Group’s business divisions. Corporate goals for the divisions are defined and reported on for the Group as a whole. Even though Wacker Chemie AG is an independent entity, no separate key performance indicators are defined or reported for it. For more information, please refer to the respective details provided on the WACKER Group as a whole. The general business conditions of Wacker Chemie AG principally correspond to those of the Group.

The annual financial statements of Wacker Chemie AG were prepared in accordance with the German Commercial Code (HGB) and the German Stock Corporation Act (AktG). These statements differ substantially from the IFRS figures in relation to fixed assets, depreciation and amortization, provisions for pensions, and deferred taxes. As regards EBITDA, there are only slight differences between IFRS and HGB figures.

Wacker Chemie AG’s overall earnings performance and operating result rose significantly. In addition, income before taxes was supported by strong income from investments in joint ventures and associates, which was further enhanced by sales of shareholdings. As a result, net income improved, rising from €121.4 million to €358.0 million.

Wacker Chemie AG’s sales rose by 6 percent to €3.86 billion (2016: €3.65 billion). All of the business divisions contributed toward this growth. WACKER SILICONES lifted its sales to €1.62 billion (2016: €1.50 billion), a rise of 8 percent. WACKER POLYMERS’ sales increased by 6 percent, reaching €775.1 million (2016: €731.4 million). WACKER BIOSOLUTIONS grew its sales to €139.4 million (2016: €138.7 million), a rise of 1 percent. WACKER POLYSILICON lifted its sales by 3 percent to €1.13 billion (2016: €1.10 billion). Operating performance rose by €272.3 million to €3.93 billion.

In 2017, the cost of materials climbed to €1.96 billion (2016: €1.79 billion), with expenses rising for nearly all strategic raw materials procured. Higher prices and volumes for ethylene, methanol and vinyl acetate monomer were the main reasons for this increase. The price of silicon metal was roughly on par with the prior year. Energy costs rose slightly. In September 2017, there was a hydrogen explosion at the Charleston site of our subsidiary Wacker Polysilicon North America L.L.C. Since then, production has been on hold there. As the loss of production is insured, no overall increase in expenses due to contract manufacturing is anticipated for Wacker Chemie AG. For the most part, future insurance-compensation payments have not yet been factored into polysilicon procurement costs. Overall, the material-to-sales ratio increased to 49.9 percent (2016: 48.9 percent).

Personnel expenses rose 3 percent to €901.7 million (2016: €872.4 million). The reasons for this rise were collective-bargaining agreements and higher variable compensation to be paid out in 2018. Wacker Chemie AG had 9,740 employees as of December 31, 2017 (Dec. 31, 2016: 9,539). At 23.0 percent, the employee-expense ratio remained at about the same level year over year (2016: 23.9 percent).

Depreciation and amortization decreased again, to €269.2 million (2016: €296.5 million), a decline of 9 percent.

Other operating income fell by €94.6 million to €135.8 million (2016: €230.4 million). The main reasons for this drop were the decline of €31.1 million in exchange-rate gains and the income of €20.3 million from advance payments retained and damages received for the termination of contracts with polysilicon customers in 2016.

Other operating expenses include – in addition to exchange-rate losses – selling expenses, maintenance, other contractor work, rents, servicing costs, R&D costs and costs assumed on behalf of subsidiaries. Selling expenses, in particular, were higher in 2017 due to sales growth. Exchange-rate losses were lower, decreasing by €31.1 million year over year.

The operating result was €219.3 million, up 22 percent versus the previous year (2016: €180.0 million).

The result from investments in joint ventures and associates rose to €291.4 million (2016: €27.1 million), chiefly due to the sale of shares in Siltronic AG. The gain associated with the sale of shares amounted to €258.1 million. Income from profit-and-loss transfer agreements and dividend payments reached €43.3 million, up €5.3 million year over year (2016: €38.0 million).

The net interest result declined, to € –36.9 million (2016: €2.5 million). The main negative factor in this decrease was interest expenses for pension obligations at €63.9 million. A year earlier, interest expenses had amounted to €13.7 million, upon first-time use of the ten-year average interest rate in line with the Bundesbank’s interest regulation. Interest income from receivables owed by subsidiaries also declined due to the lower average interest-rate level. Interest income from fixed-term deposits in US dollars, on the other hand, had a contrary effect.

Income tax expenses amounted to €113.8 million (2016: €87.0 million) and comprised current taxes paid by Wacker Chemie AG as well as taxes paid for those domestic subsidiaries with which it has profit-and-loss transfer agreements.

Net income came to €358.0 million. Retained profit for 2017 – calculated as the profit carried forward from the previous year less €99.4 million in dividends paid – totaled €1.50 billion (2016: €1.24 billion).

Wacker Chemie AG’s total assets were slightly lower year over year, amounting to €5.07 billion (Dec. 31, 2016: €5.15 billion). That was 2 percent less than in the previous year. The individual balance-sheet items did not develop uniformly.

In 2017, fixed assets decreased from €3.86 billion to €3.58 billion. Property, plant and equipment was lower year over year, as depreciation in the amount of €263.4 million (Dec. 31, 2016: €291.9 million) exceeded investment spending of €159.1 million (Dec. 31, 2016: €141.7 million). Financial assets fell from €2.72 billion to €2.53 billion. Most of this decline was due to the merger with Wacker-Chemie Dritte Venture GmbH, Munich, effective January 1, 2017, and to the sale of shares in Siltronic AG in January and March 2017. Noncurrent fund assets amounted to €104.8 million as of the reporting date (Dec. 31, 2016: €106.4 million). Overall, fixed assets accounted for 71 percent of total assets, compared with 75 percent in the prior year.

The level of inventories rose year over year to €481.9 million (Dec. 31, 2016: €424.8 million), an increase of 13 percent. This was mainly attributable to high plant-utilization rates amid higher raw-material prices. On the other hand, trade receivables fell slightly, from €414.0 million to €393.2 million.

Other receivables and other assets declined 34 percent to €238.8 million as of the reporting date (Dec. 31, 2016: €361.7 million). They included significantly lower receivables of €141.0 million (Dec. 31, 2016: €296.6 million) from affiliated companies, in particular from the subsidiary Wacker Polysilicon North America L.L.C.

As of December 31, 2017, Wacker Chemie AG held €155.0 million in fixed-term deposits with maturities of over three months. Wacker Chemie AG’s bank deposits amounted to €216.4 million as of December 31, 2017 (Dec. 31, 2016: €88.7 million).

Equity was €2.91 billion as of the reporting date (Dec. 31, 2016: €2.65 billion), corresponding to an equity ratio of 57.4 percent (Dec. 31, 2016: 51.4 percent). At Wacker Chemie AG’s annual shareholders’ meeting, a resolution was passed to distribute €99.4 million in retained profit from 2016 as dividends. The remaining retained profit of €1,144.4 million was carried forward. Retained profit as of December 31, 2017 totaled €1,502.4 million and primarily comprised the current net income of €358.0 million for 2017 and the non-distributed profit carried forward from the preceding year.

Provisions for pensions and similar obligations rose by €56.7 million year over year to €762.5 million (Dec. 31, 2016: €705.8 million). Other provisions, primarily comprising provisions for taxes, personnel and environmental protection, also increased in 2017 and amounted to €439.0 million (Dec. 31, 2016: €413.5 million). Tax- and personnel-related provisions were the main reason for this rise of €25.5 million. Overall, provisions accounted for 24 percent (Dec. 31, 2016: 22 percent) of total equity and liabilities.

As of the reporting date, financial liabilities were €496.6 million (Dec. 31, 2016: €647.0 million), down 23 percent. This was chiefly due to the scheduled repayment of bank loans. On the reporting date, bank loans raised amounted to €298.0 million (Dec. 31, 2016: €545.2 million). Liabilities to affiliated companies climbed by €98.9 million to €197.2 million in connection with contract manufacturing of polysilicon (Dec. 31, 2016: €98.3 million). Overall, the share of financial liabilities in total equity and liabilities declined to 10 percent (Dec. 31, 2016: 13 percent).

Trade payables fell by €48.0 million year over year to €136.2 million (Dec. 31, 2016: €184.2 million). As of the reporting date, other liabilities amounted to €289.4 million (Dec. 31, 2016: €516.5 million). Advance payments received for polysilicon deliveries decreased, to €170.5 million as of the reporting date (Dec. 31, 2016: €242.0 million).

Cash flow from operating activities decreased year over year, from €520.7 million to €106.1 million, primarily due to the payment of liabilities. In addition, advance payments received for polysilicon deliveries were down €71.5 million as a result of deliveries made.

Wacker Chemie AG generated a cash inflow of €42.6 million from its investing activities, compared with a cash outflow of € –223.8 million a year earlier. The sale of shares in Siltronic AG had a positive impact, generating a cash inflow of €438.2 million in 2017. On the other hand, cash payments for investment spending rose to €177.9 million (2016: €137.0 million). In addition, capital at Wacker Chemicals Norway AS, Holla, and Wacker Chemicals Korea Inc., Seoul, was raised in 2017 via an intermediate holding company. Cash not immediately needed was invested in fixed-term deposits with maturities of over three months, leading to a cash outflow of €155.0 million.

Net cash flow – defined as the sum of cash flow from operating activities excluding the change in advance payments received and cash flow from long-term investing activities (before fixed-term deposits) – fell in the year under review, coming in at €375.2 million (2016: €537.9 million).

Cash flow from financing activities totaled € –17.9 million (2016: € –326.3 million). As part of our intra-Group financing activities, subsidiaries returned funds to Wacker Chemie AG. In 2017, available funds were used, on balance, to repay liabilities to banks in the amount of €241.9 million (2016: €215.9 million). The dividend for fiscal 2017 led to a cash outflow of € –99.4 million.

Liquidity – defined as the sum of securities in current assets and in the fund WMM-Universal-Fonds as well as cash on hand and demand deposits – increased significantly, from €195.1 million to €476.2 million as of December 31, 2017. As a result, the balance of liquidity and liabilities to financial institutions improved substantially (with net financial receivables amounting to €178.2 million, after net financial debt of € –350.1 million in 2016).

Risks and Opportunities

Wacker Chemie AG’s business performance is subject to the same risks and opportunities as the WACKER Group. Wacker Chemie AG’s exposure to the risks associated with its subsidiaries and investments depends on the size of its stakes in the respective entities. The measurement of joint ventures and associates is affected in particular by the risks specified in the Risk Management Report. Through our subsidiaries and holdings, we could face impairments arising from legal or contractual contingencies (especially financing). These contingencies are explained in the Notes to the financial statements of Wacker Chemie AG. As the parent company of the WACKER Group, Wacker Chemie AG is integrated in the groupwide risk management system. For further details, see the Financial Instruments section of this Annual Report. The description of the internal control system for Wacker Chemie AG, as mandated by Section 289 (5) of the German Commercial Code (HGB), can be found in the section on the Internal Control System (ICS) and the Internal Control System for Accounting.

Outlook

WACKER’s main planning assumptions relate to raw-material costs, energy costs, personnel expenses and exchange rates. For 2018, we anticipate a euro exchange rate of US$1.25. The expectations for Wacker Chemie AG’s business performance in the coming year are essentially the same as those for the WACKER Group, which are explained in full in the Group’s Outlook section.

We assume that sales will rise slightly year over year, and we expect Wacker Chemie AG to post a positive result for the period that will be below the level of 2017.

Publication

The annual financial statements of Wacker Chemie AG have been submitted to the publisher of the the electronic version of Germany’s Federal Gazette (Elektronischer Bundesanzeiger) and can be viewed on the website of the German register of companies. KPMG AG Wirtschaftsprüfungsgesellschaft, Munich, audited the annual financial statements and issued an unqualified audit certificate for them. The statement of financial position and the statement of income are the main documents published there. Wacker Chemie AG’s annual financial statements are published together with those of the WACKER Group. The annual financial statements can be requested from Wacker Chemie AG, Hanns-Seidel-Platz 4, 81737 Munich, Germany. They can also be accessed on the internet at: www.wacker.com