REC Silicon ASA

Tore Torvund - President and CEO Francine Sullivan - Chief Legal Officer

Sean McLoughlin - HSBC Paul Strigler - Esplanade Capital

Good afternoon all of you. I am here in Oslo together with James May, our CFO; and Francine Sullivan, our Chief Legal Officer; and Mitra Negard, our Vice President for Investor Relations.

Today we presented our Q3 2014 numbers, and just to give you the headlines, the revenue was $126.5 million. We enjoyed a price increase of the polysilicon of 3% compared to our Q2.

The EBITDA excluding special items was $44.9 million which means that we had an EBITDA margin of 35%. The special items of $101 million was the gain from sale of our technology to our partner in China.

And EBITDA from our continuing operations was therefore $145.9 million. We had a strong quarter in terms of operations.

We produced in total 5,103 metric ton of polysilicon altogether, [indiscernible] FBR they were at 4,400 metric ton and we had a cash cost of $10.50. We also continued the very strong numbers in terms of silicon gas sales.

We in total sold 952 metric tons of silicon gases and the price increased about 4% compared to last quarter. Concerning the expansion initiatives, what we call the Rx 25/26, which will add 3,000 metric tons of polysilicon on semiconductor grade quality has been approved by the Board of Directors and the investment is considered to be or assumed to be $115 million.

That means that the CapEx per kilo would be around $40 and the OpEx will be below $10 for this additional 3,000 metric tons of polysilicon. We also obtained in this quarter the progress in Yulin JV in China.

The company is now formally approved. We have finished the FEED, which is the Front End Engineering and Design, coupled together with [floor] (ph) in California in the U.S.

The team has now been transferred to China and they are just starting the detailed engineering over in China. We received the $99 million and we also announced that we are looking into similar opportunities in Saudi Arabia together with a company called IDEA which has a very strong track record and very solid project development in the region.

This is not going to be decided upon until 2016 but we have created I think a very interesting company which would have good opportunities to succeed in Saudi Arabia and decide to continue into building a polysilicon plant in Saudi Arabia. I think that are the headlines, and we'll open for questions.

Couple of questions for me. Firstly, just a comment on what your Chinese customers are telling you about how they are looking at their procurement policy, their procurement strategies into 2015 and how that affects your business outlook, and what other markets you've materially been able to reroute potential volumes into?

And secondly, on the inventory build in Q3, you talk about inventory remaining flat to the end of the year for Q4. I mean how much visibility do you have on that and what are the risks you might actually detailed in further inventory through in the fourth quarter?

Thank you.

Maybe I should start with the inventory build we had in Q3 to explain what has been our strategy or thinking behind that. First basically during a period, we have been having a policy that we should sell all our production.

The reason behind this was basically that we needed the cash and we needed to continue to operate at full capacity and we didn't have the financial strength to build inventory. Concerning the financial strength, it has gradually been improved.

As we didn't have any inventory in China close to our customers, basically when a customer ordered from REC, the lead time would easily be between 45 days and 60 days because due to the shipping over the Pacific. That has not been an optimum way to do it.

So, we have for long been looking into the opportunity to build an inventory, and that's what we have done this quarter, so we can serve our customers in China in a much shorter timeframe than what we used to. The second reason why is that we do believe that the markets in Q4 should be somewhat stronger than in Q3 because of the anticipated increase in installation of panels in Q4, and also historically Q4 has been stronger than Q3.

So we built some inventory to be able to take the advantage of all possible stronger market in Q4. The third, there is also our customers were used to the fact that we had to settle all our production by the end of the quarter.

That means that all the materials was concluded 14 days before the end of the quarter and also often we had to make – to give some kind of a concession or a rebate just to be able to sell all our quantity. This time we said that we offered to a certain price.

If they didn't take it at that price, we decided not to sell to them, and that's also to get some kind of a discipline into the markets between REC and the market, that we are not obliged to sell by the end of the quarter and we easily move more volume over to the next quarter. So that's the reason behind the inventory build.

Basically we now feel that we have the right size of the inventory and it means that the aim would be to sell what we produce in Q4. Concerning the feedback from the customer, and I assume that is in relation with this possible trade issue between China and the U.S., so far we have not experienced a lot of issues.

We have experienced the fact that we see the activity has come down in Taiwan due to the fact that the Chinese make their solar cells by themselves and not are dependent upon doing that in Taiwan. Our customers, most of our customers have bonded books and they were able to renew these bonded books on September 1 and they still have capacity to take our volumes into at least into Q1 in 2015.

So we have not seen any major change in the behavior in the customer base in China.

Great. If I could just follow up on that, I mean have your customers told you that they would be committed to buying the same volumes even if the 50% levy remained into 2015?

No, not as far as I know.

Okay. And are there any other markets then that you're thinking of possibly rerouting these potential volumes into in 2015?

Maybe I should – definitely if it were to be a negative outcome of this dispute, that means that we have to take 57% of our solar grade polysilicon, definitely we will look into alternative markets, but I think also with the relatively I'd say dominance of the Chinese customers we also will need to sell some volumes into China at least for in the short term. Concerning the Company, I think it's important for you to know that this is only our solar grade polysilicon.

Our silane, our silicon gases will not be affected, neither will be the polysilicon of semiconductor grade material. So it's not the total product string from REC which will be impacted, it is the solar grade which is important but it's not all our revenue stream will be impacted by a negative outcome on this.

But definitely we work very hard to try to avoid and to argue against a final decision concerning this order. The final decision is in the U.S.

but probably it will also be funnelled down in China.

Thank you so much.

Excellent quarter. Does your expansion plans for the FBR poly and Washington state, does that suggest some kind of confidence that there will be a trade resolution?

I heard you mention it will be semi grade FBR granular polysilicon, but I guess the thought of expanding in the face of a trade war seems about gutsy and I guess I'm wondering if you've been, I guess you have at least some sort of confidence that even if it's not resolved on December 31, that U.S. produced polysilicon will eventually be allowed to be imported into China without sanctions.

Maybe we should give you an update on our view on the trade war. Definitely we are not part of the negotiation.

So as to us to judge what is the likelihood of this one to resolve or not is more based upon speculation than hard facts, but Francine Sullivan could give you an update on the trade war. And the reason why we have decided to invest in state of Washington is that I think a very good sound economic decision hearing that brownfield development [inaudible].

Francine will give you an update on the trade war.

Okay. I mean as you know, REC is the recipient of final orders from China against all U.S.

colleagues who had came for it into China and we are subject to those. However we have been continuing to sell into China under the Process in Trade which is available under the Chinese or was available under Chinese customs law.

However on August 14, MOFCOM announced the suspension of the process for renewing on the book, necessary to limit Process in Trade import into China and that suspension was effective on September 1, 2014. However, the MOFCOM announcement permitted wafer companies to renew their bonded books prior to September 1, 2014 and there's an opportunity for U.S.

polysilicon makers to ship under those bonded books until the capacity for which they were renewed prior to September 1, 2014 are valid. So the bonded book capacity will be valid for that duration even if that is after the end of this year.

Now there was two new U.S. trade law cases, the trade cases filed by SolarWorld, particularly a U.S.

petitioner who filed the first case a couple of years ago and has brought the U.S.-China trade war including the polysilicon [indiscernible] REC in the first place. SolarWorld filed two new cases at the end of [indiscernible].

Those cases resulted in preliminary duties in June and July of this year and they will file determinations of scheduled note cases on December 17 for this year. However the day after MOFCOM announced the suspension of the Process in Trade for polysilicon, it also applied to what's known as the suspension agreement with the U.S.

government in relation to these new trade prices. The suspension agreement process allows for a government to government resolution or a political solution to these second trade cases by SolarWorld which would allow the U.S.

government to make a deal with China in addition to the cases that allow SolarWorld to have a veto over any such deal. Now since then, the offices in the U.S.

Trade Rep, USTR, has told us that if there are any discussions with MOFCOM in relation to a resolution of all the trade cases, discussions have recently intensified, we have been consulting with USTR and attending mainly in relation to a potential resolution, and in addition to these the U.S. government has advised us that they are involved in diplomatic engagement with China right now in relation to getting a solution.

So there is a lot of activity in relation to a resolution between the governments right now leading up to these December 17 decision or final decision deadline on the second SolarWorld cases. We're monitoring these discussions and involved to the extent that the U.S.

government consults with us. However we are still uncertain.

Our governments have allocated resources to this issue right now and are attempting to resolve but you may be aware that [indiscernible] both sides to get a resolution, the Chinese are seeking access to the U.S. market for their [mineral] (ph) companies particularly leading out to the expiration of the ITC in the U.S.

at the end of 2016 as the expectation is that for the next couple of years leading up to the expiration of that ITC, that the U.S. will be a very big market, one of the biggest globally for panels, additionally the U.S.

government would like its polysilicon makers to have access to these markets as well the U.S. solar development industry would like to have an access to the low-cost Chinese.

And on top of that China doesn't have enough polysilicon internally now, it's relying on outside sources of polysilicon including U.S. polysilicon [inaudible].

So there is a significant amount of activity [incentive] (ph) on both sides to resolve this case right now.

And just a follow-up question, as I understand it, I think it's November 17 is the critical date you need to basically have a resolution in place one month before the final determination from the Department of Commerce, is that correct?

So the final decision is scheduled for the December 17, that's the formal guide that Department of Commerce will announce the final decision. We understand that in accordance with Department of Commerce guidelines they need to have a resolution prior to that guidance.

I don't know what the deadline is and it's difficult to speculate on what that is but we know the final decision is scheduled for the 17th of December.

And if there is no resolution, how far into Q1 does your bonded books, how far into Q1 can that take you?

I think it's difficult to speculate because we're not sure of the capacities [indiscernible] bonded books. Additionally the bonded books are available for U.S.

polysilicon and [Korea] (ph) polysilicon, so it's not just REC of course. But we understand ways the company did take the opportunity or a number of companies did take the opportunity to renew their books prior to the September 1 deadline.

Great. Thank you so much, guys.

Okay, thank you very much for your questions and thank you for calling in. Okay, bye.