REC Silicon ASA

Tore Torvund – President and Chief Executive Officer James May – Chief Financial Officer

Peter Hermanrud – Swedbank

Okay. Good morning everybody.

Welcome to the presentation for Q1 for REC Silicon. The agenda today will be that I will cover the numbers, some market updates.

I'll give you an update on the U.S. and China trade dispute.

James May, our CFO, will then do the numbers. And I will then give you an update on the expansion we are embarking on in China together with the Youser Group.

And at the end some guidance for Q2. The numbers, in our first quarter we had a revenue of $76 – no, $74.4 million.

We had an EBITDA of $24.8 million. We made about 5,210 metric tons of polysilicon.

On the FBR side we had a cash cost of $10.70. We sold 2,390 metric tons and we had an inventory build of 2,818 tonnes.

The solar grade declined by some 7.9%. On the silicon gas side we were at 736 tonnes, which was 6 metric tons above the guidance.

You will see that we had inventory build during this quarter. One main reason for this was that we had the strike or the slowdown of the West Coast ports in the U.S.

and had some issues concerning the export, both on the polysilicon side but also on the silane side. The last headline is that we now have formally made the decision to invest in a new plant in China together with the Youser Group.

When you look to the numbers here basically the EBITDA margin was 33%. But, as you will also understand, there was an inventory build during the period, so we had to write down some of the inventory towards the lower range of the polysilicon price, which has been about $15 to $18 a kg during this quarter.

I'm definitely very satisfied with the operations. We exceeded the FBR production.

I will come back to that in a little bit. The semiconductor production was 14% below guidance.

That's not – the fact that it was only that POs came in late so it will just be transferred to the second quarter. As you see, the FBR production is doing very well.

We have never produced as much FBR as we did this quarter, 4,513 tonnes. And the cash cost remains very stable around $10.70 this quarter, a very satisfactory number in terms of cash cost in our operations.

There is no doubt that the market out there is weak. Basically there is an oversupply of polysilicon compared to what is in the demand.

Our price dropped for Q1, quarter four to quarter one by 7.9%. As I said, one of the issues we had during the quarter was the fact that we had a slowdown in the port, West Coast of the U.S.

It's started in fact nine months ago, but basically from November until it was resolved in February we had issues to get our polysilicon out of the U.S. over the Pacific.

And concerning the silane side, in fact we had problems to both ship, but also get our containers back from our customers over in Asia. Also the price went down below a certain level and we decided that we would not sell on these levels.

So we then decided to build some inventory instead of continue to sell at these prices. On the silane side we delivered 736 metric tons.

It is just 6 or it is 6 metric tons above the guidance. The price remains stable within the silane market.

Our competitor now in Korea is back in operations. And we will see some slowdown in Q2 compared to what we planned for because, due to again this slowdown of the port, some of our customers chose to sign up with our competitor in the short term because they were uncertain that we were able to deliver silane in Q2.

So this is the product mix we have this quarter. And basically, you will see that the big chunk went into inventory.

And basically one of the reasons is also that we believe that the market will gradually be stronger so this will then generate more cash for the company in the second half of this year. If we then go a little bit through how we see the market, we have been working with Greentech Media to assess the market, the end market, within solar.

Because first of all we came up with the decision or we were approaching the decision to invest or not invest in China and we had to have a better view of the long-term market for PV. So we have been working closely with GTM to look into the market, both for 2015 but also on the longer term.

GTM came up with 54 gigawatts in 2015. There is four countries which count basically.

It is China, the US, Japan and Europe altogether. 43 gigawatts of these 54 gigawatts will be installed in these countries.

And as you will see, there is a gradual increase towards about 70 gigawatts in 2017 and GTM estimates 134 gigawatts in 2020. So there is an anticipated very strong growth in the PV market going forward.

If we look to the particular countries by itself, China is expected to be at 14 gigawatts. That's below the guidance from China, which is 17.8 gigawatts, but also remember that China disappointed in 2014 up to the very end, as most analysts believed it should be 14 gigawatts; it came in at 10.8 gigawatts.

So 17.8 gigawatts, which is the planned number for 2015, there is some skepticism concerning that number. In Japan, which is the second largest market this year, 10 gigawatts, mainly driven by the fact that still most of the nuclear facilities are out of operation.

Japan is believed to be somewhat smaller market in the long term. The US is a very solid market, 8 gigawatts this year, will increase to about 12 next year.

Uncertainty about the US will be beyond 2016 due to the fact the tax credit will expire by the end of 2016. And it is believed it will go down to 5 gigawatts in 2017.

While Europe has a consistent interesting growth. It will be at 11 gigawatts this year and will then gradually increase throughout this decade.

When we look to the supply, basically, as you will see, 2011, 2012, 2013 was relatively stable on the supply side. There is a lot of new supply coming on in 2014, 2015 and 2016.

These investments was or decision was made back in 2008, 2009, 2010. Now they come online.

So basically there is an increase up towards this year, about 300,000 metric tons, and it will be close to 360,000, 370,000 metric tons in 2018. Strong growth in 2015, 2016.

After these years, very low growth because it has been not made any new decisions lately for new polysilicon capacity. Also we have given you now our view on how much is made in China and you will see that the growth this particularly strong in China.

What happened was basically that when prices went up to about $22 a year ago a lot of the idle capacity came on where it decided to go on again. There is what we call tier-two capacity, which is on but still has a cash cost capacity – or cash cost around $35 in an environment where the price is now between $15 and $18.

If this capacity is going to be there long term, that's the main uncertainty. Also based upon what I have learned over the last two years, there is not very likely that there will be new investments in China based upon Siemens technology.

That's the old-fashioned technology is probably not going to be invested in anymore in China. So that's the main uncertainty about the growth of polysilicon long term out of China and that means basically availability of polysilicon on a global basis.

This is our chart where we plot the capacity compared to the cash cost. And, as you will see, what we call the marginal producers, mainly Chinese ones, do have a cash cost which is way above what is the market price as of today, while the marginal cost of the global demand should indicate that in the second half prices should be close to $35 a kg based upon economic terms.

Concerning the demand on the short term, this is a graph from IHS. Basically you see always a trend that there is more demand in the second half of the year than in the first half.

It's believed that there will be installed 26 gigawatts in the first half, in the second half 31 gigawatts. If that will be the case, that will be a good balance between the polysilicon available and the demand in the second half.

And that's why basically we have built inventory to take the advantage about this opportunity coming up in the second half. Let me then give you a short update on the trade war between the US and China.

Just to recall what we told last time, now the duty from importing solar panels to the US from China is under a 17% duty. This is a preliminary decision.

It will hopefully be final by the beginning of – end of June, beginning of July. But about 60% of the market now in the US are supplied by Chinese panels and they pay a 17% duty.

That will be – if there is a difference in the final decision, that will have to be changed, but now, as of today, they pay a duty of 17%. Concerning polysilicon produced in the US, it is a potential duty of 57%, which is coming up by the end of Process in Trade.

We are now operating under what we call bonded books. They are set to expire by the end of August.

And it might then be that we will have a 57% duty on our polysilicon. This will affect REC Silicon.

It will affect Hemlock and it will affect the new plant of Wacker, which is under start-up in Tennessee in the US. We are working together with Wacker and Hemlock to try to find a solution to this.

On the US side we have engaged politicians, our governors in the different states. And it's also now on the agenda when China and the US meet for meetings to prepare for the summit in Paris by the end of the year.

Solar is an important part of renewables. If they have – as you know, China and the US has an agreement to reduce their emissions.

So this will come up in a major meeting now in June and hopefully be found a solution to this. We are also working together with the solar panel makers to try to find a company-to-company solution to the duty into the US.

In China, our main partner in China, which is the Youser Group, and Youser Group is the 142nd largest company in China. It's a major company, more than 30,000 employees.

They have now engaged themselves within the Department of Commerce in China, called MOFCOM, to try to find a solution to REC Silicon. And the reason why is basically that they need to get REC to be very engaged in the JV in China.

As you know, this is to transfer the future technology of making polysilicon to China. Polysilicon is very important for China in the value chain for the solar panels.

So we are very engaged together with Youser towards MOFCOM to try and to find a solution to our particular problems for REC Silicon. And there was just recently a meeting where also MOFCOM has accepted to review our case in particular and then outside let’s say that’s the update on the trade.

James, would you like to take the financials?

Good morning, I’m James May. I'm the CFO of the Company and I'll be reviewing the first-quarter of 2015 financial results.

For the past several quarters our results, primarily the historical comparable periods, have included multiple segments, solar and wafer. Those segments were discontinued and re-classed as discontinued operations.

In this quarter we only have about $600,000 of expenses that's associated with the change in the valuation of the option contracts associated with the wafer bankruptcy. And it does not impact cash flows.

Our reporting has changed now so that we only report on one single segment and my comments from here forward will be to the company as a whole. During the first quarter our revenues were $74.4 million.

This represents a decline of about 41% compared to the prior quarter and can be very simply be attributed to lower volumes and lower prices. Primarily polysilicon was the largest contributor to the decline in revenues.

Here are the volumes. Sales volumes decreased by about 48% and, as Tore said, the prices decreased by about 7.9%.

These challenging market conditions were a result of the weak demand, delays in logistics caused by the West Coast port slowdown and the excess inventories that Tore described just a few moments ago. In addition, there was increasing competition to secure the limited quantities available on bonded books for imports into China and that also contributed to the reduction in price.

Because we anticipate that the market conditions moving forward during the second half of 2015 are going to improve, we elected to forgo some of the sales at low prices. While at our last earnings release at Q4 we anticipated an increase in inventory, that plus the market conditions combined and we grew our inventories by about 2,800 metric tons, and I'll describe that a little more when I get cash flows.

With silicon gas our sales volumes came in very near expectations at 736 metric tons. Represents a decline of about 13% compared to the prior quarter, but this is normal seasonality in addition to the delays caused by the port slowdown.

Pricing on silicon gases was broadly in line with what we saw during the last quarter. As Tore discussed, the FBR cash costs came in at $10.70 so that's $0.80 below our guidance of $11.50 from the fourth quarter.

The primary reason for this is we had contract shipments of MGS, our raw material, at last year’s prices so simply the quarter didn’t include the full impact. That we expect in 2015 of the price change.

In addition, our manufacturing volumes were higher. This quarter also represents the third consecutive quarter that we haven't had any planned or unplanned outages and our operations have been stable.

EBITDA for the quarter was $24.8 million. While this is a decrease of about 35% compared to the prior quarter, our EBITDA margin was 33%.

And that's a result of a higher mix of silane – silicon gas sales within our revenues in addition to the low-cost performance that we saw in the plants on the manufacturing side. During the quarter our cash decreased by about $43.5 million.

The largest or the two large contributors to this were the positive EBITDA of about $24.8 million and then investments in working capital of $48 million. Increased inventories accounted for $43 million of this $48 million and we've discussed that just in the past few slides.

Remember that that inventory will be sold in the normal course of business as we go forward. In addition, accounts receivable, while only representing a $1.6 million change, slow customer collections resulting from soft market conditions and excess inventories also contributed to the decrease in cash.

The collections were below expectations and contributed to the decline. Management of the company is very confident that we have the ability to go on and collect these accounts, and we're taking all actions necessary to accelerate the pace of collections.

This is the first quarter in quite some time that we've reported net cash outflows from operations. However, remember that this net cash outflow is a result of investment in working capital and that'll come back during future periods.

In addition, the company incurred $14.4 million of capital expenditures, a $3 million income tax payment and interest payments of $2 million. As a result, the Company ended up with about $52.9 million in cash at March 31.

In terms of our liquidity, nominal net debt decreased by $8 million during the quarter. This is solely due to the change in the valuation, the increase in the value of the dollar relative to the Norwegian krone during the quarter.

There were no underlying changes in our debt. The nominal net debt, which includes cash, increased by $36 million and the main contributor here was the decline in the cash balances that I just discussed on the last slide.

Positive cash flows from operations during future periods are expected to maintain our current liquidity position. And then I'd like to remind everybody that there are no debt maturities in 2015.

Our next debt maturities are the indemnification loan, NOK200 million, at the beginning of 2016, and then REC O2 for NOK235 million in May of 2016. Tore will now discuss the Company's expansion opportunities.

Okay. Thank you James.

Just to give you then the update on the JV, joint venture, we have with the Youser Group in China, we have now formally made the decision to invest together with the Youser Group. And as you remember we will have 49% and the Youser Group will have 51% of the ownership of this JV.

The detailed engineering has been finalized. We did it together with Fluor in Shanghai.

More than 200 people have been working now for nine months to prepare for this investment. The investment decision was made in the US.

We had a meeting together with our Chinese colleagues in Seattle on April 24, where we took the formal decision. We have already ordered long lead items and they will be delivered in mid 2016.

And also it has been recruited 57 now engineers, Chinese engineers, working for the JV, which will be in Moses Lake and Butte, for training starting in September and they should then be ready in September next year for commissioning of the plant. We have slightly changed the scope of the investment.

We are now going to make 19,000 metric tons of FBR, semiconductor grade FBR. We have reduced the Siemens from 1,000 – or 19,000 tonnes is an increase of 1,000 tonnes compared to what we planned for.

We have reduced the Siemens from 1,000 down to 300 metric ton this was based up on our market analysis about the demand for this high purity float zone. Float zone is mainly used in high speed trains and the very advanced technology, and we didn't see a demand of 1,000 tonnes so we have reduced that to 300 metric tons.

And we still keep the 500 metric tons of silane loading out of this plant. You will see that this is the detailed plant layout.

We have every, we have now everything on 3D CAD. Everything is ready to – about 250 requests for quotation is ready to be sent out when we made this decision.

It will be, just for – maybe not for here, facility administration area include about 900 rooms for people who're going to live at the plant because they are going to stay there and work and live in the plant. So we have to build also dormitories for all our employees on the site in Yulin.

86% of the equipment and the cost will be associated with Chinese companies. About 14% of the equipment will be bought outside China.

Basically it is what we call critical equipment, which will be supplied by vendors which is well-known to REC. This is to guarantee that we will have a smooth start up of the plant, but also to protect the intellectual property particular to the FBR.

It is not just important for REC but also for our partner in China. It has been a prerequisite that the most sensitive equipment should be sourced from vendors which can protect the IP so it is not easy for any of our competitors to then replicate our plant.

That has been one of the major discussions about this, but also for Youser Group it's very important. They have paid $200 million for the technology and they would like to protect it, so not other competitors will be able to use this technology.

On the timeline side we will be mechanical complete by the end of next year. Production will start end of Q2 in 2017 and we anticipate that we will make about 7,000 metric tons of granular in 2017 and then ramping up through 2018 and 2019.

The total investment is estimated to be $1.25 billion. If you look to compared to the capacity, that means that the capital invested per kilo produced will be around $65.

Remember this is post FBR and Siemens. It might seem high compared to numbers which is out there in the market.

My comment to that is basically that this is 86% cost from China. We have done a very thorough study and I have hard to understand that it is easy to make it much more at a low cost in China than what is made in this situation.

In this industry there is a lot of numbers out there you couldn’t trust all these numbers. I see it.

When you go through basically the numbers presented into Q2, our Q4, Q1 this year you will see that I would say numbers which has been announced doesn't correspond to what is basically reported out of this industry. So this is I think a correct number making investment in China and that's also the cost for additional capacity coming on in the future.

The cash cost estimated to be about $9 per kg. Then remember that we are somewhat below $11 in Moses Lake, so it's about $2 difference between the two.

Production, I said, 7,300 tonnes in 2017, 16,000 tonnes in 2018, and then fully ramped in 2020. This is the manpower to be necessary during construction phase.

We will be about 4,000 people on the site next year under the most heavy production period on this site. So that's the update on the – would also just say that all financing, all credit lines has been put in place.

It is guaranteed by Youser Group. There is no guarantee put forward from REC in terms of the investment, except for that we are going to pay our equity, which will then be paid in 2017 to maintain our 49% ownership.

For the guidance for Q2, we said last quarter that we were going to plan for an outage in Silicon 4 in Q2. We have decided to defer that outage to end of Q2.

So there is no outage planned. That means that the FBR production will be at 4,350 tonnes this quarter.

The cash cost, we guide approximately the same level we did for Q1. Probably you should not expect that we are $0.80 below also in Q2.

And the main reason for this is somewhat lower production because of the fact that, as I told, most of the reason why we guided somewhat higher was that the MGS cost increased. In Q1 we used the inventory from 2014.

Now in 2015 – in Q2 the inventory and the price of MGS will increase and that's why you have a slightly higher FBR cash cost in Q2. Silicon gas, 700 tonnes, somewhat lower than what was in our plan, as I said, due to that we lost some business opportunity due to the port slow down on the West Pacific.

According to our plan we will catch up in Q3 and Q4, so we will not make any change to the year, the guidance for the year, which was 3,700 metric ton. Semiconductor, 340 tonnes and total polysilicon production [indiscernible] metric ton.

Concerning the capital expenditure, still the same numbers, $64 million for expansion and $25 million for maintenance. That's not for Q2; that's for the total year of 2015.

So that's the presentation and is there any questions to James and myself? Thank you.

You need a mic.

Peter Hermanrud, Swedbank.

You guide on the FBR production and the total silicon production in Q2, but can you say something about what kind of sales do you expect to have? Do you expect to sell as much as you have or do you actually expect you will use inventories?

Let’s say – let’s say what we expects this quarter its not we’re going to sell what we make basically. The market is still weak, but we see some sign that the demand is picking up, but we are still – we are now in May so it will probably not be possible to – or we would not move our inventory because we think somewhat stronger market.

But our internal plans is about to sell what we make.

Just can you say something more about the sales composition in the quarter? Because you have this issue.

What's happening? How much are you selling to China and what is your sales potential there, and what are you doing to attract customers outside of China?

As you will see this is the average composition in 2014 and 55% was sold to China under what we call Process in Trade. This one has been reduced to 12% in Q1.

So silicon gas, Siemens AG, and the rest of the world remain approximately the same as we did so it is mainly China where we have not sold in this quarter. We have been able to keep our market share outside China, while in China it definitely has been a lot of inventory.

What we also see is basically that due to the trade dispute with Taiwan, as you remember, 17% duty to the US, it's now you're seeing sales from China that’s means that Taiwan has lost a lot of business. So there is a lot of changes going on due to also this trade dispute.

But the China is where we have decided not to sell because both prices was down, but also the fact that we did not have the opportunity to move material from the US to our warehouses in China. So that was also one of the reasons why we were at a low in China this quarter.

But China has been slow because it was expected that it would have been more panels installed in Q4. It came down to only 10 gigawatts for the year.

So Q4 was slow and that has moved into Q1 you can just keep the mic.

But if you're saying that sales are then picking up because you're actually, if you're selling as much as you produce, then your sales will double almost in the second quarter from the first.

Yes.

How would that be related PV China does that the increase is that the much of the increasing or is it more that you’re gaining customers outside of China.

We definitely, if we are going to do going to do that, we have to get more into China. That's because China is still 80% of the market so we need to move material into China in Q2.

We have some questions from the web.

Okay.

Do you see any competitors shutting down capacity in current price environment?

We have not identified any competitors so far. On the other hand, with the present price environment there is definitely a lot of producers which do not cover their cash costs because, as you will see, at least a lot of capacity need more than $20 a kg just to cover their cash costs, but we have not identified yet any…

Does the FBR cash costs 2015 target at $12.5 a kg still stand?

Yes. We have not changed any guidance.

On the other hand, we came in $0.80 lower in Q1 so at least under normal conditions we should be able to at least be, yes, have the opportunity to maybe get a little bit lower than but we do not change the guidance. But Q1 has get started very well.

Regarding the high levels of inventory, what amount have you charged to write downs in Q1?

What do we have CFOs for?

Basically, we will write down the inventory to the level of anticipated average sales prices going forward. If you look at the information that we given that range of spot price is expected to be between $15 and $18 so was pulled down now the other thing to consider here as when we do a write down of inventory its on the total cost of includes depreciation not just the cash cost that we’re discussing.

At the end of Q4, we had about a little less – or about $100,000 of write downs, right now we have about $15.3 million and that's a function of the increase in inventory and then the lower anticipated sales prices.

Will you be able to reduce inventory before the Process in Trade will be closed in August?

Let’s say first of all we’re working very hard not to be get these shut down of the Process in Trade this is not just an issue for REC Silicon. It is an issue for the industry.

But it's particularly an issue for the Chinese customers because today in China they depend upon about 100,000 metric tons of import. 100,000 I would say they consume about 220,000 to 230,000 metric ton, almost half of the polysilicon consumed in China today are imported.

So, first of all, I think for the whole industry if Process in Trade are shut down it will be a major issue. To be specific to answer the question, I don't think it's possible to sell everything if Process will be effective from end of August.

Why is the maintenance shutdown being deferred when markets are weak?

First of all, we think that the market will be improving. The second is that we didn't – we consider there's not any – we found out there was no reason to take it for the moment.

It will be reducing cost for the Company and that's the major reason why we deferred it.

Does the $1.25 billion cost of the JV plant include the cost of the technology transfer?

No, it does not.

Do you see any competitive silane gas capacity coming from Chinese producers in the near future.

There is a Chinese producers of silane. We don’t see any major competitor in fact what we are looking for now is to expand our customer base also in China.

We are looking into moving. So far we have mainly targeted semiconductor customers.

We are now also selling silane to PV customers. That's one reason why we think that we are going to expand our silane sales, going forward.

And the reason why is that we have a very competitive cash cost, both on the silane side and also on the polysilicon side. We are the lowest costs producer on both segments and that's why we should be able to take market share.

Can you add some comments on your FBRB expansion?

In Moses Lake or in general? The FBRB, the Yulin JV will use our new technology, the FBRB, and, as I said, that will make semiconductor grade.

Everything is ready. We have very high confidence to our timeline for the Yulin JV so that means that we will start to make – in mid 2017 we will have granular of semiconductor grade quality, which could be used to the wide range of both PV but also on the semiconductor industry.

That's all the questions from the Web.

Okay. Any other questions?

Okay. Thank you very much for coming.