Half Yearly Report

Interim Report 2011

PV Crystalox Solar plc

18 August 2011

PV Crystalox Solar PLC 

Interim results

Strong H1 Performance but continued expectation of difficult trading conditions in H2

PV Crystalox Solar PLC, one of the world's leading providers of photovoltaic ('PV') silicon wafers, announces interim results for the 6 months ended 30 June 2011.

Overview of results

·; Wafer shipment volume increased by 23% to 204MW (H1 2010: 165MW)

·; Revenues up by 16% to €129.6million (H1 2010: €111.7 million)

·; EBIT up by 161% to €24.3 million (H1 2010: €9.3 million)

·; Net cash position at 30 June 2011 of €41.3 million (31 December 2010: €54.8 million)

Progress against Strategic Objectives

·; Increasingly diverse geographical customer base with major PV companies

·; 10% reduction in average wafer production cost in H1 2011

·; Bitterfeld to achieve nameplate production capability in H2 2011

Outlook

·; Recent pricing pressures expected to persist

·; Increased demand expected in a number of significant markets, particularly China, Japan and the US

Summary Group income statement  

Dr Iain Dorrity, Chief Executive Officer, commented:

"Our performance in the first half underlined the progress we have been making in recent years to diversify our customer base and to reduce our costs. Despite significantly reduced global market demand, we have increased shipments and delivered a strong improvement in profitability.

Looking ahead, industry volumes are expected to pick up in H2 but the pricing pressure seen recently is persisting and we are currently operating below breakeven. We are taking measures to counteract these difficult conditions and we are hopeful that developments in a number of markets will lead to increased demand and more favourable trading conditions in the medium term."

Enquiries:

About PV Crystalox Solar PLC

PV Crystalox Solar is a highly specialised supplier to the world's leading solar cell manufacturers, producing multicrystalline silicon wafers for use in solar electricity generation systems.

Our customers, the world's leading solar cell producers, incorporate these wafers into solar modules to harness the clean, silent and renewable power from the sun. We are playing a central role in making solar power cost competitive with conventional hydrocarbon power generation and, as such, continue to seek to drive down the cost of production whilst increasing solar cell efficiency.

The Group's own polysilicon plant is in Bitterfeld, Germany. The Group manufactures silicon ingots in Oxfordshire, United Kingdom, and carries out wafer production for European customers at its facilities in Erfurt, Germany. Wafers for customers in Asia are produced in Japan.

Chairman and Chief Executive's Joint Statement

Overview and Strategic Update

The Group achieved a creditable operational performance in the first half of 2011, despite a deteriorating market environment in the latter months, with revenues up 16% on the previous year. Demand for our wafers continued to be strong during the first four months of the year and although demand weakened during May and June, shipment volumes for the first half of 2011 totalled 204MW, a 23% increase on the 165MW shipped in the same period in 2010. Our average sales price (ASP) during the first half year was approximately 6% below that reported for H1 2010 but the impact on margins was offset by the accelerated progress in our wafering and internal polysilicon production cost reduction programmes.

PV end-market demand during H1 2011 has been much weaker than initial industry forecasts particularly in the two key markets of Germany and Italy. A recent announcement from the German Environment ministry confirmed that PV installations in Germany, the largest global market, were only 1.1GW during the first five months of the year which is approximately half the level installed in the same period in 2010. Uncertainty due to delays in finalising revisions to feed in tariffs ("FIT") froze demand in Italy in the first half of the year although recovery of the market is expected following the announcement in May and subsequent clarifications in late July. As a result of sluggish growth in these two key markets, spot pricing of wafers and modules reduced from Q1 2011 levels by 45% and 25% respectively during May and June but has now stabilised.

The Group continues to make good progress in expanding its geographical reach and broadening its customer base. Shipments to customers in Asia reached 80% of total volumes and are broadly balanced between Japan, Taiwan and China, with each accounting for in excess of 25%.

Operational update

The expansion of the Group's ingot production capacity to 535MW was completed on schedule and within budget. The next phase of expansion which started in December 2010 is on track for completion by early 2012, with a capital expenditure of €10 million. With associated productivity improvements the capacity will reach 750MW at completion rather than the originally planned 670MW. Further capacity expansion to reach 1GW will depend on market conditions.

The Group continues to make good progress with its internal polysilicon production facility in Bitterfeld. Production has ramped up steadily since operation started in July 2009 and we have achieved an annualised output averaging 1475MT during the first five months of 2011, prior to the scheduled maintenance shutdown in June. Following some improvements to the plant during the shutdown, the facility is expected to operate at its nameplate capacity of 1800MT during the second half of 2011. At the same time production costs have been falling and since August 2010 the fully loaded production cost has been below the average price of our contracted polysilicon from external suppliers. Increasingly, our internal polysilicon will become a significant driver of our future profitability as further cost reduction is expected when we reach full capacity.

Financial Review and Position

Sales volumes were 23% higher in the first half than in the same period in 2010 although the impact was tempered by average selling prices being 6.2% lower. The net effect was that sales revenues were 16% higher than last year at €129.6 million (H1 2010: €111.7 million). Sales volumes and pricing had been in line with expectations until May when there was a fall-off in demand and significant pricing pressure.

The Group generated EBIT at €24.3 million which was an increase of 161% above that for H1 2010 of €9.3 million. This was achieved in spite of an inventory write down of €4.4 million to equate inventory valuations with market price expectation for the 3Q of 2011. This was ameliorated by an acceleration of our cost reduction programme in the first half of 2011. The Group's management are confident that further cost reductions of 5% to 10% will be achieved in the second half of the year.

The Group had a net positive cash balance of €41.3 million which was down on the €54.8 million at the end of 2010. The Group had invested €14.9 million (net of grants) in capital equipment in H1 2011. Working capital had increased by €7.6 million, mainly due to higher inventories at the end of the period following lower than expected sales volumes in June. In addition, the Group had paid the 2010 final dividend of €8.1 million in June. This cash position remains a competitive advantage of the Group and despite the difficult trading conditions anticipated in the second half the Group expects to retain a healthy cash position through the year-end.

Dividend

In view of the currently challenging market conditions, the Board has decided not to declare a dividend. The Board continues to recognise the importance of dividends to shareholders and the directors will review the potential to re-instate dividends based on the future performance and prospects of the Group.

Risk factors

The principal risks and uncertainties affecting the business activities of the Group were identified under the heading 'Principal Risks and Uncertainties' in the Directors' Report on pages 14 to 15 of the 2010 Annual Report, a copy of which is available on the Group's website www.pvcrystalox.com. In the view of the Board the key risks and uncertainties for the remaining six months of the financial year continue to be those set out in the 2010 Annual Report although the impact of the overcapacity in the PV industry is more severe than had been anticipated.

Market drivers

The European Photovoltaic industries Association (EPIA) believes the mid-term market drivers for the PV industry continue to be positive and expects global PV installations to grow to 44GW in 2015. For the past decade, Europe has played a dominant role in the growth of the PV market and although there is now uncertainty over the path of European incentives, industry pricing and regulatory constraints, the EU maintains its commitment to meeting its 2020 climate change goals and boosting the share of renewables in the total energy mix to 20%.

Asia Pacific photovoltaic markets are set to grow rapidly and are projected to account for approximately one-quarter of global demand by 2015, up from 11% in 2010, according to the latest report from Solarbuzz. The top five markets in this region-China, Japan, India, Australia, and South Korea-are expected to account for 3.3GW of demand in 2011.

The Chinese government's new FIT scheme which was announced on 24 July has the potential to increase solar installations in the country by 1.5GW in the next 18 months. Furthermore there is increasing expectations that China will double its 2015 solar goal from 5GW to 10GW and also raise its 2020 goal from 20GW to 50GW.

A national FIT scheme introduced last year is also driving solar growth in Japan, with the impact of the Fukushima nuclear disaster adding further momentum. Japan was the fourth largest PV market in the world in 2010, doubling for a second year in a row and installing 960MW, thanks to re-launch of the nationwide residential incentive programme and the net feed-in tariff. Following the Fukushima nuclear disaster, Japan set an ambitious new renewable energy target and the country will now aim to get 10% of its primary energy supply from renewables by 2020 with several prominent business figures and politicians backing a larger role for solar.

Outlook

End-market demand is expected to accelerate during the second half of the year fueled by a recovery in the two biggest markets, Germany and Italy, and strong growth in the US and Asia. Industry analysts are forecasting that global PV installations will more than double in the second half of the year to reach a full year total of 19GW to 21GW, representing growth of 10% to 20%. In the longer term the EPIA policy driven forecast predicts installations of 44GW in 2015.

Nevertheless the current supply situation and pricing pressure will mean that trading conditions are expected to remain challenging in the coming period. As noted in our trading update on 28 June, the increasing production capacity in the PV industry and high inventories have resulted in severe price erosion across all parts of the value chain, so far with the exception of polysilicon. Given these dynamics the Group is currently operating at below breakeven level and the Group is likely to incur an operating loss in the second half. Full year shipment volumes are expected to be in the range 400MW to 450MW.

The Group is taking action to address the difficult market environment by working to obtain more sustainable wafer ASPs and to realize reductions in supplier prices. Furthermore, the Group is accelerating its cost reduction programmes to decrease the cost of its internal polysilicon, enhance ingot crystal quality and introduce a lower cost wafer production technology. With these programmes reaching completion and the potential for substantial market growth the Group looks forward to a return to more favourable trading conditions.

Maarten Henderson

Chairman

Dr Iain Dorrity

Chief Executive Officer

17 August 2011

Statement of Directors' Responsibilities

The directors confirm that this condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that this Interim Report includes a fair review of the information required by the Disclosure and Transparency Rules of the Financial Services Authority, paragraphs DTR 4.2.7 and DTR 4.2.8.

The directors of PV Crystalox Solar PLC are listed at the end of this Interim Report and their biographies are included in the PV Crystalox Solar Annual Report for the year ended 31 December 2010.

By order of the Board

Dr Peter Finnegan

Chief Financial Officer

17 August 2011

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2011

All of the activities of the Group are classed as continuing.

The accompanying notes form an integral part of these financial statements.

Condensed Consolidated Balance Sheet

as at 30 June 2011

Condensed Consolidated Statement of Changes in Equity

for the six months ended 30 June 2011

Condensed Consolidated Cash Flow Statement

for the six months ended 30 June 2011

The accompanying notes form an integral part of these financial statements.

Notes to the Condensed Consolidated Interim Financial Statements

for the six months ended 30 June 2011

1. Basis of preparation

These condensed consolidated interim financial statements are for the six months ended 30 June 2011. They have been prepared in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting'. They do not include all the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2010.

The statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the 2010 financial statements.

2. Basis of consolidation

The Group financial statements consolidate those of the Group and its subsidiary undertakings drawn up to 30 June 2011. Subsidiaries are entities over which the Group has the power to control the financial and operating policies so as to obtain benefits from its activities. The Group obtains and exercises control through voting rights. Consolidation is conducted by eliminating the investment in the subsidiary with the parent's share of the net equity of the subsidiary.

3. Functional and presentational currency

The financial information has been presented in Euros, which is the Group's presentational currency.

4. Segment reporting

The segments are defined on the basis of the internal organisational and management structure and on the internal reporting to the Board. IFRS 8 requires entity-wide disclosures to be made about the countries in which the Group earns its revenues and holds its assets which are shown below:

Segment information for the six months ended June 2011

*Excludes financial instruments, deferred tax assets post-employment benefit assets and rights arising under insurance contracts.

Two customers accounted for more than 10% of Group revenue each and sales to these customers are as follows (figures in €'000):

• Sales 31,544 (China);

• Sales 28,072 (Japan).

Notes to the Condensed Consolidated Interim Financial Statements

for the six months ended 30 June 2011

4. Segment reporting continued

Segment information for the six months ended June 2010

*Excludes financial instruments, deferred tax assets post-employment benefit assets and rights arising under insurance contracts.

Four customers accounted for more than 10% of Group revenue each and sales to these customers are as follows (figures in €'000):

• Sales 32,054 (China);

• Sales 24,554 (Japan);

• Sales 18,741 (Rest of Asia); and

• Sales 18,338 (Japan).

5. Cost of material

Cost of material includes an inventory write down of €4.4 million (H1 2010: nil).

The write down represents a reduction in value of inventories to the anticipated sales price in Q3 2011 (less future processing costs where applicable) of both finished goods and work in progress.

6. Employee benefit trust

The Employee Benefit Trust currently holds 10,834,000 shares (2.6%) of the issued share capital in the Company. It holds these shares in trust for the benefit of employees.

7. Income tax

The average taxation rate shown in the consolidated statement of comprehensive income is 25.2% (H1 2010: 29.6%).

In accordance with IAS 12 the profit element of material held in stock at the period end must be eliminated at the tax rate applicable to the company holding the stock. This elimination had a disproportionate effect on the average tax rate in the period ended 30 June 2011.

The anticipated long-term average tax rate is approximately 28%.

8. Earnings per share

The calculation of earnings per share is based on a profit after tax for the period of €18.4 million (H1 2010: €6.7 million) and the number of shares as set out below:

9. Property, plant and equipment

Additions to property, plant and equipment in the six months ended 30 June 2011 were €16.6 million (H1 2010: €4.4 million).

Notes to the Condensed Consolidated Interim Financial Statements

for the six months ended 30 June 2011

10. Dividends paid in the period

As agreed at the Annual General Meeting held on 26 May 2011, the Group paid a dividend of 2.0 Euro cents per ordinary share as shown below:

11. Changes in contingent assets and liabilities

There were no changes in contingent assets and liabilities.

12. Related party disclosures

The Group defines related parties as the senior executives of the Group and also companies that these persons could have a material influence on as related parties. During the reporting period, none of the shareholders had control over or a material influence in the parent group. All future transactions with such related parties will be conducted under normal market conditions.

13. Material post balance sheet events

There were no material post balance sheet events.

14. Approval of interim financial statements

The unaudited interim financial statements were approved by the Board of directors on 17 August 2011.

The financial information for the year ended 31 December 2010 set out in this Interim Report does not constitute statutory accounts as defined in Section 434 Companies Act 2006. The Group's statutory financial statements for the year ended 31 December 2010 have been filed with the Registrar of Companies. The auditor's report on those financial statements was unqualified and did not contain statements under Section 498(2) or Section 498(3) of the Companies Act 2006

Officers

Directors

Maarten Henderson (Chairman)Dr Hubert AulichDr Iain DorrityDr Peter FinneganMichael ParkerJohn Sleeman

Company Secretary

Matthew Wethey

PV Crystalox Solar PLC

Brook House

174 Milton Park

Abingdon

Oxfordshire OX14 4SE

Tel: +44(0) 1235 437 160

Fax: +44(0) 1235 437 199

www.pvcrystalox.com]