WACKER CHEMIE is luckier than most chemical makers these days. The Munich-based firm is a big producer of polysilicon, a key component of photovoltaic solar cells. And in today's economy, solar energy is one of the few businesses that are growing.
At Wacker's recent annual-results press conference, company executives described how they are trying to capitalize on that growth while dealing with weakness in other divisions that are more exposed to the current economic tides.
At the conference, Wacker Chief Executive Officer Rudolf Staudigl described 2008 as a year of two halves. The company posted new records for both sales and net income. Sales volumes rose substantially in the first half of the year, and prices were also higher. But by the fall, Staudigl said, "the global economic crisis greatly intensified the usual fourth-quarter seasonal downturn."
Sales for the year were $6.3 billion, up 14% from 2007. Half of the growth, Staudigl said, came from the polymer dispersions business that Wacker acquired during the year from Air Products & Chemicals; the other half was organic growth. Net earnings for the year were $644 million, up 4%.
The star of the company was its polysilicon business, where sales zoomed up 81%. "In 2008, our engineers managed to rapidly complete new, additional capacity," Staudigl said, bringing an expansion in Burghausen, Germany, onstream six months ahead of schedule. With that addition, Wacker produced 11,900 metric tons of polysilicon in 2008, 40% more than in 2007. "Thanks to this accelerated capacity growth and, above all, vibrant solar-sector demand, polysilicon volumes soared," he said.
Marcus Diebel, who follows Wacker's stock for investment firm J.P. Morgan, expects solar-sector demand to continue to be strong. In a new research report, he notes that the Chinese Ministry of Finance has announced a substantial subsidy for approved solar projects. Although Diebel cautions that there are still questions about the subsidy's fine print, "We believe this news would be significantly positive for Wacker's polysilicon division," he writes. J.P. Morgan expects the division to contribute 80% of Wacker's pretax profits this year.
Even with the rosy outlook for polysilicon, Wacker has gone into a cautious mode, Staudigl said at the conference. Performance in other businesses last year was mixed. The firm saw declines in fine chemicals and at its Siltronic division, which supplies the semiconductor industry with silicon wafers. Thanks to the Air Products acquisition, its polymer business showed 37.1% growth. Sales of silicones rose 3.5%.
Seeing no imminent upturn, the company intends to reduce personnel expenses in 2009 by 15%, primarily through reductions in temporary and contract workers. "We don't want to reduce jobs," Staudigl insisted, "just employment costs."
And the company is working to adjust output to weaker demand. Siltronic, for example, has had day- and weeklong shutdowns at individual sites and has canceled shifts.
The polymer division stopped making vinyl acetate in Burghausen for two weeks, and several plants that make dispersible powders used in adhesives and grouts are idle or are running at reduced capacity. Start-up of a new polymer dispersion unit in Nanjing, China, has been delayed from this spring to the middle of the year. Siloxane and pyrogenic silica production by the company's silicone division was cut by as much as 50% in late 2008.
J.P. Morgan projects Wacker's capital expenditures to drop to about $1.18 billion this year, from $1.32 billion in 2008, as the company tightens spending. In fact, said Auguste Willems, a Wacker board member, investment approval is being given only to "key strategic projects."
Right now, this means polysilicon. For example, the company is building a $1.1 billion polysilicon plant at its site in Nünchritz, near Dresden, and is spending nearly $150 million to enlarge a plant currently under construction in Burghausen. When both plants are fully in operation, Staudigl said, "our annual polysilicon capacity will rise from today's 15,000 metric tons to 35,500." The company recently bought land in Tennessee for a planned $1 billion U.S. polysilicon investment.
Some of Wacker's polysilicon output goes to Wacker Schott Solar, a joint venture established in 2007 with Schott Solar, based in Jena, Germany. WSS converts polysilicon blocks into wafers used by manufacturers of photovoltaic cells.
Schott Solar's participation in the venture builds on the specialty glass manufacturing expertise of parent company Schott. For example, Schott supplies glass for the lenses made by Carl Zeiss, which still has facilities in the historic city in eastern Germany.
At its inception, WSS took over Schott Solar facilities in Jena and Alzenau, near Frankfurt. In April 2008, it added a new facility in Jena. The addition was the first in a roughly $540 million investment package across the two sites. Another wafer plant that will have triple the capacity of the plant finished last year is under construction in Jena and is due onstream late this year, said Patrick Markschlä;ger, a managing director at WSS.
Wacker took reporters to the Jena site to show off the massive construction project there. Executives were coy about discussing quantities of wafers produced, preferring to talk about the amount of power they enable.
According to Axel Schmidt, another managing director, at full capacity in 2012, the venture's annual wafer output will enable 1 gigawatt of electricity—about the output of a nuclear power plant—up from 120 MW of capacity last year. "This will make the joint venture one of the world's largest solar-wafer manufacturers," Schmidt claimed.
WITH SOLAR APPLICATIONS providing solid support, Wacker can afford to maintain divisions that are currently going through more trying conditions. Case in point is the company's fine chemicals business, which showed no profit in the fourth quarter of 2008.
Board member Willems conceded that 2008 was a low point for the business, which makes chemicals for small-molecule drugs, as well as protein-based biologics. "In 2007, we had started to restructure the chemicals part," he said. The result was a decline in sales from $164 million in 2007 to $144 million in 2008. But in 2008, he emphasized, both parts were profitable.
"In a portfolio, you need stars, but you also need babies," Willems said. "Years ago, polysilicons were the baby. We think fine chemicals is in this category now."
Wacker got into the biologics business in 2005 when it acquired ProThera, a producer of microbial pharmaceutical proteins that was spun off from the government-owned Hans Knöll Institute, in Jena. Wacker's intentions at that time were clear: It wanted to become a significant contract manufacturer of therapeutic proteins, complementing its capabilities in small molecules.
The field of biologics has proven to be a troubled one for a clutch of chemical companies that jumped in—and subsequently limped out of—the sector. Industry consultant Peter Pollak ticks off Cambrex, Dow Chemical, Avecia, DSM, Siegfried, and WuXi AppTec as being among the departed.
In contrast, Wacker is fully committed to both biologics and small molecules, Willems maintained. For example, it is planning investments that will double capacity for protein production, as well as increasing capacity for cyclodextrins by 50%.
Wacker is not investing in completely new areas, Willems emphasized. Nor does it have grandiose plans for its fine chemicals business. "We want to grow as we go along," he said. "But there is no reason not to maintain investments here. We didn't invest in this business 10 years ago just because it was the fashion."