REC - Fourth Quarter Report 2005

The REC Group (REC) generated revenues of NOK 857 million in the fourth quarter of 2005, and increase of 147 percent compared with the NOK 347 million reported in the fourth quarter 2004.

Highlights
- Strong growth in revenues; +147 percent in Q4 2005
- EBITDA increased to NOK 364 million in Q4 2005 (NOK 28 million)
- Operating profit (EBIT) to NOK 275 million in Q4 2005 (NOK -5 million)
- Strong production growth and increased productivity
- Expansion projects well underway in all divisions
- IFRS entails significant negative non-cash effect on profits for 2005
Financial highlights - REC Group
The REC Group (REC) generated revenues of NOK 857 million in the fourth quarter of 2005, and increase of 147 percent compared with the NOK 347 million reported in the fourth quarter 2004.
 
The strong growth has been taken on in a profitable manner, and the EBITDA of NOK 364 million in the fourth quarter corresponds with an EBITDA-margin of 43 percent. These figures compare favourably with an EBITDA of NOK 28 million and an EBITDA-margin of 8 percent in the same quarter in 2004.
 
The EBIT was NOK 275 million in the fourth quarter of 2005 (NOK -5 million), whereas net financial items were NOK -41 million (NOK -22 million).
 
The profit before tax and effects of the foreign exchange and fair value effect of convertible loans was thus NOK 233 million in the fourth quarter of 2005, compared with NOK -27 million in 2004.
 
For the full year, the REC Group reports revenues of NOK 2 454 million, which was an increase of 93 percent over the 2004 figures.
 
The full-year EBITDA of NOK 830 million corresponds with an EBITDA-margin of 34 percent and compares with EBITDA of NOK 141 million and an EBITDA-margin of 11 percent in 2004.
 
EBIT was NOK 601 million for 2005, compared with NOK 40 million, and net financial items NOK -78 million (NOK -54 million). The profit before tax and effects of foreign exchange and fair value effects of convertible loans was NOK 523 million in 2005, compared with NOK -14 million in 2004.

 
Effects of transition from NGAAP to IFRS
Due to the transition from NGAAP to IFRS, the Group Income Statement is significantly affected by the recognition of foreign exchange and fair value effects of two outstanding foreign currency convertible loans of EUR 31 million and USD 140 million. As the loans are denominated in foreign currencies, they are fully accounted for as debt in the balance sheet, whereas the change in the estimated fair value of the convertible element of the loans has been fully charged to the profit and loss statement.
 
As indicated in the above table, the incorporation of changes in foreign exchange and fair value assessment of the convertible instruments had a negative effect on profit before tax of NOK 493 million for 2005. Due to higher deferred taxes, the negative effect of the transition on net profit after taxes was NOK 355 million.
 
Including the effects of changes in the fair value of the convertible instruments, the REC Group reported a profit before tax of NOK 30 million for 2005, compared with NOK -8 million for 2004. For Q4 2005 isolated, the effect of changes in foreign exchange and fair value of the convertible instruments was NOK 29 million (NOK 3 million), and the profit before tax NOK 263 million (NOK -24 million).
 
The high fair value estimate for the convertible element of the loans is a strong indication that the loans will be converted to equity during 2006. The EUR 31 million bond matures on March 31, 2006, whereas the USD 140 million loan may be converted on March 13, 2006, September 8, 2006 or at maturity on December 1, 2006.
 
Under IFRS, the REC Group will continue to charge changes to the fair value of the convertible loans to the Group Income Statement until the loans have been converted. There have also been certain transition changes related to IAS 3 - Business Combinations and IAS 31 - Interest in Joint Ventures.
 
Under IFRS, the subsidiary REC Solar Grade Silicon LLC ("SGS") has been consolidated according to the Joint Venture method during the period January - July 2005. There have also been other, minor, accounting effects of the transition to IFRS. None of the changes of the transition to IFRS have had any cash effect.
 
Segment reporting
The strong development in revenues and operational profitability reflects higher production, increased capacity utilisation and improved production yields across all business units, as well as the acquisition of REC Advanced Silicon Materials LLC (ASiMI) in August, the increased shareholding in SGS in August and acquisition of the smaller silicon ingot producer REC SiTech AS in Norway in July.
 
REC Silicon
REC Silicon produces solar grade polysilicon for the photovoltaic industry and electronic grade polysilicon for the electronics industry at two facilities in Moses Lake, Washington and Butte, Montana in the USA.
REC Silicon reported revenues of NOK 503 million for the fourth quarter of 2005, representing close to a five-fold increase over the NOK 104 million in revenues reported for the fourth quarter of 2004. The EBITDA was NOK 238 million for the quarter, compared to NOK 16 in the same quarter in the previous year, and the EBITDA-margin thus increased to 47 percent in Q4 2005 from 16 percent in Q4 2004.
 
Financial highlights - REC Silicon
For the full year 2005, REC Silicon reported gross revenues of NOK 1 018 million, compared with NOK 339 million in 2004. The EBITDA for 2005 was NOK 413 million (26 million) and the EBITDA-margin 41 percent (8 percent).
 
The significantly higher revenues for Q4 2005 and 2005 reflect the acquisition of 75 percent of ASiMI, which was consolidated on a 100 percent basis with effect from August 1, 2005.
 
Through the acquisition, the REC Group also increased its shareholding in SGS from 70 percent to 100 percent. ASiMI was fully integrated into REC Silicon during the fall of 2005. In the wake of the acquisition, REC Silicon has laid off close to 70 permanent and temporary employees, and the division currently employs around 500 people evenly divided over the two geographic locations.
 
The total production of polysilicon for REC Silicon was 1 362 MT, compared with 1 129 MT in the previous quarter and 574 MT in the fourth quarter of 2004. 41 percent of the production was allocated to REC Wafer at market prices.
 
The average unit costs for the polysilicon production in SGS in the fourth quarter was roughly on par with the same period in 2004, despite higher energy prices and increased maintenance costs. This reflects positive effects of the continuous work to streamline the processes and improve production yields.
 
Total production of polysilicon at the ASiMI plant was 684 MT in the fourth quarter. In the third quarter the operations were consolidated in only two months, and reported production was 463 MT polysilicon. As in the previous quarter, the capacity was directed to the electronic industry under existing contracts.
 
During 2005, REC Silicon has run continuous test production with its proprietary new fluidised bed reactor (FBR) technology for production of granular polysilicon. The results have been encouraging, and application of the FBR technology in new projects may enable REC Silicon to lower investments and reduce in particular energy consumption and costs compared with the current reactor technology standards. Preparations for a new plant have been progressing over the course of 2005 and a final investment decision is expected in the first half of 2006.
 
REC Wafer
REC Wafer produces multicrystalline wafers for the solar cell industry at two production facilities in Glomfjord and at Herøya in Norway, as well as monocrystalline ingots for wafer production at a separate plant in Glomfjord.
 
REC Wafer reported revenues of NOK 462 million for the fourth quarter of 2005, compared with NOK 237 million in revenues reported for the fourth quarter of 2004. The EBITDA was NOK 131 million for the quarter, compared to NOK 21 in the same quarter in the previous year, and the EBITDA-margin increased to 28 percent in Q4 2005 from 9 percent in Q4 2004.

 
Financial highlights - REC Wafer
For the full year 2005, REC Wafer reported gross revenues of NOK 1 596 million, compared with NOK 884 million in 2004. The EBITDA for 2005 was NOK 417 million (149 million) and the EBITDA-margin 26 percent (17 percent).
 
The total wafer production increased significantly in 2005. Measured in electrical generation capacity, the output from the two plants totalled roughly 210 MW in 2005, compared with roughly 115 MW in 2004. The increased production reflects capacity expansions, increased production efficiencies and further reduction of wafer thickness.
 
In the fourth quarter of 2005, the wafer production was roughly 70 MW, which was an increase of 20 percent over the previous quarter and 87 percent over the same quarter in 2004. During the fourth quarter, the Glomfjord plant made the transition from 280µm to 240µm wafer thickness, following in the tracks of the Herøya plant where the transition was made in the previous quarter.
 
The improved utilisation of the polysilicon feedstock is expected to have a positive effect on unit costs in the longer term. The construction of a second wafer plant at Herøya began in July 2005 and proceeds according to plan. The new plant will increase the wafer capacity by roughly 190 MW.
 
The installation of equipment will commence shortly, and while REC Wafer sees a gradual increase in fixed costs during the construction period, the production volume will increase gradually over a 12 month period following the start-up in the second half of 2006. During Q4 2005, the REC Group also decided to expand capacity at the wafer plant in Glomfjord.
 
The investment program will be rolled out in phases over a two-year period, and is expected to increase production capacity by an additional 100 MW. The REC Group acquired REC SiTech AS with effect from July 1, 2005, adding monocrystalline silicon ingot capacity of 25 MW at facilities adjacent to the REC Wafer's existing wafer plant in Glomfjord. SiTech was integrated in the Wafer Division in the second quarter of 2005.
 
REC Solar
REC Solar produces solar cells at its plant in Narvik in Norway and solar cell modules at its facilities in Arvika, Sweden. REC Solar reported revenues of NOK 108 million for the fourth quarter of 2005, compared with NOK 71 million in revenues reported for the fourth quarter of 2004. The EBITDA was NOK 25 million for the quarter, compared to NOK 1 in the same quarter in the previous year, and the EBITDA-margin increased to 23 percent in Q4 2005, compared with 2 percent in Q4 2004.

 
Financial highlights - REC Solar
For the full year 2005, REC Solar reported gross revenues of NOK 404 million, compared with NOK 214 million in 2004. The EBITDA for 2005 was NOK 86 million (-9 million) and the EBITDA-margin 21 percent (-4%).
 
Measured in solar power capacity, the sales of solar cells and solar modules were roughly 20 MWp and 14 MWp respectively in 2005, compared with 11 MWp and 6 MWp in 2004. In the fourth quarter 2005 both plants ran at full capacity.
 
Compared with Q4 2004, production increased by 13 percent at REC ScanCell and by 60 percent at REC ScanModule. Both plants have made the transition in the production from 280µm to 240µm wafer thickness.
Customer satisfaction was high throughout the year, with regards to product quality as well as deliveries. In terms of profitability, 2005 marked the entry into positive territory. The improvement is a direct result of product portfolio changes, successful ramp-up of production and signficant production process improvements over the past year. Ongoing expansion projects continued for both the cell and module plants in the second half of 2005.
 
REC Solar expects to start production on additional lines already in the first half of 2006, and will see a gradual ramp-up of production over the remainder of the year. Production is expected to increase to approximately 35 MWp in 2006, while the capacity run-rate will be around 45 MWp in the second half of 2006.
 
The growth and profitability shows that REC Solar is on par with industry standards in terms of market position, product quality, and production systems, and the capacity expansions should enable the division to make further cost advances in 2006.
 
Solar Vision has completed the installation of solar home systems to 10,000 homes in South Africa, and experiences strong market demand.
 
Eliminations, other and financial items
At year-end 2005, the REC Group eliminated NOK 564 million of internal revenue and NOK 53 million in internal profit. Earnings from equity accounted companies include the proportionate to ownership amount of loss year-to-date from our CSG Solar AG investment in Germany.
 
Net interest expenses have increased as a direct result of a high number of financing transactions and higher debt levels related to the acquisition of ASiMI and additional capacity investments.
 
During the fourth quarter, the REC Group replaced a USD 140 million shareholder loan with a term loan facility of USD 170 million, underwritten on a 50/50 basis by ABN Amro and DnBNOR. The shareholder loan was provided by REC ASA's main shareholders Good Energies Investments, Elkem and Hafslund.
 
Other financial income/expenses relate mainly to unrealized exchange rate gains from the market-to-market of foreign exchange contracts and debt in foreign currency. Please also see the above discussion of the effects of the transition to IFRS. The REC Group is currently in the process of refinancing the entire Group, and the new corporate financing facility will replace all current subsidiaries' financing and also provide additional funding for further expansion. The REC Group expects that this will reduce average interest rates going forward.
 
Outlook
The global market for PV solar cells continued to grow at a healthy pace in 2005, as evidenced by increasing demand for silicon feedstock, wafers, cells and modules. Forecasts by leading industry analysts indicate that the market will continue to show strong growth also in the quarters to come.
 
The REC Group continued to outpace the industry growth also in the fourth quarter of 2005 and the year as a whole, and will focus on increasing production capacity throughout the value chain during 2006. The supply of polysilicon has been increased through the acquisition of ASiMI, and the Group will decide on further capacity expansions during the first half of 2006.
 
The Group is also carrying out significant expansion projects in the downstream area where ramp-up largely will be completed in the first half of 2006. Further, wafer production will increase in the second half of the year as the second production facility at Herøya gradually comes on stream. These growth initiatives and other strategic investments will require additional equity financing, and the REC Group reiterates its intention to apply for a listing on the Oslo Stock Exchange during the first half of 2006.
 
Høvik, March 1, 2006 Board of Directors
For more information, please contact;
Erik Thorsen, President & CEO, +47 67 81 52 60
Jon Andre Løkke, SVP Finance, +47 67 81 52 65