As expected Siltronic started into a muted H1 2019

Siltronic AG (MDAX/TecDAX: WAF) recorded an expected muted H1 2019. Demand for wafers declined over the course of the first half of the year leading to lower sales and earnings. Sales and earnings also declined quarter-on-quarter.

"Following a very successful 2017 and a record 2018, demand for wafers was significantly weaker than expected in H1 2019. The main reasons for this development were the general global economic slowdown, geopolitical uncertainties and ongoing inventory corrections in the value chain of our customers," said Dr. Christoph von Plotho, CEO of Siltronic AG.

Sales decline due to lower wafer area sold

Due to the lower wafer area sold in H1 2019, sales declined by 3.3 percent or EUR 22.5 million to EUR 666.2 million compared to EUR 688.7 million in H1 2018. All wafer diameters were affected, but the decline in 300 mm wafers was rather moderate compared to the smaller diameters.

In addition to higher average selling prices compared to H1 2018, Siltronic's business also benefited from the continued strength of the US dollar against the euro, which accounts for the majority of Siltronic's sales. In H1 2019, the euro stood against the US dollar on average at 1.13. That is about 7 percent weaker compared with an average of 1.21 in H1 2018. However, the positive exchange rate effect of the US dollar could only partially compensate the reduction in wafer area sold.

Sales of EUR 311.8 million in Q2 2019 were EUR 42.6 million lower than in Q1 2019.

Cost of sales slightly down despite higher energy costs

Cost of sales fell only slightly in H1 2019 from EUR 411.9 million to EUR 409.3 million as the decline in costs for raw materials and supplies was largely offset by higher expenses for energy compared to H1 2018.

Quarter-on-quarter, cost of sales fell by 5 percent. This was mainly due to lower personnel, raw materials’ and supplies’ costs.

Gross profit of EUR 256.9 million in H1 2019 was 7.2 percent down compared to H1 2018 (EUR 276.8 million). The gross margin declined from 40.2 percent to 38.6 percent.

Gross profit fell from EUR 144.5 million to EUR 112.4 million quarter-on-quarter, a decline of EUR 32.1 million or 22.2 percent

Slight increase in selling, R&D and general administration expenses

Selling, research and development (R&D) as well as general administration expenses amounted to EUR 65.1 million in H1 2019. This corresponds to 9.8 percent of sales. Compared to H1 2018, there was a slight increase of EUR 0.6 million.

Effects from currency hedges impacted H1 2019

In H1 2019, net expenses from exchange rate effects amounted to EUR 15.1 million, with expenses in Q2 2019 of EUR 6.9 million being significantly lower than in Q1 2019 (EUR 8.2 million)

Weaker demand reduced EBITDA and EBITDA margin

Due to the declining wafer area sold and higher energy costs, EBITDA of EUR 227.2 million was achieved in H1 2019 after EUR 268.3 million in H1 2018. The EBITDA margin fell from 39.0 percent to 34.1 percent.

EBIT declined from EUR 220.7 million in H1 2018 to EUR 178.0 million in H1 2019. The EBIT margin was 26.7 percent in H1 2019, compared with 32.0 percent in H1 2018. In addition to the weak start into 2019 and the rise in energy costs, expected higher depreciation for investments also contributed to this.

The decline in the EBITDA margin from Q1 to Q2 2019 was mitigated by lower cost of sales and lower negative currency effects.

Profit of EUR 156 million in H1 2019

A profit for the period of EUR 156.1 million was generated in H1 2019. This corresponds to a decline of 13.3 percent compared with H1 2018 (EUR 180.0 million). Earnings per share fell accordingly from EUR 5.66 to EUR 4.66.

In Q2 2019, profit for the period amounted to EUR 68.5 million compared to EUR 87.6 million in Q1. Earnings per share in Q2 2019 were EUR 1.98 compared to EUR 2.68 in Q1 2019.

Strong net cash flow and high investments

Capital expenditure including intangible assets amounted to EUR 177.9 million in H1 2019 and mainly related to the planned capacity expansions, the new pulling hall in Singapore and the further automation of production. Payments for capital expenditure including intangible assets amounted to EUR 162.0 million.

The cash flow from operating activities includes a return of EUR 33.0 million of customer prepayments. No new prepayments from customers were received in H1 2019.

Due to the high capital expenditure, net cash flow was EUR 81.2 million in H1 2019, compared to EUR 179.5 million in H1 2018. Net cash flow in Q2 2019 was EUR 0.4 million compared to EUR 80.8 million in Q1 2019. Net cash flow in the second quarter included a payment of EUR 40.3 million from an insurance company as compensation for the take-over of long-term environmental risks.

Equity ratio down to 43.4 percent due to lower profit and dividend payment

Equity fell to EUR 803.7 million as of June 30, 2019 down from EUR 915.7 million as of December 31, 2018. The EUR 112.0 million decrease in equity is attributable to the half-year profit of EUR 156.1 million, less the dividend payment of EUR 150.0 million and the interest-related change in pension obligations of EUR 128.8 million.

The pension provision in Germany was discounted at 1.29 percent as of June 30, 2019 compared to 1.98 percent as of December 31, 2018. In the USA, the interest rate fell from 4.08 percent to 3.37 percent.

Net financial assets lower due to dividend payment

Despite the dividend payment of EUR 150.0 million to Siltronic AG shareholders, net financial assets decreased by only EUR 99.2 million.

Full year 2019 remains challenging

In view of the economic and geopolitical uncertainties as well as the current demand situation, Siltronic expects sales in Q3 2019 to decrease further. However, the company confirms the guidance for 2019, which was adjusted in June.

For full year 2019, sales are expected to be around 10 to 15 percent below the previous year's level. The EBITDA margin should be between 30 and 35 percent. EBIT is expected to be significantly lower than in the previous year. Siltronic now expects a tax rate of 10 to 15 percent for 2019. Net cash flow will be clearly positive, but approximately EUR 180 million lower than in 2018. It will rise significantly in 2020.

"We are not satisfied with the business development in the first half of 2019. Despite the current market weakness, we are convinced though that the underlying megatrends such as digitization, electro-mobility, big data and artificial intelligence are intact and will lead to stronger demand for wafers again in the future. However, we cannot currently determine with certainty when this will happen," said Dr. Christoph von Plotho, CEO of Siltronic AG.