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 2020 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 has its headquarters 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 company 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 the company’s key stakeholders, especially with 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 influenced by the effects of the coronavirus pandemic. Amid a decline in sales of 5 percent, the operating result was on par with the previous year. The financial result was substantially lower due to reduced dividend income. At year-end, Wacker Chemie AG posted a net loss of €-101.5 million. That was €68.5 million less than a year earlier.

Sales decreased from €3.78 billion to €3.58 billion, a drop of 5 percent. This contraction was largely due to the economic impact of the coronavirus pandemic. Sales were lower across almost all divisions. At WACKER SILICONES, sales of €1.70 billion were down 8 percent (2019: €1.84 billion). WACKER POLYMERS’ sales totaled €780.1 million (2019: €805.6 million), a 3 percent decline. Sales at WACKER BIOSOLUTIONS fell €6.9 million to €145.6 million (2019: €152.5 million). On the other hand, WACKER POLYSILICON posted slightly higher sales of €794.2 million (2019: €783.1 million).

The cost of materials decreased by €250.5 million in 2020 to €1.82 billion (2019: €2.07 billion), mainly due to lower procurement prices and to reduced volumes for commodities and strategic raw materials. In 2020, Wacker Chemie AG benefited from lower prices for ethylene, methanol and vinyl acetate monomer. Prices for silicon metal, another raw material, also trended downward at times. Energy costs were also slightly lower. Overall, the material-to-sales ratio decreased to 51.3 percent (2019: 54.4 percent).

Personnel expenses increased 8 percent to €1,067.5 million (2019: €989.7 million). This rise stems from collective bargaining agreements and from higher variable-compensation components that will be paid out in 2021. Expenses for pension agreements concluded as part of the Shape the Future restructuring program were also higher. As in the prior year, personnel expenses included non-recurring expenses to secure the future financing of the pension fund (Pensionskasse der Wacker Chemie VVaG). As of December 31, 2020, Wacker Chemie AG had 9,823 employees (Dec. 31, 2019: 10,093). The employee-expense ratio rose to 30.1 percent (2019: 26.0 percent).

Depreciation and amortization decreased again, falling to €169.6 million (2019: €224.7 million), a drop of 25 percent.

The other operating result (other operating income less other operating expenses) improved by €35.7 million to €-539.3 million (2019: €-575.0 million). That was mainly due to the reduction in other operating expenses, achieved through cost savings. On the other hand, restructuring charges of €48.9 million were posted in connection with the Shape the Future project. The prior-year figure had contained income of €112.5 million in insurance compensation for damage incurred following the incident at the Charleston site (USA) 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 other contractor work were lower in 2020. The foreign currency result rose by €40.1 million to €27.1 million (2019: €-13.0 million).

The operating result was €-49.5 million (2019: €-56.7 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 €63.8 million was below the prior-year figure of €107.6 million. In 2020, dividend payments from subsidiaries decreased markedly. Dividend income from the investment in Siltronic AG was also lower.

The net interest result improved to €-92.4 million (2019: €-121.8 million), reflecting a year-over-year decline in discount rates for pension obligations. Interest expenses for pensions declined accordingly, to €85.4 million (2019: €93.8 million). The prior year’s interest expenses had also included reimbursements to subsidiaries.

The income tax item was impacted by the loss posted in the reporting year. Wacker Chemie AG – including those German subsidiaries with which it has profit-and-loss transfer agreements – recognized tax income of €8.2 million in the reporting year. This income consisted mainly of refunds for previous years. In the prior year, the company had recognized tax income of €39.3 million.

The fiscal year ended with a net loss of €-101.5 million. Retained profit for 2020 – adjusted for the loss carried forward from a year earlier and the €24.8 million in dividend payments – totaled €1.20 billion (2019: €1.32 billion).

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

Wacker Chemie AG’s total assets increased 10 percent year over year to €6.04 billion (Dec. 31, 2019: €5.48 billion). The individual balance-sheet items did not develop uniformly.

At €3.65 billion, fixed assets for 2020 were lower than the year before (2019: €3.71 billion). Property, plant and equipment was also down slightly year over year. Depreciation and amortization of €164.0 million (Dec. 31, 2019: €218.0 million) exceeded investment spending of €155.3 million (Dec. 31, 2019: €208.3 million). Financial assets also decreased, from €2.70 billion to €2.67 billion. This decline was due to the scheduled repayment of a loan issued to Dow Siloxanes (Zhangjiagang), Co. Ltd., China. Overall, fixed assets accounted for 61 percent of total assets, compared with 68 percent in the prior year.

Inventories decreased year over year. They amounted to €562.6 million (Dec. 31, 2019: €606.7 million), down 7 percent. This decline was due both to lower raw-material costs and to increased volumes, especially at WACKER POLYSILICON. Trade receivables were also lower year over year, falling 5 percent to €346.8 million as of the reporting date (Dec. 31, 2019: €365.5 million).

Other receivables and other assets amounted to €322.5 million as of the reporting date (Dec. 31, 2019: €350.2 million), down 8 percent. They included receivables from affiliated companies in the amount of €246.8 million (Dec. 31, 2019: €271.4 million).

As of December 31, 2020, Wacker Chemie AG held €680.6 million in securities and fixed-term deposits with maturities of over three months (Dec. 31, 2019: €107.7 million). Wacker Chemie AG’s bank deposits amounted to €463.4 million as of December 31, 2020 (Dec. 31, 2019: €339.4 million).

Equity came to €2.60 billion as of the reporting date (Dec. 31, 2019: €2.73 billion), yielding an equity ratio of 43.2 percent (Dec. 31, 2019: 49.8 percent). At Wacker Chemie AG’s annual shareholders’ meeting, a resolution was passed to distribute a dividend of €24.8 million from the retained profit for 2019. The remaining retained profit of €1,300.1 million was carried forward. As of December 31, 2020, retained profit totaled €1,198.6 million and mainly comprised the current net result of €-101.5 million for 2020 and the non-distributed profit carried forward from the preceding year.

Provisions for pensions and similar obligations rose €67.1 million year over year to €980.0 million (Dec. 31, 2019: €912.9 million). Other provisions – primarily comprising those for personnel, taxes and environmental protection – also increased in 2020, amounting to €473.0 million (Dec. 31, 2019: €326.3 million). This was due, above all, to the rise of €149.8 million in provisions for personnel. A provision of €48.0 million was recognized in connection with the Shape the Future program. The phased early retirement agreements offered under this program resulted in provisions for top-ups in the amount of €23.9 million in 2020. Provisions accounted for 24 percent of total equity and liabilities (Dec. 31, 2019: 23 percent).

As of the reporting date, financial liabilities were €1,507.3 million (Dec. 31, 2019: €1,061.1 million), up 42 percent. Bank loans amounted to €1,057.6 million (Dec. 31, 2019: €770.3 million). Liabilities due to affiliated companies grew by €158.4 million to €444.4 million as of the reporting date (Dec. 31, 2019: €286.0 million). The overall share of financial liabilities in total equity and liabilities increased to 25 percent (Dec. 31, 2019: 19 percent).

Trade payables grew €51.6 million year over year to €264.2 million (Dec. 31, 2019: €212.6 million). As of the reporting date, other liabilities amounted to €189.1 million (Dec. 31, 2019: €218.3 million). The decline in liabilities due to affiliated companies was the main factor in this decrease. They fell €46.6 million to €50.2 million (Dec. 31, 2019: €96.8 million).

Deferred income came to €17.5 million as of the reporting date (Dec. 31, 2019: €18.7 million). It mainly comprised a payment by Siltronic AG to Wacker Chemie AG for the transfer of employees.

Cash flow from operating activities increased to €351.9 million (2019: €96.9 million), lifted primarily by cost savings and a reduction in the cost of materials. The trend in working capital also improved cash flow from operating activities.

Investment spending on property, plant and equipment was substantially lower in 2020. Thus, net cash flow – defined as the sum of cash flow from operating activities and cash flow from long-term investing activities (excluding securities and fixed-term deposits) – improved in the reporting year, rising to €222.8 million (2019: €-139.0 million). Free funds were invested in securities and fixed-term deposits, causing the cash outflow for investing activities to rise to €703.2 million (2019: €298.0 million). Cash flow from investing activities also included the repayment of a loan issued to Dow Siloxanes (Zhangjiagang), Co. Ltd., China.

Cash inflows from financing activities amounted to €475.3 million (2019: €273.9 million). In addition to funds received from US subsidiaries on the basis of existing cash-pooling arrangements, bank loans of €287.2 million were raised on balance in 2020 (2019: €186.4 million). The dividend paid for 2019 led to a cash outflow of €-24.8 million.

Liquidity – defined as the sum of the securities in current assets and of cash on hand and bank deposits – amounted to €1,144.0 million as of December 31, 2020, and was higher mainly because of the increase in securities and fixed-term deposits. A year earlier, liquidity had amounted to €447.1 million. The balance of liquidity and liabilities to financial institutions resulted in net financial receivables of €86.4 million. A year earlier, the company had net financial debt of €-323.2 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 holdings is affected in particular by the risks specified in the Risk Management Report. Through our subsidiaries and investments, 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 and energy costs, personnel expenses and exchange rates. For 2021, we anticipate a euro exchange rate of US$ 1.20. The expectations for Wacker Chemie AG’s business performance in the year ahead are essentially the same as those for the WACKER Group, which are explained in full in the Group’s Outlook section.

At present, it is not possible to reliably predict the future effects of the coronavirus on economic growth. We currently assume that sales will edge up year over year. For Wacker Chemie AG, we expect net income to be slightly positive before accounting for potential income from the sale of our stake in Siltronic.

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.