Management Report of Wacker Chemie AG

(Additional Information Pursuant to the German Commercial Code)

The management report of Wacker Chemie AG and the Group management report for 2018 are combined in accordance with Section 315 (5) in connection with Section 298 (2) of the German Commercial Code (HGB). The annual financial statements of Wacker Chemie AG (prepared in accordance with the German Commercial Code) and the combined management report are published simultaneously in the electronic version of Germany’s Federal Gazette.

The combined management report includes a separate section covering all reporting elements pertaining to Wacker Chemie AG that are required by law. 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. It has a total of 54 subsidiaries, joint ventures and associated companies, and also provides the Group with corporate functions. Wacker Chemie AG’s Executive Board exercises key management functions for the Group as a whole, which include determining the Group’s strategy, allocating resources (such as funds for investment spending), and bearing responsibility for managing executive personnel and corporate finances. Wacker Chemie AG’s Executive Board also oversees communication with important stakeholders, especially the capital markets and shareholders.

The key performance indicators used in corporate management are implemented groupwide in the business divisions. Corporate goals are defined and reported for the divisions on a groupwide basis. 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 for the WACKER Group as a whole. The general business conditions of Wacker Chemie AG are essentially the same as 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 Earnings Pursuant to the German Commercial Code

Wacker Chemie AG’s earnings were marked by a decline in the operating result. Although operating performance edged up year over year, the operating result decreased, mainly due to the higher cost of materials. The result from investments in subsidiaries, joint ventures and associates was affected by the write-up of shares in subsidiaries in China. Overall, net income decreased from €358.0 million to €203.3 million.

Wacker Chemie AG’s sales rose by a slight 0.3 percent to €3.87 billion (2017: €3.86 billion). WACKER SILICONES grew its sales by 16 percent to €1.88 billion (2017: €1.62 billion). WACKER POLYMERS lifted its sales by nearly 4 percent to €802.1 million (2017: €775.1 million). Sales decreased at WACKER POLYSILICON, falling 27 percent to €825.0 million (2017: €1.13 billion). WACKER BIOSOLUTIONS increased its sales to €153.0 million (2017: €139.4 million), a rise of 10 percent.

In 2018, the cost of materials climbed to €2.09 billion (2017: €1.96 billion), mainly due to higher procurement prices and volumes for strategic raw materials. The upward price trend continued for ethylene, methanol and vinyl acetate monomer. Silicon metal was markedly more expensive in 2018 and energy costs were also higher. Production resumed at the Charleston site of our subsidiary Wacker Polysilicon North America L. L. C. Due to contract manufacturing, the cost of ramping up the site’s production plants weighed on Wacker Chemie AG’s earnings in 2018. The loss of production is insured. Future insurance compensation payments have not yet been factored into polysilicon procurement costs. Overall, the material-to-sales ratio increased to 52.5 percent (2017: 49.9 percent).

At €908.2 million, personnel expenses were roughly on par with the previous year (€901.7 million). Wage increases due to collective-bargaining agreements will be almost offset by the lower variable compensation component due for payment in 2019. As of December 31, 2018, Wacker Chemie AG had 10,033 employees (Dec. 31, 2017: 9,740). At 22.9 percent, the labor-to-sales ratio was more or less unchanged (2017: 23.0 percent).

Depreciation and amortization decreased again, to €238.9 million (2017: €269.2 million). That was a decline of 11 percent.

The other operating result (other operating income less other operating expenses) fell €45.1 million to €-623.8 million (2017: €-578.7 million). Under other operating income, expiring reimbursements of expenses were offset by utilizing part of a compensatory payment made by Siltronic AG in 2014 for the transfer of employees to Wacker Chemie AG. Other operating expenses include not only exchange-rate losses, but also selling expenses, maintenance, other contractor work, rents, servicing costs, R&D costs and costs assumed on behalf of subsidiaries. In particular, expenses for maintenance and IT services were higher in 2018. The foreign currency result improved by €3.5 million to €-5.1 million (2017: €-8.6 million).

The operating result came in at €114.3 million, down from the previous year’s figure of €219.3 million.

The result from investments in subsidiaries, joint ventures and associates contained income from profit-and-loss transfer agreements and dividend payments. This income of €66.6 million was higher than the year-earlier figure of €43.3 million and, for the first time, included dividends from Siltronic AG. In 2018, the result from investments in subsidiaries, joint ventures and associates was influenced by impairment-loss reversals totaling €176.7 million on the carrying amounts of Dow Siloxane (Zhangjiagang) Holding Co. Private Ltd., Singapore, Wacker Chemicals Fumed Silica (Zhangjiagang) Holding Co. Ltd., Singapore, and Wacker Chemicals (China) Co. Ltd., Shanghai, China. This was due to the improved market situation and a modified transfer-price policy between WACKER’s Chinese companies and the two joint ventures. In the previous year, income from the disposal of shares in affiliated companies had come to €258.1 million, due to the sale of shares in Siltronic AG.

The net interest result declined further, to €-75.8 million (2017: €-36.9 million), mainly due to interest expenses of €84.0 million for pension obligations (2017: €63.9 million). In addition, a loan to the subsidiary Wacker Chemical Corp., Adrian, Michigan (USA), was repaid during the year, reducing interest income compared with the year before.

Income tax expenses amounted to €72.9 million (2017: €113.8 million). This item included not only the current taxes paid by Wacker Chemie AG, but also the tax expenses for those domestic subsidiaries with which it has profit-and-loss transfer agreements.

Net income came to €203.3 million. Retained profit for 2018 – calculated as the profit carried forward from the previous year less €223.6 million in dividends paid – totaled €1.48 billion (2017: €1.50 billion).

Net Assets and Financial Position of Wacker Chemie AG in Accordance with the German Commercial Code

Wacker Chemie AG’s total assets were 5 percent higher year over year, amounting to €5.34 billion (Dec. 31, 2017: €5.07 billion). The individual balance-sheet items did not develop uniformly.

In 2018, fixed assets increased from €3.58 billion to €3.71 billion. Property, plant and equipment was slightly lower year over year, as depreciation in the amount of €231.9 million (Dec. 31, 2017: €263.4 million) exceeded investment spending of €213.8 million (Dec. 31, 2017: €159.1 million). Financial assets grew from €2.53 billion to €2.69 billion as a result of impairment-loss reversals totaling €176.7 million on the carrying amounts of the investments in WACKER companies in China. A reduction in noncurrent fund assets had a contrary effect. As of the reporting date, these fund assets amounted to €5.9 million (Dec. 31, 2017: €104.8 million). Overall, fixed assets accounted for 69 percent of total assets, compared with 71 percent in the prior year.

The level of inventories rose markedly year over year, reaching €624.3 million (Dec. 31, 2017: €481.9 million). This increase of 30 percent was attributable to high plant utilization rates in combination with higher raw-material costs and strategic inventory build-up at WACKER POLYSILICON. Trade receivables, too, rose slightly, from €393.2 million to €397.2 million.

Other receivables and other assets grew by 26 percent to reach €300.2 million as of the closing date (Dec. 31, 2017: €238.8 million). They included receivables from affiliated companies in the amount of €189.6 million (Dec. 31, 2017: €141.0 million).

As of December 31, 2018, Wacker Chemie AG held €40.7 million in fixed-term deposits with maturities of over three months. Wacker Chemie AG’s bank deposits amounted to €266.5 million as of December 31, 2018 (Dec. 31, 2017: €216.4 million).

Equity came to €2.89 billion as of the reporting date (Dec. 31, 2017: €2.91 billion), yielding an equity ratio of 54.0 percent (Dec. 31, 2017: 57.4 percent). At Wacker Chemie AG’s annual shareholders’ meeting, a resolution was passed to distribute a dividend of €223.6 million from the retained profit for 2017. The remaining retained profit of €1,278.8 million was carried forward. As of December 31, 2018, retained profit totaled €1,482.1 million and primarily comprised the current net income of €203.3 million for 2018 and the non-distributed profit carried forward from the preceding year.

Provisions for pensions and similar obligations rose by €59.1 million year over year to €821.6 million (Dec. 31, 2017: €762.5 million). Other provisions – primarily comprising provisions for taxes, personnel and environmental protection – also increased in 2018 and amounted to €458.2 million (Dec. 31, 2017: €439.0 million). As provisions rose in the same proportion as the balance sheet total, they continued to account for 24 percent of total assets.

As of the reporting date, financial liabilities amounted to €634.1 million (Dec. 31, 2017: €496.6 million), up 28 percent. This increase was chiefly due to new bank loans raised, which amounted to €583.9 million as of the reporting date (Dec. 31, 2017: €298.0 million). Liabilities due to affiliated companies fell by €150.6 million to €46.6 million as of the reporting date (Dec. 31, 2017: €197.2 million). The overall share of financial liabilities in total equity and liabilities increased to 12 percent (Dec. 31, 2017: 10 percent).

Trade payables increased by €132.5 million year over year to €268.7 million (Dec. 31, 2017: €136.2 million). This rise was attributable to increased business volumes, higher investment spending, and the inverse effects of prepayments made in 2017. As of the reporting date, other liabilities amounted to €251.9 million (Dec. 31, 2017: €289.4 million). This decrease was primarily due to the decline in advance payments received under polysilicon contracts, which fell by €38.7 million to €131.8 million in 2018 (Dec. 31, 2017: €170.5 million).

Deferred income came to €21.6 million as of the reporting date (Dec. 31, 2017: €37.3 million) and mainly comprised a payment by Siltronic AG to Wacker Chemie AG for the transfer of employees. A portion of this item was reversed in 2018 when Siltronic AG ended its employee transfer program. The residual amount will be reversed over the remaining period of service of the transferred employees.

Cash flow from operating activities increased year over year, from €106.1 million to €129.8 million.

The cash outflow for investing activities came to €662.7 million. The majority of this figure went toward enhancing the equity base of US subsidiary Wacker Polysilicon North America L. L. C., which in turn used the funds to pay down a long-term loan from Wacker Chemie AG. Funds were also used (via an intermediate holding) to increase the capital base of the subsidiaries Wacker Chemicals Norway AS, Holla, and Wacker Chemicals Korea Inc., Seoul, for the purpose of expanding production capacity at the two sites. The reduction in fund assets (WMM Universal-Fonds) and in fixed-term deposits had a contrary effect. In the prior year, Wacker Chemie AG had generated a cash inflow of €42.6 million from its investing activities, the main component of which was €438.2 million from the sale of shares in Siltronic AG.

As a result of these factors, 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 substantially in the year under review, coming in at €-729.0 million (2017: €375.2 million).

Cash flow from financing activities, on the other hand, was clearly positive at €582.9 million (2017: €-17.9 million). The main change in 2018 was the repayment of an intra-Group loan by the subsidiary Wacker Polysilicon North America L. L. C. On balance, bank loans of €285.9 million were also raised in 2018, following the repayment of €241.9 million in bank liabilities a year earlier. The dividend paid in 2018 led to a cash outflow of €-223.6 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 – decreased significantly, from €476.2 million to €313.1 million as of December 31, 2018. The balance of liquidity and liabilities to financial institutions was thus €-270.8 million (2017: net financial receivables of €178.2 million).

Risks and Opportunities

Wacker Chemie AG’s business performance is subject to essentially 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.

Outlook

WACKER’s main planning assumptions relate to raw-material costs, energy costs, personnel expenses and exchange rates. For 2019, we anticipate a euro exchange rate of US$1.20. 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 profit for the period below the level of last year.

Publication

The annual financial statements of Wacker Chemie AG have been submitted to the publisher of the German Federal Gazette 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 statement of income are the main parts of the annual financial statements published in this Annual Report. 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: