REC Silicon ASA

Good morning, my name is Tor Vind and I'm the CEO of REC Silicon. We would like to welcome you to the presentation of the first quarter in 2021. We are all in the US in different locations, so hopefully the technology will be working. Together with me, I have James May, our CFO. Kurt Levins, who is responsible for our Butte operations. And he is going to talk about the silicon gas semiconductor update. Also Chuck Sutton, responsible for our solar market. we'll give you an update on the PV. I will then cover shortly the ULIN, give you some update on the battery side, and also how we see next quarter for REC silicon. Next. The highlights for this quarter is basically that the revenue came in at $28.1 million. And we have again a positive EBITDA of $4 million. The cash balance is by the end of the quarter, 131.5 million. And that's a cash decrease from the previous quarter of 3.4 million. As you know, we mainly make our income today from our semiconductor business. In Butte, we sold silicon gas of 781 metric tons this quarter, somewhat lower than what we had in Q4, but that's mainly due to the fact that Q1 normally is a weaker quarter than what we will have going forward in 2021. We sold 137 metric tons of semiconductor-grade polysilicon. And we then got the approval from our board to invest approximately 8 million in Butte. When we raised the capital back in October, we said that some of these capitals should be used to take business opportunities. We have been not able to pursue lately. And we have now then decided to invest in a DCS expansion. And the completion will be approximately 18 months from today. And we estimate that the payback time will be 2.5 years on this expansion. On the Moses Lake facility, as you know, there is no activity, no production in Moses Lake. But we see that in the marketplace, it is a very strong demand growth coming on. And Chuck will talk more about that. And we continue to work hard together with other companies and also with the US government to create a non-Chinese low carbon footprint solar value chain. And Chuck will give you more information about that. On the battery side, we continue the discussions with silicon anode companies concerning a silent supply contract in Moses Lake. We pursue discussions with several of these companies for the moment. And also we, or one of our a potential partner that started a pilot making silicon atom material in Moses Lake. So this is the highlight from this quarter. And then I hand over to James to present the financial review.

Good morning. Next slide, please. Story indicated the revenues for the first quarter were $28.1 million, which represents a decrease of approximately 22% compared to the $36 million that we saw during the fourth quarter of 2020. This decrease can be attributed to lower volumes, primarily due to this normal seasonality in our shipments. However, compared to the first quarter of 2020, the year-ago quarter, revenues increased by almost 14%, as we are now seeing a sustained recovery from the COVID-19 pandemic, as well as increasing demand from the semiconductor industry. Total EBITDA for the first quarter was $4 million compared to $1.9 million for the fourth quarter. And again, the increase, or in this instance, the increase in EBITDA can primarily be attributed to lower expenses in the solar material segment and in others. Compared to Q1 of 2020, EBITDA increased by approximately $3 million, or a factor of nearly three, due to higher silicon gas sales volume, higher semiconductor-grade polysilicon sales volume, and more importantly, higher production volumes, which is resulting in increases in capacity utilization and therefore increases in efficiency of the butte operation. Next slide, please. As I indicated on the last slide, revenues for the Butte facility declined due to lower sales volumes. Semiconductor polysilicon sales volumes decreased from 250 metric tons in the prior quarter to 137 metric tons, and silicon gas sales volumes decreased from 881 in the prior quarter to 781 in the current quarter. Decrease, again, is due to normal annual seasonality of shipments. However, if you look at the prior year quarter, Q1 of 2020, you can see the overall trend of increasing revenues over the last several quarters. A few more minutes, Kurt is going to provide a great deal more detail with respect to the market developments and outlook for the Butte Montana facility. EBITDA contributed by the semiconductor segment was $10.8 million for the first quarter of 2021. As you can see on the slide, the profitability of the Butte facility is trending upward, consistent with the sales trend due to higher volumes and increasing efficiency associated with higher production volumes. Next slide, please. Revenues within the solar material segment were only $100,000 and represent small sales from the remaining inventories of granular polysilicon. During the first quarter, net expense was $1.9 million in the solar material segment and $4.9 million in other. The decrease in net expense compared to the fourth quarter of 2020 was due to changes in estimates to arrive at liabilities at year end, which resulted in higher expenses during the fourth quarter of 2020. Next slide, please. Story indicated cash balances decreased by $3.4 million. during the first quarter. Cash outflows from operations were $1.3 million and consisted of inflows due to EBITDA of 4 million and a currency gain of $400,000 due to the effects of a weaker US dollar. These were offset by a $3.4 million increase in working capital, which was driven by a $7.6 million increase in inventories, $700,000 increase in trade receivables, which was offset by a $4.8 million increase in accounts payable and accrued liabilities. Other outflows included interest payments of $2.2 million, which was associated with the IFRS 16 long-term leases and a $200,000 contribution to the defined benefit contribution plan or defined benefit pension plan in the United States. Cash outflows from investing activities were $1.7 million and were a result of capital expenditures only. And cash outflows from financing activities were 500,000. And this was a result of the payment of long-term lease liabilities only. Again, total cash balances decreased by $3.4 million during the quarter to $131.5 million on March 31st. Next slide, please. Our nominal debt decreased by 400,000 during the quarter to 220.3 million. The change is due to a net decrease in lease liabilities of 400,000, offset by a $100,000 increase in the indemnification loan due to changes in currency rates. Nominal net debt increased by $3.1 million to $88.8 million during the quarter, And this was due to the decrease in cash of 3.4 million offset by the decrease in nominal debt of 400,000 that we just spoke of. Now turn the presentation over to Curt Levins to discuss market developments and business prospects for our Butte, Montana facility. Thank you.

Good morning. First, I'd like to talk about our semiconductor polysilicon segment and what we see in terms of, you've heard several times before, repeated from James and Tor, the seasonality effect. The fact is year after year, we see this same effect due to different customers, order patterns, issues around ends of fiscal years, weather, and even holiday periods. What's important to note is that when we look at this relative to last year, it's much higher. And on polysilicon, there was less COVID effect due to the forward nature of agreements for supply in polysilicon. We are seeing increased inventory drawdown in the semiconductor wafer space and polyspace. And that is a result of the very strong demand and use. But it's also important to note that while utilization is going towards a more full situation, without further expansion, the opportunity for very large increments is going to be, in terms of more volume, is going to be somewhat muted. Also want to note that we are on track for three key qualifications of our material, which will result in our volumes gradually getting phased into production volumes at the customer in the second half. Next. In silicon gases, again, we see similar effect in the first quarter. However, last year there was some COVID effect to our Q1 results. In this quarter, it's important to note that the underlying demand was very strong. However, there were some cycle or say some logistics challenges that we ran into and worked through. So sufficient enough that we were able to make timely deliveries of our products. However, There were opportunities that were more timing related, meaning that we had to move material into subsequent periods as a result of bookings and the global freight situation. We continue to monitor that and have thus far been able to manage it with our channel partners and our channel partners inventory, as well as end users inventory. overseas so that it's not something that is of concern at this point. Our advanced silicon gases are increasing in terms of demand. Advanced silicon gases make up a segment of our silicon gases business. The main driver of that increase is due to device technology advancement. So as these new processes come online, as you do hear about new fabs being built, there is a fair percent of those that are being built with the most advanced technology. And that's using our other gases that we sell specifically for those applications. We are currently sold out. We've de-bottlenecked our process and we're continuously de-bottlenecking as well as engaging in process improvements to increase our volume. And our current expectation is to continually increase shipment level every quarter through the remainder of this year. Next. so to to put a finer point on it in terms of how we see things evolving in the semiconductor polysilicon space for us we've done is provided some customer indicative forecasts to give you a viewpoint in terms of what we talked about when we say growing volumes through the remainder of the quarters in this particular case you can see what q1 actual is And then you can see a low case and a high case based upon feedback from our key customers in terms of shipments for the remaining year. It, of course, will be dependent upon how fast the customers draw down inventory, where we end up in that range, as well as dependent upon our final qualification and some of those key customers that I had already noted and the timing around that. However, above all shipments are expected to increase and above and beyond that. We're going to start need to look at new wafer capacity and fabrication capacity that is all in the works. However, it takes time. Next. In terms of Silicon gases, we also see a trend towards increasing shipments through the remaining quarters of this year. Main consuming segments are currently increasing. That means the semiconductor. The flat panel display as well as the PV segments are all very strong right now. The. Quarterly shipments that we are showing at this case is includes all of our. Silicon gases together. You will note as well that. There may be some effect as a result of. Timing on new customer facilities, startups and there could be some minor adjustments and movements due to the global logistic bottlenecks. All things that we are in fact. Working around and. Making sure that we keep on top of next. We talked about DCS before when we had several quarters ago when we talked about business opportunities that we had. We were able to get approval for one of those business opportunities, and that's for dichlorosilane. This is part of our portfolio. Specifically, demand for this material is driven by leading edge semiconductor fabrication. and the new investments and new processes going in. This has a compounded annual growth rate that is above underlying normal semiconductor materials rate. And most importantly, we have advantages in terms of our offer to the customers in this particular product, as well as advantages due to our scale and process that enable a world-class cost position. We are currently at full capacity in our existing operation. So this new investment is going to allow us to increase our production capacity by more than two times and nearly double the current packaging capability. In addition, the design basis is going to allow for a more rapid incremental expansions in the future as the market continues to grow. So we will not have to take as long to bring on the capacity. The product quality is designed for the next generation processes and requirements. And currently it's being very well received from in terms of discussions around getting this going as quick as possible from key customers and end users. And as Tor noted, I believe that the payback right now is estimated to be two and a half years. Thank you. With that, I'll turn it over to Chuck.

Good morning. Projections for global PV installations continue to increase. During first quarter, analysts again raised their outlook for 2021 and beyond. The primary drivers that we see helping to maintain the high installation outlook is continued decline in the PV project installation cost. These include the decline costs in modules, inverters, and the balance of system components like racking and wiring. High power modules and higher efficiency modules in specific allow for more power per square meter. That's helping drive that cost down. Globally, governmental support for renewable energy is increasing. You see this in Europe, United States, China and India as examples. You're also seeing the general population with a growing desire for climate change initiatives and decreasing the impacts of carbon release. You can see with the graph on the right hand side that the outlook to 2020 continues to grow and the pace of growth is forecasted to increase in the near term. 2021 is currently projected to have installations around 180 gigawatts up from the 160 gigawatts outlook at the beginning of the year. Next slide. We see the market is shifting to higher efficiency products. Modules are becoming larger with more power, but also we see a shift to higher efficiency technologies to increase the power per square meter. N-type wafers and cells allow for more power per square meter and the manufacturers are starting to acknowledge this benefit and move products this direction. REC silicon FBRB polysilicon meets the quality requirements needed for higher efficiency products. This has been demonstrated with our material from the ULINJV plant being used in monocrystalline production. In reviewing the process for Moses Lake, we see limited investment being required to upgrade the FBRA manufacturing process to meet these standards. With regards to N-type material specifically, there are some quality and control adjustments needed for the polysilicon ingots, but the main investment when switching to the N-type process is in the cell technology area. Reviewing the graph on the right, you can see that the shift to N-type wafers will continue with a projection around 50% of the market being N-type products by 2030. We see this as a strong driver for further installation growth as the years go on. Next. As installations have increased, the demand for raw material also has increased. This has now reached the level of existing operating polysilicon factory capacity. As the supply chain has become more constrained around polysilicon, this has led to increases in prices. Prices have continuously increased over the last six months, along with increasing wafer prices. The wafer manufacturers are trying to pass along the cost increases to the cells and modules. You can see this lined out in the two graphs on the right-hand side. Project installers are starting to push back on module price increases, delaying projects if they're able to in hopes that prices will decline again. This is causing module manufacturers to lower factory utilizations. If this continues, we could see some forecast adjustments for 2021 global installations and the potential for factory utilization slowdown move up the supply chain. To maintain PV installation growth and stabilize pricing, new polysilicon capacity is needed, and today's pricing supports that. But there is always the risk of overinvestment in the polysilicon capacity that we have seen in the past. Next. In this slide, you can see the solar value chain pie graphs going across, and you can see that China is a dominant piece in all areas, except in the actual installations. While as a country, they have the most installations, proportionally it doesn't match up to the manufacturing side. This is the part of what is driving the desire for localized manufacturing, both for supply security, but also supply chain independence and control. You can see that the U.S. has a base for polysilicon supply and also a fair percentage of installation. It is the other pieces of the value chain that need more development, and we believe things are headed in that direction. Next. In the United States, the Biden administration is starting to outline their support for renewables and carbon reductions. We are seeing it in proposals like the American Jobs Plan, where they have called out support for different areas, like revitalizing manufacturing by increasing capital support for rural areas and clean energy. They've called out the Buy American initiative to spur jobs developing clean energy. They're also looking to strengthen the manufacturing supply chains for critical goods, with renewables and energy storage being part of that. Along with looking to further extend the investment tax credit, which has already been extended three years by Congress, that brought around a forecast at 15 gigawatts of additional installations. Extending the investment tax credit another 10 years is a proposal and has great potential around jobs to modernize the power generation and deliver clean energy. Congress has also put forth the Endless Frontiers Act. in support of research and development in key technology areas, like clean energy and batteries. It also has a part calling for support in developing domestic supply chains. The last part, there's also a group working on the Ultra Low Carbon Solar Alliance. It's working to build a label that certifies and declares a product has been produced with the lowest carbon processes. given the downstream markets the options to pursue these products for their projects. All of these initiatives, we believe, will help drive solar production in the United States. Thank you very much, and I will give you back to Mr. Torben now.

Thank you, Chuck. And just to add to sentence to Chuck's presentation, definitely, let's say, if President Biden is going to meet his renewable goals here in the U.S. It is also a requirement that it will create jobs in the U.S. And as you can see from the pie chart Chuck showed, the U.S. have the end market, we have the polysilicon. What we lack in The value chain is particularly wafer, where the Chinese are so dominant, having about 99% of the capacity. And that's why, let's say, we had to shut down, because the trade dispute between the US and China, which make it impossible for us to get access to the wafer producers located in China. And that's why there is a strong support to try to build non-Chinese low-carbon footprint value chain within the solar, both in the US, but also supported by the initiatives in Europe. If we look to China and Yulin JV. Next, please. We are, as reported in the last quarter, we have had some disputes with our with the JV partner in China about the payment of $4.7 million. I'm not going to get into the details into this dispute, but it's related to two things. It's the performance criteria of the facility or the plant over there, and it is also payment for our support, which we give on a daily basis to our colleagues in Jylin. There's ongoing discussion to try to solve this issue, and I'm very hopeful that we will soon be able to report that we have resolved this dispute. The Jylin JV, let's say, a state-of-the-art production facility. It contains both the FBRB production facility. We have Siemens semiconductor grade polysilicon there. And we also have a 500 metric ton of xylem loading. And as you understand, due to the very strong demand for polysilicon for the moment, we are also sold out of Jyllim. and we then delivered about 2,800 metric tons of FBR to the major mono wafer companies in China, out of Yulin. We loaded 120 metric tons of Xylem, which went to both the PV and to the flat panel market. And we also, we are the only company inside China, which is now able to produce high quality polysilicon for the semiconductor industry. Gradually the operations are improving and we expect that there will be an increase in production in the second quarter. And by being part of this JV in China, REC silicon In fact, it's the only company in the polysilicon space which do have production capacity both inside and outside China. And if you expect that there will be two PV value chain, we will be able to benefit from both these markets. Can you go to the next, please? Then I'm going to give you a very short update on where we are on the discussions concerning supplying the silicon anode companies with silane out of Moses Lake. And the graph which we have taken on the right hand side here shows the estimated demand estimated by a company, a consulting company called Karn. here in the US. And as you will see, in fact, there is three sources of silicon. You have the MGS or that metallurgical silicon grade silicon. That's approximately 97, 98% pure silicon. That's what is basically used today into the batteries. You have a source called TCS, which is the source or the feedstock for our competitors working in the PV industry, but using then Siemens reactors. And we have Silen, which is the gray line. And as you can see, from 2024 to 2025, This consultant is very bullish that silane will be the predominant source of silicon into battery anodes. The reason why is that silane is 100% pure silicon, and that's what you need to make high-efficiency silicon anode material. His estimate is that by 2030, there will be a market for 50,000 metric tons per year here in the US and the global market will be around four times larger. 200,000 metric tons on the global demand by 2030. This is definitely dependent upon how the electrification will continue. But all indications is that this will be a very strong market. you to remember we do have today 25,000 metric tons spare capacity of silo in Moses Lake. Please continue. And we are now having discussions with several of these silicon anode companies concerning a silo supply contract. And we also have put forward that before we will enter into a contract, we need some financial guarantees, because to start up without financial guarantees for the offtake is not an option for REC. And as I also mentioned, we are the only one outside of China which can supply Cylon for the moment. We have 25,000 metric tons in Mosul Lake, we have 7,200 in butte. On the other hand, definitely, we are not going to ban the semiconductor market, where we are as of today, but we have some spare capacity in butte, which could be used for the silicon anode material companies as well. We are negotiating with several companies, but we have nothing more to report. There is a strong interest, but we are not yet at the final stage to sign a contract. On the other hand, one of these companies has started a silicon anode pilot in Moses Lake, and they are producing small amounts of silicon anode material at our plant. which is then using Xylem from our Butte facility. So if we go into the last slide. As you know, we are a huge Xylem producer. And the reason why is that we use Xylem for PV, while all the other competitors use TCS. Xylem is the best feedstock. That's why we have a very strong market presence in the silicon gas. 70% of the semi-global demand for silicon gas is supplied by our Butte facility. Approximately 3,200 metric tons a year, plus minus. Hopefully, somewhat higher in 2021. And also Cylon, as the purest feedstock, together with Siemens, produced the highest quality polysilicon called Float Zone. And it is only one other company which might be able, or which is able to do that. And as was presented by James, we had an EBITDA out of Butte this quarter around $10 million. So the EBITDA on a yearly basis in Butte will be between $35 and $45 million. So that's a relatively good business. And we believe it will improve going forward, both due to the market strength in the end market, but also the fact that we now could start to invest in business opportunities we have not been able to do due to our financial situation before. On the solar side, we could have made a decent amount of money today if we had access to the Chinese market. There is nothing in the politics we see now between the US and China, which point towards a resolution to the trade dispute between the two countries. And that's why we focus so much to start together with other companies and the government here in the US to try to make a non-Chinese value chain within the PV. And that is very important, as I said. to create jobs in the renewable space. Here in the second largest market for solar panels. Just behind China. And as you know, FBR is a very competitive technology. It consumes way less energy. And at the same time, it is a continuous process 24-7. and the reactors can run more than 12 months before we have to make some changes. Compared to Siemens, where you have a batch process, which makes it, you have to make turnaround every week, approximately. And there is no doubt that also in the future, we are pursuing now this very strong momentum in the silicon anode area. And if you want to do silicon anode material, and you are going to use silane, you basically have to go to REC, because we are the only one which do have available capacity built both in Mosul Lake and also in Butte. And remember, the investment for Motos Lake was 1.7 billion. So a greenfield plant making silo will definitely at the same capacity that ours will definitely be an investment of one above 1 billion. So I think we have three very attractive areas where we see now as silent can be used. And that's where we pursue all the business opportunities we can see. I think that is what we intended to present today. So if there is any question, please let us know.

Okay. We have a few questions that have been put in on the web. The first one, is that based on the market outlook, do you plan to open up Moses Lake during 2021? And how long will it take to increase capacity utilization from zero to 100% at the Moses Lake facility?

We have communicated that we plan to restart Moses Lake in 2023. We also have communicated that to be able to do that, we need to make some decisions by the end of this year, by the end of 2021. When it comes to how fast we are going to increase the production, it will definitely depend on two conditions. First, the assumption in the 2023 startup is that we do have, at that time, demand from the silicon anode, let's say, companies to deliver, to make silicon anode material. And we also are pursuing the PV market. And that means that either China, surprisingly, would open up for our polysilicon, or we would be able to re-establish and non-Chinese value chain within that time period. As I said, we are pursuing both these strategies, and we feel confident that we will be able to put together a portfolio, which make it possible to start up in 2023.

Okay, the next question. Given the price development of polysilicon in China over the last several months, do you see a case for restarting even with the current trade tariffs in China?

No, that is probably not possible because As most of you know, if you buy polysilicon from the US and import it to China, you have to add 57% duty on top. And it is not on the price we sell the polysilicon, but it is the market price. So, for example, when the price today is about $20 per kilo, they have to pay 57%. on top of 20 and add that duty to what would be our price for selling to our customers. And that is not going to be interesting for potential customers in China. So the only way we can get access to the Chinese customers will be that these This duty is only on polysilicon made in the US. There is polysilicon capacity also in Germany and in Malaysia. They are not having any duty. China, for the moment, imports approximately 100,000 metric tons of polysilicon from non-Chinese companies located outside of China. which do not have duty. So, this is particular to the trade discussion between the US and China. But again, it is not an option to get into the Chinese market, as long as the 57% duty exists on our policy.

During April, the company announced the termination of the strategic partnership with Violet Power, and indicated that it was pursuing other opportunities with proven operators within the solar supply chain. Could you comment a little more on the termination of that agreement and maybe the partners that the company is working with and the timing of this initiative?

Yeah, as I have already communicated, we see a lot of opportunities. We are working with different companies to create a non-Chinese PV value chain. And that's our focus as of today. When it comes to the termination of the Violet J or MOU, it is definitely disappointing that we came to that conclusion. But it doesn't change our view that there will be a viable non-Chinese value chain within solar together with other companies.

Could you comment on how big a part of revenues are products sold in the spot market versus on long-term contracts?

I think I will then direct this to James May.

OK, thank you. In terms of the silicon gases, those are on long term framework agreements that require us to negotiate prices from time to time, but those are fairly firm contracts in that we have established channels to market those products. On the polysilicon side, the the contracts reported quarter to quarter basis as we go forward. OK. Does REC plan to increase its share in the ULIN JV from 15%?

As I said, we we are now in negotiation to try to resolve the dispute we have had in the Jylland JV. As you know, we have 15%. We have the opportunity to increase to 49%, which was the original ownership. We have not yet taken any final stand on this, but we will continue to to look into it as part of a broader strategic review on what is the opportunity for RAC silicon, both outside of China, but also inside of China.

G14 has announced plans to build a factory in Moses Lake and break ground sometime in 2021 Q3. Can you confirm that REC is an important part of this plan and is this the company that began the pilot facility in Moses Lake?

I can confirm that we entered into an MOU with G14 in October. We continue to work with G14 when it comes to their plan to build a facility in Moses Lake. I think we have to refer back to G14. So far, we have no contract with G14 concerning supply of silen to such a potential plant built by G14.

And is REC in a dialogue with the Biden administration regarding future business possibilities?

Chuck, why don't you respond on that?

Thank you. There's a few different, you know, as mentioned in the presentation, there's a few different efforts going along with the Congress and with the Biden administration on renewable energies. I won't go into all the details of each one of them, but there's different acts that are being pushed forward, whether it's carbon, stabilization of supply chain, and that kind But it is conversations throughout the government on what needs to happen in the U.S.

Okay. The company, Mr. Rocco was recently installed as the chairman of the board of REC Silicon, seemed to be down on a very limited timeframe. Is there any special reason behind this?

I don't think I am the right person to answer that question. On the other hand, let's say, Erling Erika has started as a chairman on REC Silicon, and he is a very, very, let's say, engaged chairman we now have in REC Silicon who wants to really make this company a great company. And it's a pleasure to work together with him to try to pursue all the business opportunities we have.

Can REC Silicon produce ingots or wafers in order to circumvent the import tariffs into China?

Let's say RSC today make silicon gas and polysilicon. Let's say a wafer company is different. We don't have any wafer company within RSC Silicon today. So if we were to make wafers, we need to have a major investments into that space.

Okay, when it comes to the reopening of Moses Lake, does the company have enough cash to reopen it?

I would think we have, but you can confirm it, James.

Yeah, the intent of our capital raise was to have the cash on hand in order to reopen the facility. Obviously, it depends upon the timing of the reopening and then under what circumstances. Under what we see now, we have the cash to do that. And with that, that concludes the questions we have from the web.

Thank you. And thank you all for listening in. And James and I will be available if you have further questions after this call. But again, thank you so much for dialing in to this Q1 2021 from REC Silicon today. Thank you. Have a good day.