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Edited Transcript of REC.OL earnings conference call or presentation 25-Jul-19 6:00am GMT

Q2 2019 REC Silicon ASA Earnings Call

Oslo Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of REC Silicon ASA earnings conference call or presentation Thursday, July 25, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* James A. May

REC Silicon ASA - CFO

* Tore Torvund

REC Silicon ASA - CEO & President

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Conference Call Participants

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* Andreas Bertheussen

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Tore Torvund, REC Silicon ASA - CEO & President [1]

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Okay. Good morning. And welcome to this reporting of the second quarter for REC Silicon. And it will be, today, James May, our CFO, and myself who are going to make the presentation. We will cover these items, a lot about the trade war, but also what we see -- alternatives we see given the situation we are into.

Let me give you the highlights. The good news is that we are back in black in terms of EBITDA, not a lot of money but at least we have a positive EBITDA of $500,000 in this quarter out of a revenue of $47 million. Our cash position is I think to be REC Silicon relatively comfortable. We have $38.4 million in our bank account. The silicon gas sales came in at 834 metric tons. Definitely, silicon gas is now our main contributor to our cash flow. So we came in at 834 slightly above what we did in Q1. Definitely, we were successful in the private placement, which was closed on May 14. And unfortunately, we had to shut down Moses Lake. We have announced this a long time ago. We shut down production on the 15th of May, and we had to let go approximately 100 of our skilled employees in Moses Lake as of last Friday, July 12 -- this July 15. But we did what we announced long time ago, and the reason is, as you know, that we are not getting access to the market as long as this trade war exists between the U.S. and China.

In terms of key metrics, I will come back to that. Our silicon gas, we are somewhat below the guidance. I will give you some more detailed explanation on that part of it. We have sold about 2,000 metric ton of polysilicon, and our inventory has then decreased by 1,100 metric ton during the quarter mainly because we then shut down production of May 15.

Then I will hand over to James, and I will come back afterwards with more details around this.

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James A. May, REC Silicon ASA - CFO [2]

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Good morning. Total revenues for the second quarter of 2019 were $47 million, which is about $2 million higher than we reported for the first quarter. This increase can be attributed to higher sales volumes of polysilicon in the Semiconductor Materials segment.

EBITDA for the quarter, as Tore said, was $500,000 compared to an EBITDA loss of $4.7 million for the first quarter. The increase in EBITDA is largely due to lower electricity cost for the Semiconductor Material segment. I'll provide some additional details regarding this in a few moments.

As you recall on January 1, 2019, we implemented IFRS 16 regarding leases. As a result, lease payments have now been -- which were previously reported as expenses within manufacturing overhead, has been capitalized with a long-term debt and an interest component.

Income for the last 2 quarters is comparable and reflects a noncash item for depreciation on leased assets. However, income for 2018 has not been restated for IFRS 16 and is lower due to these lease payments being in manufacturing overhead. EBITDA for the second quarter would have been $3.2 million lower if IFRS 16 had not been adopted.

The Solar Materials segment revenues were $12.2 million compared to $12.9 million in the previous quarter. Small decrease is a result of lower sales prices, which declined by 6.9% for prime granular solar polysilicon, while the overall average for all grades declined by only 4.8%. This is due to a lower sales mix of shipments in the lower quality grades. Granular sales volumes were nearly flat from the first quarter at 1,738 metric tons. In first quarter, we had 1,742 metric tons.

On May 15, the company ceased production in the FBR facility in Moses Lake due to the continued restricted access to China markets, as Tore just mentioned. Therefore, production was only 980 metric tons and production costs increased to $18.50 per kilogram for the quarter.

Granular polysilicon inventories declined by 1,059 metric tons during the quarter, which leaves 1,435 metric tons of finished inventories, which we expect to sell out during the third and fourth quarters of this year.

Solar Materials contributed an EBITDA loss of $9.4 million for the quarter compared to $7.4 million loss in the prior quarter. The increase in loss can be attributed to lower cost efficiencies caused by shuttering the plant midway through the quarter without reducing manufacturing overheads.

Revenues for the Semiconductor Materials segment were $34.8 million for the second quarter compared to $32.2 million in the prior quarter. The increase is largely due to higher polysilicon sales volumes, which increased to 352 metric tons, which is a 34.2% increase compared to the first quarter. Most of this increase, 79 metric tons of it, was due to higher sales volumes in solar polysilicon, which is fallout material in the process. However, semiconductor grade polysilicon volumes did increase by approximately 22 metric tons to 201 metric tons due to higher sales of the highest price Float Zone grade polysilicon.

Silicon gas sales remained broadly unchanged from the first quarter at 834 metric tons. However, average sale prices increased by 3% due to higher sales mix into the semiconductor and flat panel display applications as opposed to lower-priced sales into the PV applications.

EBITDA contributed by the Semiconductor Materials segment was $15.2 million or about $6 million higher than it was during the first quarter of 2019. As I alluded to a minute ago, this was mainly due to lower electricity prices at the Butte facility during the quarter.

Electricity costs averaged approximately $69 per megawatt during the first quarter of the year, which, as we indicated last time, were historical highs. And they declined to an average of about $19 per megawatt during the second quarter, which is very near historical lows.

In summary, the change results in lower manufacturing costs of about $6.9 million compared to the first quarter. The remaining $900,000 impact -- negative impact in EBITDA can be attributed to higher manufacturing overhead costs due to planned maintenance activities in the plant.

In terms of cash flow, cash outflows from operating activities was $4 million for the quarter. These outflows were a result of interest payments of $7.6 million, which was $6.3 million in the senior secured bond plus $1.3 million on leases covered by IFRS 16. We made payments totaling $3.1 million associated with agreement that we made last year to settle REC's obligation to contribute equity to the Yulin JV. These were offset by the EBITDA of $500,000, a refund of U.S. taxes for $2.7 million and a decrease in working capital of $3.2 million.

The decrease in working capital of $3.2 million consisted of a $7 million decrease in inventories primarily as a result of finished goods and somewhat as a result of raw materials. These were offset by an increase in accounts receivable of $1.8 million and a decrease in accounts payable of $2 million. The remaining $100,000 is due to changes in other assets and liabilities. Cash outflows from investing activities were $200,000, which consisted of cash inflows of $1.2 million for the sale of land in Moses Lake, Washington, which was offset by CapEx of $1 million for the quarter and an increase in restricted cash balances of $300,000.

Cash inflows from financing activities was $17.1 million and mainly consisted of $19.1 million from the private equity placement that was settled on May 14. This was offset by a decrease in lease liabilities associated with IFRS 16 of $1.9 million. In total, cash balances increased by $13 million to $38.4 million for the quarter.

As you will recall, when we did the private placement on April 9, we predicted that cash balances would be $29.2 million at the end of second quarter. However, we're about $9 million higher than that, and these are primarily timing differences. It includes the delay and the restructuring cost of $3.7 million that we now expect to occur during the third quarter. We've got -- we've realized more favorable payment terms on raw materials. And in addition, our working capital, the finished goods inventory primarily has declined in a faster pace than predicted. In summary, I think we can say that our cash trajectory is still consistent with the plan that we presented on April 9.

In terms of debt, nominal debt increased by $23.9 million (sic) [$23.8 million] during the quarter. $23.6 million of this increase was due to the leases covered by IFRS 16, and almost all of that was due to a long-term lease for [plant gases] at the Butte facility, which was renegotiated. And the term was extended for an additional 15 years. The remaining $200,000 change is due to the change in the valuation of the indemnity loan due to a weaker U.S. dollar relative to the Norwegian kroner. Nominal net debt increased by $10.9 million. Was due to the $23.6 million (sic) $23.8 million in the change in nominal debt offset by the increase in cash of $13 million that I talked about on the previous slide.

Once again, for this quarter, there are no significant changes with respect to our expectations regarding the contingent liabilities faced by the company. We believe that the statuses of neither the tax issues nor the indemnity loan are likely to change before year-end 2019.

Now I'll turn it back to Tore to talk about the company's market outlook.

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Tore Torvund, REC Silicon ASA - CEO & President [3]

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Yes. Okay. I'd say we are not working in the solar market anymore since we have shut down the Moses Lake. But we have still some a little bit more than a 1,000 metric ton of inventory.

So just to give you a short update on the solar market, basically, there is strong growth in the solar market from '18 to '19, expected to be 120 gigawatt this year. And you can see that now mainly driven by Europe, U.S. and Rest of the World.

What we see is that the installation level in China has come down, and China has come down now for the second consecutive year. As you remember it was well above 50 back in 2017. But a healthy growth between '18 and '19 and also expected to be relatively healthy growth going forward, driven by the fact that solar now become more and more competitive with alternative ways of making electricity.

In terms of the short term, China only installed 8 gigawatt in the first half of this year while it is expected that they might install between 25 and 30 in the second half of this year. So most expect that there will be a very strong second half of 2019, and then it will go back a little bit in the beginning of 2020. The reason why China has now accelerated is the fact that the policy decision was just communicated some weeks ago, and that's why there will be a strong pull into the market in these 2 next quarters.

Europe and the U.S. will be 10 and 8 gigawatt, respectively. Also, in the U.S., there is a relatively strong pull of installing due to the fact that the tax credit is due to expire gradually towards 2022. And there is uncertainty if that is going to be renewed.

Let me then go into the -- where we basically make our money for the moment and that is on the semiconductor market. And the most important there is definitely our sales of silicon gas. Silicon gas is mainly Silane, which is the SiH4, that's the majority of our sales. But we also have developed new gases based upon our plant in Butte called DCS, MCS and disilane.

We delivered, as I said, 834 metric ton, which is 5 metric ton more than what we did in Q1. On the other hand, it fell short of what we expected for the quarter and that is mainly due to the fact that there is, as you know, uncertainty into the semiconductor market for the moment. This uncertainty basically meant that our customers, they reduce their inventory. So it has been somewhat reduced inventory they have taken less than what we expected. Also, the fact that the PV market, also part of our Silane goes into the PV market, and as I said the first half of this year has been relatively weak in terms of solar cells and module mix. That does make some influence.

I was in China 1.5 weeks ago, and definitely there is now a very strong sentiment to buy China. In China, it has been said to most companies that if there is an opportunity to find products in China and not buy a U.S.-based product, you better buy the Chinese product. Even though the quality is not the same, but there is a buy-China effect into this and definitely that has also influenced our situation. On the positive side is that we were able to increase the price, overall price, from Q1 to Q2 by some 3% given that this market was relatively difficult.

Silicon gas, we have about 70% of the global demand. We are by far the biggest company making silicon gas. So every change into the market will definitely influence our performance. We believe that in Q3, we will have -- we have a guidance of 900 metric tons mainly due to the fact that there is some inventory replenishment to be done and at the same time the PV, as I said, will improve. And there is also gradually and as you have seen, semiconductor has been running relatively well in the last months. So it seems that we are through the worst in terms of the semiconductor market, which will then influence and hopefully improve the volume we are going to deliver for the second half of this year.

Let me come to the semiconductor grade polysilicon. As I said that silicon gas, we have 70% of the total market -- the global market. We are in the polysilicon side, a minor player. We make about 800 metric tons a year into a market which is 30,000 metric tons. So in the semiconductor polysilicon, we are a relatively small player.

As James said, we sold 352 metric ton in this quarter, which is a 34% increase compared to Q1. When you make semiconductor polysilicon there is something called fallout. That means that part of what you make has to be downgraded, and that is then sold into the solar market. So most of this increase was due to the fact that we had some inventory of solar in Butte, which was then moved into the market. So we have somewhat increased in the semiconductor side, but that went up to basically 201 metric ton, which is approximately the same level that we had. I think we had 180 in Q1.

The semiconductor, again, price went up, but the overall went down because we moved into solar with what we call the fallout. And again, solar in the U.S. has very limited customer. It's the same customer we have out of our solar in Moses Lake. It's because of the duty with China.

The uncertainty in the market is definitely that semiconductor correlate very much with the global GDP and with all the uncertainty, all this trade wars going on, it's definitely still an uncertainty around the future in semiconductor market. As I said, I was in China just recently. And China, there is a weakness in China. I think everybody can see that when you visit China now. And everything seems to be related to this trade war, and I will come back to this. I think that's also a good reason to believe that there will be a resolution to the trade because also not only the U.S. but also China is now very much hurt by this trade war.

When it comes to what we do with Butte, we have the best quality there is making out of Butte. That's called Float Zone. There is only 2 companies who are able to make that quality. We focus now on making this. This is definitely more demanding to make Float Zone. It take much longer time. That means that volume will gradually be going down as you can see from 2018 to 2019. But the margin is better on the Float Zone side, and that's a wise way to utilize our assets in Butte. It's not to go for volume, but to go for high quality where we get the best margin. And remember, Butte made a contribution of $15 million in EBITDA in this quarter. If we were able to do that for the 4 consecutive quarters, that means an EBITDA of $60 million a year. So Butte is still very profitable in an isolated situation, and that is mainly due to our silicon gas but also the fact that we make the high-end part of polysilicon -- semiconductor polysilicon.

Let me then move to this trade war or the China tariff update. As you know, there was a meeting between President Xi and President Trump during the G20 in Osaka, and they decided again to continue the trade talks between the 2 parties. It has been some back and forth, but finally yesterday, it was officially announced from the White House that the USTR Ambassador Lighthizer and Treasury Secretary Mnuchin is traveling to China on Tuesday, July 30, to meet with the Chinese delegation not in Beijing this time, but in Shanghai. So after the meeting in Osaka, several phone calls, it seemed that basically we are back to a situation where we start to negotiate for a resolution to the trade between the 2 countries.

And I've said many times, I'm definitely optimistic that there will be a resolution. And the reason why is that both in China but also now in the U.S., you can see a lot of indications that this trade war hurt both countries. Definitely, the recent uncertainty about the time line, but since they have been now discussing for more than a year, currently, at least according to the U.S., 90% was already agreed upon. There shouldn't be too much to discuss to get the final agreement between the 2 countries. We have heard that the agreement is over 100 page. So it's a very extensive agreement. And most of the details should have been discussed, but there is definitely some major issues to be resolved before a final agreement will be settled.

Concerning polysilicon, we have -- you have probably seen that Ambassador Lighthizer in the Senate hearing, confirm that polysilicon is important to be sold, it's important to be a part of this deal. So we feel confident that if there is a deal between the 2 countries, polysilicon will be part of this deal.

But also, let's say, together with our other 2 other companies in the U.S., we are also planning for a situation where we don't get a resolution. Let's say if China is not willing to settle or U.S. is not willing to settle, we need to have an alternative plan for REC and for the polysilicon in the U.S. So we have been actively pursuing an alternative in case there is not a settlement between the 2 countries. And as you know, polysilicon is a very important part of what you can think is the future technology development also in the U.S. It goes into semiconductor. Semiconductor is very important for the U.S., solar and definitely also when we now talk about batteries.

And remember, batteries, we are the only company in -- not only in the U.S. but the only company making Silane in huge quantities, and that Silane might be a very important ingredient in how batteries are developing in the future. And there is no doubt that, let's say, made in China '25, which is these areas which China have said they're going to be a leading country within 5 years from now, there is a lot of concern not only in the U.S. but also elsewhere. That China is going to be dominating within these most important technology development in the future.

So we have been working with the U.S. -- different departments in the U.S. to underline the importance of having access to polysilicon internally in the U.S. and access to silicon gases in the U.S. And among those we have been discussing with is also Department of Defense in Washington D.C. Because this might also have some security consequences for the U.S.

So if we look to how the value chain in solar looks like as of today, you will see that on the polysilicon side if you look to the bottom of this slide, on the polysilicon side, China today has 72% of the capacity of polysilicon. The Rest of the World, which is South Korea and Germany, has 22%. And the U.S., we have about 11% of the capacity of polysilicon.

When it comes to our customers, those who make the ingots and the wafers, you see how China is dominating that part of the value chain. When you come to cells and modules, you will see that there is 20% and 25% outside of China. But along the value chain, this is the reason why when you make polysilicon in the U.S., you basically have no customers because it is the Chinese who are the customers, and they have imposed 57% duty on our polysilicon.

Let's say what has been done in the U.S. is to counter this or you might discuss who started and who followed. But basically, if you start on the right-hand side here, let's say, if you make a module in China today or if you make a module outside of China -- outside of the U.S., you are due to have a 25% duty due to the Section 201, which was implemented 1.5 years ago. If you are Chinese, you have additional 25% due to what we call Section 301, and then you have the old AD/CVD which is about 30%. So if you make solar panels in China and would like to import it to the U.S., you have to pay 80% duty. The same for cells. And if you produce, what we call, MGS, you have 140% duty on this.

Where you don't have any duty in the U.S. is on the wafer side and on the polysilicon side. If we look to the top of this, the U.S. has 6% of global supply of MGS. We make 11% of the polysilicon but we also have 13% of the market. So the U.S., we have enough polysilicon and we have a market for solar panels. This is basically what we intend to do in the plan B. It is that if you want to make it into U.S. market, you better use U.S. produced polysilicon. Because the U.S. has about 15 gigawatts of capacity installed every year. If you take that 15 gigawatt of polysilicon that is equivalent to about 60,000 metric tons of polysilicon, assuming that we use about 4 grams per watt in these calculations. The total capacity between Hemlock, Wacker and REC is about 80,000 metric tons. So U.S. is very balanced between how much polysilicon we make and how much solar we install every year.

What we miss is the link between the 2 markets, which is the wafers. And we already see that due to these duties in cells and modules that there is now building new industry in the U.S. making cells and modules and also basically we see that companies have developed in both Vietnam, Malaysia and elsewhere to serve the market because basically the Chinese is not able to get access to market directly from China.

So we are working with, as I said, the authorities about this. But if there is no solution to the trade and if there is going to be a huge trade war between the 2 countries, still the U.S. might be able to support the polysilicon industry because basically, we have the end market within the border of the U.S. And you see what is expected to be the installations in 2019, 14.8; in 2020, 15 gigawatts; (sic) [15.5 gigawatts;] and in 2021, about 17 gigawatts. So there is a very good balance between polysilicon and the end market.

This is not our preferred solution, definitely we prefer to have a free trade situation. But if there is no -- if there is a trade dispute with China and which is going to continue, we definitely have to look to alternative ways to get polysilicon into the market. And we need then an alternative value chain to the Chinese dominance in this.

If I then move to the battery side, let's say battery and silicon, that's about not the cathode part of it but it is about the anode. And the anode, there is now a lot of companies who claim and this is not our area of competence. But if you add about 15% of silicon to the anode part, that means 15% silicon into graphite the capacity of the battery will increase by some 30%. And basically, if you do that on an equivalent basis, the battery per kilowatt hour will drop from $140 to down to $98.

So there is a tremendous focus now because most companies will say that all the research has been going on, on the cathode side of the battery. If you are going to increase the capacity of a battery, you have to do something with the anode side and that is to add silicon. And there is no doubt among most of these companies that silane is the best way to add silicon into the anode.

Silicon is already used on the anode side, 1% to 3% according to our knowledge and it is mainly used into the small devices. But let's say the large volume here will definitely be electric cars and the industry thinks that 30% of silicon can be added to the anode side within the next 5 years. The global market is estimated to be $10 billion just on anode side by 2025. And as I said, silane is by far the preferred way to add this silicon to batteries.

We have already 1 company, a U.S. company working on site in Moses Lake using our lab. And according to several, we have had discussion with now, it is not that it is not working. It has been tested, it has everybody see that this is the way to go. It is about how can we be certain that you have a value chain which might support this huge volume we are talking about. And that's why some of these company has come to us because silane, we have only in Moses Lake we have 30,000 metric tons of capacity of silane. And we are the only one on a global basis which do already have this available. So the silane side is fine and then it is the rest of the value chain which needs to be developed before this can really take off and be the new kind of batteries with up to 30%, 40% more efficiency in terms of weight. And also silane has the advantage that you can then add on much more capacity in the short term. So charging will be considerably shorter than in today's battery.

Talking about China, as you know, we are also in China together with our partner in Yulin. Not too much to be updated. We've made about 1,200 metric tons of polysilicon -- FBR polysilicon in our facility. We have now demonstrated full capacity ability on the silane side. However, we had an incident in the first quarter and that means half of that capacity will not be back in operation until last quarter of this year. It was mainly operator errors what was due to this silane incident in Q1. We have demonstrated the FBR capacity that the reactors are running at full capacity. We have still some issues to produce semiconductor grade polysilicon. But we are gradually heading there. Our Siemens reactor has produced very high quality polysilicon for the semiconductor industry and that is for the first time in China. So this will gradually be a very competitive asset which where we have 15% and we still have the opportunity to increase to 49% next -- or in beginning of 2021.

So to conclude the short term business plan for REC Silicon, as I said unfortunately, we had to shut down Moses Lake. We have laid off 100 very skilled people but definitely that is not only difficulties for our own people who had to leave the company but also for the relatively small community in Moses Lake. This is a major hurt to their situation. We have retained people so we can come back relatively fast, if there is a resolution to the trade or if we are able to succeed on what we call then the plan B. But for the moment we found it was most prudent to shut down and lay off to conserve the financial strengths of the company.

Where we are going to make the money until we see then that Moses Lake can come back is based upon our Butte operations, an annual EBITDA of $50 million. As I said, we made $15 million in Q2. So $50 million should be well within what we are able to do and then not any major CapEx requirement, that should be sufficient to be cash neutral into the foreseeable future. And there will be some solution either one way or another to Moses Lake. And also over time, we probably will get a decent cash return out of our investment in Yulin. So it's now to stay steady state until we find the solutions to the other assets we have in our portfolio.

On the Moses Lake, as I said, the long-term strategy Moses Lake. Either we get into the Chinese market again and can run 100% capacity and then we definitely will be competitive in the market also in China. It is alternatively to make an alternative value chain outside of China, and then we wait for the battery market to take off where we are the only company with huge capacity of silane, which then is going to be used for increasing the battery efficiency.

So that's the overall strategy in terms of guidance there is probably not too much to say. 900 metric tons of silane gas expected in Q4, the same Q3 and in Q4. And in terms of semiconductor, and this is pure semiconductor products, 220 and 200 metric tons respectively in Q3 and Q4.

So that is our presentation as of today. So be happy if there is any questions or comments.

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Questions and Answers

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [1]

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Andreas Bertheussen from Kepler Cheuvreux. Just 2 questions if I may on the silane gas. So looking at your volume forecast few years down the road, can you add some color to sort of to what's the main driver of this growth forecast?

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Tore Torvund, REC Silicon ASA - CEO & President [2]

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Silane is used for flat panels, it's used for making solar cells and it's used for chips. So as long as people are buying not more flat panels but bigger flat panels because it is by square, you will drive -- you will drive this. What we also see, we call it silicon gases. It is silane, which is the SiH4 and then we have different derivatives of silicon gas. DCS, MCS, disilane and we see that particularly in the chips area, they gradually use more and more sophisticated silicon gases. On the disilane side, and I wouldn't talk about actual prices, but I think prices now is about 50x higher than what it is for silane gas. It's [low-volume.] We could have sold way more. But with our cash situation we don't have the necessary funding to invest.

On the other hand, we are now in negotiations with several companies that they are going to invest together with us in Butte. And then we make an agreement that they are then privileged to be the take-off company for this for a certain period of time. So that's a way for us to continue to develop Butte without using our own financial funding. So we have 3 different gases, which has much more value and which is where we really see the growth coming now because that goes into the more and more advanced chips which is used for semiconductor industry. But it's all based upon silicon and the fact that we have this silicon gas give us all this opportunity to develop in different directions.

We see relatively limited competition on this because we are very cost effective. And that there is a huge investment to get into the market not only to make the silane but also the fact that you have to be able to distribute it. And our module fleet is a very valuable part of that business case.

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [3]

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So if I understand you correctly, it's a mix of your 3 sort of end demands in a GDP related kind of way. There's no switch in mix or larger contribution from PV or...

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Tore Torvund, REC Silicon ASA - CEO & President [4]

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Let's say we have been reluctant to enter into the Chinese market. We try to preserve our markets in South Korea, in Japan and in Taiwan because of all these trade issues. But definitely, we have been also in the Chinese market, in the PV market. But where really what is important to us is to keep the market we have in the 3 other countries which is much more stable in terms of relationship between the U.S. and these countries then what is the situation towards China.

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Andreas Bertheussen, Kepler Cheuvreux, Research Division - Equity Research Analyst [5]

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And then as a follow-up sort of, can you give some color on the geographical mix of the silane gas sales then?

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Tore Torvund, REC Silicon ASA - CEO & President [6]

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We normally don't. I know that James gave a lot of details, but...

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James A. May, REC Silicon ASA - CFO [7]

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Far and away, the majority of the silane gas or the silicon gas is the silane. But I think when you look at it, you have to understand that 15 years ago, silane gas started out just like DCS, MCS and disilane relatively small quantities. And while they've been small, now they're getting to the point they actually change the average price. But no they're not huge volumes at this point. It's the potential that matters.

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Tore Torvund, REC Silicon ASA - CEO & President [8]

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But they make significant contribution to our bottom line.

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Unidentified Company Representative, [9]

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Yes, well we have some questions from the web. First of all, could you give some more flavor to the impact of the consolidated EBITDA for the company after the Moses Lake shut down?

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James A. May, REC Silicon ASA - CFO [10]

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Sure. I think Tore alluded to it in that Butte is going to produce somewhere around $50 million of EBITDA per year. If you look at the other two components of EBITDA, $20 million to $25 million will be the cost of our selling, general and administrative which is in other and eliminations and that leaves $20 million to $25 million in Moses Lake which given that we've got a little room for CapEx, we have the ability to pay interest. And that's where we're getting the neutral cash flows from. And then we've taken I think a fairly conservative look at what expenses will be in Moses Lake. And we're continuing to work on making sure that we're at least within that parameter. And that we have the ability, I think, to improve on it a little bit.

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Tore Torvund, REC Silicon ASA - CEO & President [11]

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So we have [adjusted] interest. We pay [$15] million a year on our bond. It's a relatively expensive bond.

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Unidentified Company Representative, [12]

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And with reference to the kind of plan B for the solar value chain, how is that supposed to work? Are you kind of assuming a mandate to use of U.S. produced polysilicon in U.S. solar installments or could you elaborate a bit on that?

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Tore Torvund, REC Silicon ASA - CEO & President [13]

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No, I don't want to elaborate on this. We are presently working on all the details here together with our 2 other U.S.-based companies. But what we assume is that if the trade talks with China is not going to materialize, we feel that there is -- would be a strong political will to do something like what we have elaborated here. Because as I said, let's say polysilicon and silicon gases are very important for a lot of industries in the U.S. We have the end market. And we think we will get the necessary political support. How we actually are going to do it and how we actually are going to propose things, it's -- I don't want to elaborate on that yet. We will probably be able to do that in the next earnings release in October.

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Unidentified Company Representative, [14]

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And what are your kind of long-term plans for Moses Lake with regards to how long you are prepared to wait for either access to China or the silicon anode batteries market's take off before making a final decisions for kind of alternatives for the Moses Lake facility?

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Tore Torvund, REC Silicon ASA - CEO & President [15]

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Okay. The reason why we have now shut down Moses Lake, we have rightsized the organization. It is that from now on, we can wait until we find a solution. We are going to be cash neutral based upon what we make in Butte. So we can wait until we see a solution to this. And the alternative is either we get into China or if we -- when we have established an alternative. Let's say customer base for our polysilicon or silane gas out of Moses Lake. So that's the reason why we did it. We had to do something so we can stay financially healthy until this situation will be resolved.

Being in Norway definitely, most people will say this is a strange strategy. What we have to remember is that the U.S. is a huge economy, it's in fact the largest economy in the world. And let's say, the internal market there as I said for polysilicon, the end market is within the U.S. The only thing you are missing is the link between polysilicon and the end market. The duties which was imposed during this administration should had focused to establish to make modules and to make cells.

The only missing link now is to make wafers, to connect polysilicon with the end market. I'm not propose that it has to be done in the U.S. It could be done elsewhere. But probably, you are not going to do it in China. It might also in fact if that is a requirement. Maybe the Chinese decide to take away the duty just to get access to the U.S. market. We don't know what is going to happen. But we have to remember that the U.S. has a huge market for the end product which is unlike if this had been a Norwegian activity where you don't have considerable end market.

So that's the difference between what we normally -- and then it's important for me to say that what we prefer is the free trade situation. But if we are not able to get that we need to find an alternative.

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Unidentified Company Representative, [16]

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And well with the Moses Lake shut down, how long would it take and what's the estimated cost to bring Moses Lake back to full production capacity?

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Tore Torvund, REC Silicon ASA - CEO & President [17]

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The timing will be uncertain. We have retained, people with the necessary competence. We also made for our people some who has lost their job have decided to stay with the company for a while. And we had an arrangement either you have some kind of a severance package which is much less than what you normally would talk about in Norway. But some has decided to stay and wait for a possible resolution within the next 2 to 3 months. If that happens, we will have more people. If these people leave, there will probably take us some months, up to 6 months to restart the facility. In terms of what cost, I don't think we should move into that. It is -- will mainly be working capital expenditure.

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Unidentified Company Representative, [18]

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And a few questions on the Yulin. If the trade war continues in the years to come, what is your plan with regarding to the ownership? You have an option to bring that back to 49%.

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Tore Torvund, REC Silicon ASA - CEO & President [19]

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The trade war doesn't affect in principle our investment in China. In China, we are into the Chinese market. So it doesn't matter if we -- where the ownership is located and the ownership in fact for China is in Singapore and not in the U.S. What is our plan? As we have told you, we have -- depends upon our financial situation at that time, it is about 18 months from now. We can either increase our -- let's say increase with 34% or we can decide to sell our 15% at that time. What we're going to do will depend upon what is the situation for the company at that time. But we have the flexibility for doing or we could say 15% if we want to do that. We are still supporting. We have about 10 people working in Yulin. I'm personally meeting over there every month and it is a tremendous facility. It will be hopefully the most cost effective, high quality production facility in China. And the advantage, as you know it is that it is using very limited power compared to all these new facility built lately in Inner Mongolia which is basically based upon access to cheap coal-fired power while we have much less power consumption in our facility. We also have silane loading and Siemens in this plant. Another question?

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Unidentified Analyst, [20]

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How is your cooperation with China and Yulin when it comes to competence now that you have shut down Moses Lake? How is the competence flow? And how much do you contribute to develop the competence and will they pass you in a way?

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Tore Torvund, REC Silicon ASA - CEO & President [21]

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This has definitely been, let's say -- it's a balance here. My view and what we have done is to say that we need to be successful in China. We need to be successful in the U.S. Trade wars they start and they disappear. Everybody knows it has always been trade wars. And down the road there will be a change. As a company, it is important that we are successful in both places. The important thing in China, if you look to the long-term development of solar, to my mind, solar will just continue to grow. If you see the growth of 20%, it will continue. It will become more and more competitive with the alternative way of making electricity, when you get the batteries storage opportunities.

Long term, this is probably the source of energy which is the most competitive long term. That means there will be built more polysilicon capacity on a global basis. To my mind, FBR is the right way to do it. Why? It only consumes 50% of the power of a typical alternative way of making polysilicon. And it is way more labor efficient. For example, when we were running Moses Lake, we can produce the same quantity with 200 employees as the alternative technology needs 600 to 700 employees. Because it is a continuous process compared to a batch process. So FBR is the right way of making polysilicon.

China will always be important. Success in Yulin, everybody is looking at Yulin. If that's successful, all new capacity will be FBR. If it is not successful, there will never be built a new FBR plant. And that's why it's so important for the future not only for -- but also for REC because we are the only one who knows how to build and to operate an FBR plant. That's why China gave us a unique opportunity to test out our next generation of FBR as we don't have the financial funding to do that in the U.S. So that's why we use China. We have retained the most competent people and the most competent people are either supporting Yulin from the U.S. or are working on site.

So as I said, we have about 10 people on site on rotation basis from the U.S. They spend 4, 5 weeks in China, 2 weeks back in the U.S. paid by our Yulin partner, not paid by REC. So this is also a way to keep employees without having the financial burden of having them employed ourselves.

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Unidentified Analyst, [22]

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But if the shutdown in Moses Lake continues for a couple of years, then I will guess that the Yulin facility will be more competent than the workforce you have in Moses Lake.

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Tore Torvund, REC Silicon ASA - CEO & President [23]

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We might be equivalent, I think. First of all, we transferred the technology we had developed back to 2014. We have technology in the U.S. which has not been sent or transferred to China. And also remember that our JV partner can only use this technology in China. If we, for example, build FBR plants elsewhere, it is REC who then have the right of this technology. So -- limited to China.

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Unidentified Analyst, [24]

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But is it an option for you to fully integrate with Yulin or [use a] group? I mean you can sell -- I mean, to become 1 company?

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Tore Torvund, REC Silicon ASA - CEO & President [25]

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Everything is possible, but it's not very likely in the short term. Remember, this is China. China so far, one of the requirement request in this trade discussion between the U.S. and China is that companies should be able to invest in China without having a JV partner. We have a JV partner, we had 49%, 51% which is the standard. This is the requirement the U.S. said. Why can't Chinese companies might invest in or could invest in the U.S. Why can't U.S. companies invest 100% in China. And this is part of what they call the IP protection measures. Tesla has been able to, as the first company who was able to invest as a 100% company in China. So that's the only example as I know over there.

Our partner is a so-called state-owned enterprise, an SOE, which is a government-funded or 100% government-owned company. There should be definitely a lot of development before we could be 1 company. The agreement we have, we signed back in 2014, open up for the opportunity to list the company after 5 years. So if we agree, both parties, it could be listed for example on the stock exchange in Hong Kong or in Shanghai, where we are going to -- and that will be probably the most likely scenario, if we continue to work to be partner in this company long term.

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Unidentified Analyst, [26]

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Just a final question on Yulin. You mentioned that you have produced some 250 metric tons so far. What is the estimate for the full year 2019?

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Tore Torvund, REC Silicon ASA - CEO & President [27]

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We don't make forecast out of Yulin. What we have agreed upon is now to test out and to get to qualify the product before we basically go for high-volume. We have according to my knowledge about 7 different customers testing out the product. We made 2,400 metric tons, not 200 -- 2,400 metric tons in first half. So we are now testing out the product. And definitely we would like to have contracts before we ramp up at full capacity so we don't foresee that full capacity. With high quality production, high quality material will be available until beginning of next year.

Okay. Thank you so much for attending this presentation, and then happy summer. Now it’s summer vacation for the next 2 weeks. Okay. Thank you.