The dramatic decline in PV industry pricing has led to claims of
unfair trade practices and the initiation of anti-dumping
investigations in the USA, China and Europe.
In November 2012 the U.S. International Trade Commission (USITC)
unanimouslyfinalised its initial finding that Chinese photovoltaic
imports materially injured the U.S. industry. It found that Chinese
producers/exporters have sold solar cells in the United States at
dumping margins ranging from 18-250% and that they have received
countervailing subsidies.
Business review:
Operational review
In July 2012 the Chinese Ministry of Commerce (MOFCOM) began
investigating claims of polysilicon dumping by US and South Korean
companies and its scope was later extended to include European
producers. A preliminary decision was expected in February 2013 but
has now been postponed to a later date.
In early September 2012 the European Commission launched
investigations into possible dumping of wafers, cells and modules
by Chinese producers into the EU market and claims that Chinese
imports also benefit from unfair government subsidies. Exports of
PV products from China to the EU totalled EUR21 billion in 2011,
making the case the largest unfair-trade probe ever started by the
EU. The investigations are expected to take 15 months to complete
although provisional duties may be imposed in May/June 2013 if
there is sufficient evidence to support the complaints.
Operational Review of 2012
On account of the depressed market prices and our cash
conservation strategy, wafer production output was reduced
significantly during 2012 and we operated at around 14% of our
maximum 750MW capacity. Although our long term wafer supply
contracts provided some protection from the worst of the market
pressures, the fall in average sales prices (ASPs) and less than
optimum production volumes adversely impacted our margins.
Polysilicon production remained suspended throughout the year at
the Group's Bitterfeld facility as our reduced polysilicon
requirements were more than satisfied by external suppliers and
market pricing which continued to fall throughout the year,
remained below our cash costs.
In common with most, if not all, PV companies, the Group has
long term contractual commitments for the purchase of polysilicon
at prices which are incompatible with current market prices for
wafers. We were successful in negotiating significantly reduced
pricing for deliveries in 2012. As a consequence of the reduced
wafer production levels the Group has traded excess polysilicon
during the first half of the year in order to avoid excess
inventory levels.
The Board completed a strategic review of the business in the
latter part of 2012 which took account of the adverse market
conditions and the Group's strong net cash balance. As a result the
Group will carry out a radical programme of restructuring while
retaining its core production capabilities and also return excess
cash to shareholders.
As part of this programme the Group has permanently closed its
polysilicon production facility in Bitterfeld, Germany. In
addition, production output will be reduced at its UK ingot and
German wafer operations. Regrettably these actions will lead to
very significant job losses both in the UK and in Germany.
Cash conservation focus in 2013
The Group will continue with its cash conservation strategy
while current market conditions persist. The Group has adjusted its
operations to align with anticipated sustainable short term market
demand so that the ongoing business will be broadly cash neutral in
2013. Wafer production volumes have been halved from 2012 levels,
and we continue our focus on cost control and inventory management
including trading of excess polysilicon where necessary.
The Group has long term contractual commitments for purchase of
polysilicon but was successful during 2012 in reaching agreement
with its suppliers to adjust volumes and prices. A positive outcome
to negotiations has also been concluded for Q1 2013. Price
reductions have also been negotiated with other key suppliers
including wafering subcontractors which, in combination with the
weaker Japanese Yen, will enable further reduction in direct wafer
production costs in 2013.
Outlook
Modest market growth is expected in 2013 with industry analysts
IHS forecasting installations of 35GW up 9% on 2012. The dominance
of Europe is expected to continue to decline as governments reduce
incentives. Strong growth in both China, which is expected to
overtake Germany as the largest market, and also in Japan, will
ensure that Asia will become the most important region in the year
ahead.
The Group continues to believe in the positive long-term outlook
for the photovoltaic industry, but is mindful of the intensely
competitive environment which is likely to persist in the short
term and which has already led to many companies leaving the
industry, either voluntarily or through insolvency. The Board
believes that the adjustment of operations to align with
anticipated sustainable short term demand will enable generation of
positive cash flows during 2013 and leave the Group well positioned
should the market begin to recover.
The market is expected to remain extremely challenging with
continued pressure on pricing, although the first two months of
2013 have seen some modest improvement from the lows experienced in
late 2012. The European Commission has indicated that it will
announce its findings into claims of dumping of Chinese PV products
in June 2013 and any decision to impose antidumping duties would be
expected to provide some further support to pricing and boost
demand for the Group's wafers.
Business review:
Financial review
"The Board believes that its ongoing cash conservation strategy
will enable the Group to sustain adequate cash resources for the
foreseeable future."
Summary of Financial Review
Cash settlements totalling EUR90.6 million received in
connection with termination/variation of long-term customer
contracts.
In 2012 Group revenue decreased by 78.0% to EUR46.3 million
mainly due to restricting sales to contracted customers rather than
selling at below cash cost.
Earnings after tax were a loss of EUR121.4 million producing
earnings per share at a loss of EUR0.30.
Net cash inflows of EUR67.1 million were generated from
operating activities.
The Group's net cash position at year end was EUR89.4
million.
The base plans indicate that the Group will be able to operate
within its net cash reserves for the foreseeable future.
The main part of the loss in the year related to non-cash
write-downs.
An impairment charge has been recognised to reduce the carrying
values of plant by EUR82.5 million.
The Group wrote down its inventories by EUR41.5 million.
An additional onerous contract charge of EUR42.0 million was
recorded.
In 2012 Group revenue decreased by 78.0% to EUR46.3 million
(2011: EUR210.4 million). This fall was due to the Group's cash
conservation strategy whereby wafer sales were in the main limited
to contracted customers where a price could be obtained that was
higher than the cash cost of production. Wafer shipments in the
year were 108MW (2011: 384MW).
During the year the Group incurred an EBIT loss of EUR110.1
million (2011: loss of EUR67.5 million) driven primarily by
non-cash write-downs. Firstly, the Group's production capital
equipment was written down by EUR82.5 million. Secondly, the Group
wrote-down its inventories by EUR41.5 million and thirdly, the
onerous contract provision in respect of long-term polysilicon
supply agreements was increased by EUR42.0 million. Finally, there
was a loss of EUR9 million in respect of the discontinued
polysilicon operation and EUR22 million in respect of the fall in
wafer volume and average selling prices. On the positive side there
were cash settlements in respect of the cancellation of customer
contracts of EUR90.6 million. In summary; the Group generated
EUR67.1 million additional net cash from operating activities in
the year despite reporting an EBIT loss of EUR110.1 million.
Net interest expenses were EUR0.7 million (2011: income EUR0.5
million). The main reason that there is net interest expenses is
the inclusion of a charge of EUR1.3 million in respect of unwinding
the discount rate used in the calculation of the Group's onerous
contract provision. The Group's net cash position at year end was
EUR89.4 million (2011: EUR22.6 million). An income tax charge of
EUR10.6 million (2011: credit of EUR6.2 million) is mainly due to
the expected income tax credit of EUR29.1 million at the effective
tax rate of 26.3% being more than offset by the writing-off of
previously recognised tax losses and unrelieved 2012 tax losses of
EUR40.4 million.
The loss attributed to the equity owners in the year was
EUR122.7 million (2011: EUR55.7 million), which equates to a loss
per share of EUR0.299 (2011: loss EUR0.150).
The Group generated net cash inflows from operating activities
of EUR67.1 million (2011: EUR1.6 million) and free cash inflow of
EUR65.0 million (2011: outflow of EUR20.0 million). Free cash flow
is defined using the cash flow statement as net cash from operating
activities plus cash from/(used in) investing activities less
interest received. The net operating cash flow was decreased by the
absorption of EUR7.3 million into working capital (2011: EUR8.6
million). Lower sales in the year had released EUR21.9 million cash
from debtors although this had been more than offset by an increase
in inventories of EUR33.2 million partially offset by the non-cash
write-downs of closing inventories.
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