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 2019 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 53 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 communications 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/amortization and impairments, right-of-use assets and financial liabilities in connection with lease accounting, 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 negative operating result due to a decline in operating performance of €170.0 million. Wacker Chemie AG posted a net loss of €-33.0 million at year-end, down €236.3 million from the prior-year level.

Sales fell from €3.87 billion to €3.78 billion, a decrease of 2 percent. Compared with the prior year, sales in each of the divisions were either at the same level or lower. WACKER SILICONES’ sales were on par with the previous year at €1.84 billion (2018: €1.88 billion). WACKER POLYMERS posted a slight increase in sales to €805.6 million (2018: €802.1 million). WACKER BIOSOLUTIONS achieved sales of €152.5 million, almost equivalent to the prior-year figure of €153.0 million. WACKER POLYSILICON’s sales contracted by 5 percent to €783.1 million (2018: €825.0 million), with higher volumes not fully compensating for lower prices.

Cost of materials also included procurement costs for contract manufacturing of polysilicon by Wacker Polysilicon North America L.L.C. The latter resumed production in 2019 after the incident that took place in 2017. The cost of materials decreased by €17.5 million in 2019 to €2.07 billion (2018: €2.09 billion), mainly due to lower procurement prices and reduced volumes for strategic raw materials. On average, prices for ethylene, methanol and vinyl acetate monomer were somewhat cheaper than in 2018. Prices for silicon metal, another raw material, were also lower after reaching a high in the prior year. Energy costs, on the other hand, were slightly higher. Overall, the material-to-assets ratio was higher at 54.4 percent (2018: 52.5 percent) due to the decline in operating performance.

Personnel expenses rose 9 percent to €989.7 million (2018: €908.2 million). The reasons for this rise were collective bargaining agreements and non-recurring expenses to secure the future financing of the pension fund (Pensionskasse der Wacker Chemie VVaG). The decline in the variable compensation component had a contrary effect. As of December 31, 2019, Wacker Chemie AG had 10,093 employees (Dec. 31, 2018: 10,033). The employee-expense ratio rose to 26.0 percent (2018: 22.9 percent).

Depreciation/amortization and impairments decreased again, falling to €224.7 million (2018: €238.9 million), a decline of 6 percent.

The other operating result (other operating income less other operating expenses) increased by €48.8 million to €-575.0 million (2018: €-623.8 million). This was primarily due to special income from insurance compensation for the damage caused by the incident at the Charleston, Tennessee (USA) site in 2017. 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 2019. The foreign currency result declined by €7.9 million to €-13.0 million (2018: €-5.1 million).

The operating result was €-56.7 million (2018: €114.3 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 €107.6 million was higher than the prior-year figure of €66.6 million. The increase was primarily attributable to higher earnings at the German subsidiary Wacker Biotech GmbH and to Siltronic AG’s substantially higher dividend payment. In the previous year, the result from investments in subsidiaries, joint ventures and associates was influenced by non-recurring effects from impairment-loss reversals totaling €176.7 million on the carrying amounts recognized for 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.

The net interest result declined to €-121.8 million (2018: €-75.8 million). It included not only higher interest expenses of €93.8 million (2018: €84.0 million) from pension obligations, but also subsequent reimbursement of subsidiaries. As the loan to the subsidiary Wacker Chemical Corp., Adrian, Michigan (USA), was repaid in full, interest income was also lower year over year.

The income tax item was impacted by the loss the company posted in the year under review. Wacker Chemie AG – including those of its German subsidiaries with which it has profit-and-loss transfer agreements – recognized tax income of €39.3 million (2018: €-72.9 million).

The fiscal year ended with a net loss of €-33.0 million. Retained profit for 2019 – calculated as the profit carried forward from the previous year less €124.2 million in dividends paid – totaled €1.32 billion (2018: €1.48 billion).

Net Assets and Financial Position of Wacker Chemie AG Pursuant to the German Commercial Code

Wacker Chemie AG’s total assets increased 3 percent year over year to €5.48 billion (Dec. 31, 2018: €5.34 billion). The individual balance-sheet items did not develop uniformly.

Fixed assets were virtually unchanged year over year, amounting to €3.71 billion (Dec. 31, 2018: €3.71 billion). Property, plant and equipment was slightly lower year over year, as depreciation and impairments in the amount of €218.0 million (Dec. 31, 2018: €231.9 million) exceeded investment spending of €208.3 million (Dec. 31, 2018: €213.8 million). Financial assets grew slightly, from €2.69 billion to €2.70 billion, due to the capital increase for the subsidiary Wacker Chemicals Korea Inc. and the acquisition of a 25-percent stake in UK battery specialist Nexeon Limited. The full repayment of noncurrent fund assets in the year under review had a contrary effect. Overall, fixed assets accounted for 68 percent of total assets, compared with 69 percent in the prior year.

Inventories decreased slightly year over year, coming in at €606.7 million (Dec. 31, 2018: €624.3 million). This decline of 3 percent was due, on the one hand, to lower raw-material costs and, on the other, to a drop in selling prices, especially at WACKER POLYSILICON. In addition, trade receivables declined 8 percent, amounting to €365.5 million as of the reporting date (Dec. 31, 2018: €397.2 million).

Other receivables and other assets grew 17 percent to reach €350.2 million as of the reporting date (Dec. 31, 2018: €300.2 million). They included receivables from affiliated companies in the amount of €271.4 million (Dec. 31, 2018: €189.6 million). The increase resulted chiefly from short-term financing in the amount of €95 million for the subsidiary Wacker Chemicals Norway AS, Holla, Hemne, Norway.

As of December 31, 2019, Wacker Chemie AG held €107.7 million in fixed-term deposits with maturities of over three months (Dec. 31, 2018: €40.7 million). Wacker Chemie AG’s bank deposits amounted to €339.4 million as of December 31, 2019 (Dec. 31, 2018: €266.5 million).

Equity came to €2.73 billion as of the reporting date (Dec. 31, 2018: €2.89 billion), yielding an equity ratio of 49.8 percent (Dec. 31, 2018: 54.0 percent). At Wacker Chemie AG’s annual shareholders’ meeting, a resolution was passed to distribute a dividend of €124.2 million from the retained profit for 2018. The remaining retained profit of €1,357.9 million was carried forward. As of December 31, 2019, retained profit totaled €1,324.9 million and mainly comprised the current net result of €-33.0 million for 2019 and the non-distributed profit carried forward from the preceding year.

Provisions for pensions and similar obligations rose by €91.3 million year over year to €912.9 million (Dec. 31, 2018: €821.6 million). Other provisions – primarily comprising those for taxes, personnel and environmental protection – decreased in 2019 and amounted to €326.3 million (Dec. 31, 2018: €458.2 million). This was due, above all, to the decline of €132.3 million in tax provisions and provisions for personnel. In particular, provisions for variable-compensation components fell substantially. Provisions accounted for 23 percent of total equity and liabilities (Dec. 31, 2018: 24 percent).

As of the reporting date, financial liabilities amounted to €1,061.1 million (Dec. 31, 2018: €634.1 million), up 67 percent. Bank loans amounted to €770.3 million (Dec. 31, 2018: €583.9 million). Liabilities due to affiliated companies grew by €239.4 million to €286.0 million as of the reporting date (Dec. 31, 2018: €46.6 million). The overall share of financial liabilities in total equity and liabilities increased to 20 percent (Dec. 31, 2018: 12 percent).

Trade payables decreased by €56.1 million year over year to €212.6 million (Dec. 31, 2018: €268.7 million). As of the reporting date, other liabilities amounted to €218.3 million (Dec. 31, 2018: €251.9 million). This decrease was largely due to the decline in advance payments received under polysilicon contracts.

Deferred income came to €18.7 million as of the reporting date (Dec. 31, 2018: €21.6 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 decreased year over year, falling by €32.9 million to €96.9 million (2018: €129.8 million).

The cash outflow for investing activities came to €298.0 million and included investments in property, plant and equipment and additions to the portfolio of fixed-term deposits. In addition, financing of the expansion of production at the subsidiary Wacker Chemicals Korea Inc., Seoul, was finalized by means of a capital increase via an intermediate holding company. Full repayment of the WMM Universal-Fonds deposits had a contrary effect. In the prior year, the cash outflow for investing activities was considerably higher at €662.7 million, mainly due to changes in financing for the subsidiary Wacker Polysilicon North America L.L.C. As a result of these factors, net cash flow – defined as the sum of cash flow from operating activities and cash flow from long-term investing activities (before fixed-term deposits) – improved substantially in the year under review, coming in at €-139.0 million (2018: €-767.7 million).

Cash flow from financing activities was once again clearly positive at €273.9 million (2018: €582.9 million). A key influencing factor in fiscal 2019 was the receipt of funds from US subsidiaries under the cash-pooling program in place. In addition, bank loans of €186.4 million were raised on balance in 2019 (2018: €285.9 million). The dividend paid in 2019 led to a cash outflow of €-124.2 million. The main change in the prior year was the repayment of an intra-Group loan by the subsidiary Wacker Polysilicon North America L.L.C.

Liquidity – defined as the sum of the securities in current assets and of cash on hand and bank deposits – amounted to €447.1 million as of December 31, 2019. In the prior year, liquidity amounted to €313.1 million and also included WMM Universal-Fonds securities. The balance of liquidity and liabilities to financial institutions resulted in net financial debt of €-323.2 million (2018: €-270.8 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 2020, we anticipate a euro exchange rate of US$1.15. 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. We expect Wacker Chemie AG to post a higher loss than last year. At present, it is not possible to reliably predict the impact of the fast-spreading coronavirus on global economic trends.

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.