REC Silicon ASA

Good morning and welcome to RAC Silicon's third quarter presentation. Today I'm joined by Kurt Levens in Butte, Montana. Kurt Levens is responsible for our semiconductor business. And here in Moses Lake, I'm joined by James May, the CFO, and I'm also in Mosul Lake, Thor Torvind, and I'm the CEO of the company. Can we move to the third quarter highlights? Revenue came up 0.7 million higher in the last quarter. That's a very encouraging number. because the fact is that we were able to ship less silicon gas in this quarter, but we were able to have higher prices on what we ship. Unfortunately, we were hit by high power prices. We have had high power prices also in the US during third quarter. So the higher our prices together with planned maintenance turnaround, which took a little bit longer and cost a little bit more and anticipated as then reduced our EBITDA to negative 3.7. The cash balance increased by 2.7 during the period. And we are very pleased that we were able to settle the last legacy issue from the REC silicon wafer bankruptcy back in 2012, to settle it with Nordea, which was then communicated yesterday. In the Butte facility, we continue to see a large opportunity for future growth. So we have decided to expand the distribution capacity of Xylon. Kurt will come back to it. And we also will improve our float zone for the silicon product by doing some investments in our reactors. These are very good investments. And we'll then have a relatively short payback. Silicon gas sales. came back or came in at 7.28, which was lower than expected. This is mainly due to the fact that we have had large problems with the logistics over the Pacific. We are not the only one, but that's the reason why we didn't meet our goal on the silicon gas side. On the other hand, it is very encouraging that the price increased by some 7.6% compared to last quarter. When it comes to semiconductor segment, we also see a price increase, which is mainly due to the fact to the mix, but we also see on the polysilicon side, a stronger prices going forward. When it comes to Moses Lake, we have continued to discuss with the battery or silicon and battery companies to make a contract with them. When it comes to making a non-Chinese low carbon EV value chain, it is a lot of interest. And we are gradually processing or progressing within this. In this area. So then I will hand over. To games made to explain in more detail. The financial results.

Good morning story indicated I will be reviewing the company's financial performance for the third quarter. Third quarter revenues came in at $36.2 million, which represents an increase of approximately 2% compared to the prior quarter. This increase can primarily be attributed to higher average sales prices, which were mostly offset by lower volumes. We're reporting an EBITDA loss for the third quarter of $3.7 million compared to income of $7.9 million for the second quarter. Recall that EBITDA during the second quarter included other income of $8.3 million related to the forgiveness of loans guaranteed by the U.S. government under the CARES Act. Excluding this item, EBITDA decreased by $3.3 million compared to the prior quarter. This decrease can primarily be attributed to lower EBITDA contribution in the semiconductor materials segment. We'll discuss that a little bit more on the next slide. Note that all revenues reported by the company for the third quarter are in the semiconductor material segment. Total polysilicon sales were 397 metric tons for the third quarter, or about 69 metric tons lower than the prior quarter. However, as Tor indicated or called out, the second quarter included a one-time sale due to spot market opportunities of approximately 165 metric tons. So our underlying base shipments have increased nicely compared to the prior quarter. Total average polysilicon prices realized during the third quarter increased by some 20%, primarily due to the change in mix caused by the large spot market sale during the second quarter, while prices for each individual grade of semiconductor polysilicon remained fairly stable. However, we did see sharp increases in prices for solar-grade polysilicon, which increased the average sales prices realized for this polysilicon by almost 70% compared to the prior quarter. Silicon gas sales volumes decreased from 819 metric tons in the prior quarter to 728 metric tons in this quarter due to the continuing challenges associated with the disruption in the global supply chain. I'm certain that Kurt will provide additional information with respect to our markets for the semiconductor segment. EBITDA contributed by the semiconductor materials segment was $1.8 million for the third quarter, compared to $11.5 million for the second quarter. Again, recall that the second quarter included the forgiveness of the CARES Act loans, which contributed $4.5 million to EBITDA in the semiconductor materials segment. Excluding this item, EBITDA for the third quarter decreased by $5.2 million compared to the prior quarter. As you can see in the lower left-hand side of this slide, this decrease can be attributed to higher electricity prices, which accounted for about $2.9 million of the change, and then about $2.3 million due to lower production utilization caused by the completion of planned maintenance. During the third quarter, the solar material segment contributed a loss of $2.3 million to EBITDA. This is comparable to results reported for prior periods when non-recurring items are excluded. In other, the net cost was $3.3 million compared to net costs of $4.8 million for the prior period. This decrease can primarily be attributed to a reduction in accruals for estimated expenses associated with employee incentive plans. Cash balances at the end of the quarter increased by $2.7 million. Cash inflows from operations were $3.8 million, which were primarily a result of an $8.3 million decrease in the working capital invested. This consisted primarily of a $6.8 million decrease in inventories and also included $1.8 million decrease in trade payables, while accounts payable decreased by about $200,000. In addition, Our prepaid account balance has increased by $2.1 million due to payments, prepayments received from customers that we will convert into revenues during the fourth quarter. This demonstrates the increasing tightness in the markets for semiconductor-grade polysilicon, and we hope that we can see this trend continue into the future. These cash inflows were offset by outflows, which included EBITDA, the EBITDA loss of $3.7 million, interest payments of $2.2 million, which were associated strictly to payments on long-term leases, $300,000 of contributions to the defined contribution plan in the United States, and a currency loss of about $300,000. The remaining cash flows can be attributed to other changes in other assets and liabilities. Cash outflows from investing activities were $600,000 and consisted of $2.1 million in capital expenditures, which was offset by a $1.4 million maturity of municipal bonds held by the company. Cash outflows from financing activities were $500,000 and were a result of the long-term lease payments only. In total, cash balances increased by $2.7 million to $126.3 million on September 30th, 2021. Pleased to report that we've obtained a resolution to the company's one remaining legacy obligation. We agreed to a settlement with Nordea on October 18th that results in payments totaling 95 million kroner, which translates to a remaining liability of $10.8 million. The payment will be made in two parts. Approximately 32 million kroner will be paid from an existing escrow account held by REC Silicon at Nordea, which will result in a decrease in our restricted cash balances. And then the remaining 63 million dollars, or excuse me, 63 million kroner will be paid in cash prior to the end of February 2022. The settlement results in a decrease in the company's debt of approximately $12 million. In addition, because this was associated with the REC wafer bankruptcy in 2012, we've reported $13.4 million in profit from discontinued operations associated with this transaction. Nominal debt decreased by $12.9 million during the quarter to $198.5 million Again, this is due primarily to the settlement of the indemnification loans. In addition, the indemnification loans decreased by 500,000 during the quarter prior to settlement due to changes in currency rates and lease liabilities decreased by approximately 300,000. Nominal net debt decreased by 15.5 million to 72.3 million due to the increase in cash of 2.7 million plus the decrease in nominal debt of 12.9 million. I'll now turn the presentation over to Kurt to discuss developments in our semiconductor material segment. Thank you.

Good morning. I'm going to give it a little bit of color on both our electronic grade polysilicon as well as our silicon gas segments. So as it's been mentioned previously, in electronic grade polysilicon, We had a very strong quarter. Minus the Q2 one-off shipment that we had, you can see that our volumes grew and we expect this to continue on through Q4. Right now we have very good visibility on the commitments from the customers and that is in fact extending into 22 right now. We are involved in discussions with our customers And we have very high visibility on the level of commitments, as well as the longevity of those commitments. So right now, due to the strength in the market, customers are entering into much longer engagements than in previous past, as well as they feel much more comfortable due to the fact that they have more visibility on their order flow. We did, in fact, though, suffer some disruption due to global logistics. And this was mainly in the fact that we had even more opportunity to ship material to satisfy customer commitments that were interrupted and pushed into the next quarter as a result of the logistics problems. We don't know when they're going to resolve. It is not affecting our polysilicon business as much. but we still see some effects. And that's primarily because polysilicon is not a dangerous good, and the fact that it is quite often moved in ship line provided containers, not like where our gas is where it's moved in our containers. Next. In silicon gases, again, our underlying demand was very strong. We see right now, growing strength in the semiconductor industry. As everyone has probably heard, there is a shortage. However, the shortage just means that the existing fabs are able to run at much fuller capacity. Until new capacity starts coming online, we won't see another step change. But that is planned and in the forecast. With regards to how we ended up doing, our Incoming modules were severely hampered by the ongoing logistics issues. We are not able to fill modules and fill containers and turn them around until we receive them. Congestion both in China and overseas, as well as in the ports off of the U.S. coast, west coast, is causing the turnaround times on these assets to greatly extend. And this means that we have to then begin prioritizing and discussions with our customers about how we can meet their commitments. This has resulted in a lower volume in the third quarter. In the fourth quarter currently, based upon our commitments, we expect more. We have attenuated in there for some level of, I will just say, disruption based upon the past patterns of the past two quarters, we're starting to get some feel for the average times. However, I'll say that it is still to some degree very variable. And even though we have a lot of mitigating procedures in place, We certainly aren't suffering any issues over land freight and some of the other issues you hear because we have multiple sources and we manage that part very well. It's still, once it's on the ship lines, it's out of our hands. So underlying demand, as I said, in Q4 remains robust and underlying demand as we look out into 2022 is again expected to grow And we'll just continue to manage the situation. And as it then breaks, we expect that the amount of fulfillment that we're going to get and execution on our orders is going to be greater than what we're able to obtain right now. Next. So in light of these stronger marketplaces, in light of the forecasted demand and visibility that we're getting with customers. We made a decision to invest for our growth in order to maintain our global leadership position. What this entails is that in our silicon gases distribution capacity, we are going to invest in more containers as well as cylinders that allow us to support recently online and as well as future awarded business across the globe. We have over 20 separate sites that we've been awarded that we started to supply to in this year and that will continue on through the end of 2022 and beginning of 23. And we expect that there will be more. We need to be able to continue up that growth plane by supplying those sites. It also will give us some cushion against logistics shocks and transitions of customer locations. In some cases, we have customers who are going to multiple sites versus a single large mega site. And during that process, that means we need to employ more modules to be able to supply them. In addition to that, we're going to be supplying or we're going to be modifying and working on some of our reactors in order to make float zone that is able to support the electrification macro trend. This means that we're going to make larger rods, more mass float zone rods. In particular, this is an area where customers are currently forecasting a 9% to 10% compounded annual growth rate for the next few years. Both of these investments are high return investments with fairly quick paybacks. Thank you.

Thank you, Kurt. I was on mute. Let me start over again. I'm going to give you a short update on the business environment here in the US concerning the possible PV value chain. The US market is very attractive. the reason why it is well protected against particular direct import from China. We have had an anti-dumping and countervailing duty towards China and Taiwan since 2012. That means that solar panels imported directly from these two countries will have a penalty in the range of 90 to 240%. That means basically that there is no direct import from China and from the US. There is an ongoing review now in 2022, but there is no doubt that this will continue to be in place. also for the foreseeable future. If you go to the next, in addition, we have what we call Section 201. Section 201 was implemented in 2018. It goes not only towards China, it goes towards solar panels imported from almost all countries. There is some few exception. But the beauty here started out of 30%. It is by today 15%. And it will expire in 2022. But there is also a good reason to believe that it will be continued at a certain level going forward. So that means that The market here in the US pays approximately 50% more for a solar panel than what is in the open market elsewhere. That's why the US market is very attractive from the ability to pay for the solar panels. Next. Problem is that the US is not making a lot of solar panels. The market in the US in 2020 is about 20 gigawatt. There is a module capacity in the US of 6.5, but as you know, there is no wafer capacity. There is almost no cell capacity, and that's why REC Silicon are not able to supply this capacity here in the US. The way, mainly the Chinese have circumvented the duties is that they have built factories in Vietnam, Thailand and Malaysia. And they then take polysilicon and wafers from China. They convert it into cells and modules in these countries, and then they have to pay the 201. By doing this, they then circumvent the ADCVD. Since the market is supposed to grow towards 55 gigawatt, the Biden administration is very focused on to create an industry here in the US which could supply at least part of the necessary volumes of solar panels based upon production here in the US. Next. That is what is an ongoing discussion as of today. If you look to the right-hand side, this is what the industry has discussed with the US government of the kind of tax credit we need to build a competitive industry in the US. The credit needs to be maintained from when it's approved in 2021 until 2028. And then there is a step down of this credit towards zero in 2031. The credit is refundable. If there is no tax to be deducted, it can be returned in cash. And to support some of the the discussions in the government. We have also added inverters and trackers into this bill. As you will see, the most important thing for REC would be a tax credit of $3 per kilo produced of polysilicon. but more important would be the support for making ingot and wafers, which is $12 per square meter, which is equivalent to $5 to $6 per watt for making wafers. If this is going to be implemented, there is a very strong economic incentive to build ingot and wafer capacity in the US. which is what we need to create this non-Chinese value chain. What is the likelihood that this is going to be approved? It is a vivid discussion here now in the US about this. There is two bills talking about the infrastructure. The tax credit is part of the second bill called $3.5 trillion. There is a lot of discussion, not only between the Democrats and the Republicans, but also within the Democratic Party. What should be the size? What should be then into the second infrastructure deal? We are still hopeful. We don't know the outcome yet, and we don't know the timing. But it will be a decision made at least before the end of the year. Some optimistic have said that it might be as soon as by the end of this month. Next slide. At the same time, we see that polysilicon prices are now approaching $40 per kilo. If we were able to have customers, the margin, as we would probably be able to produce today, polysilicon at $10, but the margin would be close to $30 if we had had some customers to take our polysilicon. The reason why the price is coming up to that level is definitely what's going on in China. Some of the polysilicon producers have had to shut down or at least temporary shut down due to the fact that there is power shortage, as we all know in China. That will probably result in making that polysilicon prices will come down somewhat. But to my mind, it will never come back to the $10, which has been previously. The reason why is that all this polysilicon is based upon subsidized power. uh subsidized power has been the basis for the business case in china not only for polysilicon but also for polysilicon and also for the ingot and wafers when you look to the pv value chain the most power intensive part of the value chain is polysilicon where siemens probably is around 40 of the cost in polysilicon and somewhat less, but still very important, making ingots. For China to continue to subsidize this kind of industry seems not to be economically viable. China is the biggest importer of energy. oil, gas, and coal. If they're going to meet also their target on the CO2, power prices has to come up. And if power prices comes up, it's doubtful that the political prices will come down. This is around 20 to $25 long-term is what is required. and particularly when now there is also a shortage of polysilicon. No one will invest in new capacity, probably not inside, but not outside China, without a long-term price in the range of 20 to 25. That will probably also gradually make solar panels somewhat more expensive. But as we have seen here in the US, with power prices on the rise, the solar industry will be able to pay more for solar panels and still be competitive towards other kinds of energy resources. Okay, next. To give you also a short update on the US perspective when it comes to batteries. Let's say the US is lagging behind on the electrification. There is a tremendous activity, both within Ford and GM, to catch up. but there is very limited production of electric cars, if you see beyond Tel Sessom in the US. At the same time, say 6% of the battery production is assumed to be in the US, if you look to 2025, while China, again, is dominating. ahead of Europe. The argument now used by the battery industry is that if we don't catch up, if we don't invest in batteries, exactly the same thing will happen. What has happened with the semiconductor industry, what has happened with the solar industry, It will also happen with the EV industry because of the lack of batteries here in the U.S. So it's already in the infrastructure deal number one, which is bipartisan. Both Democrats and Republicans have approved that one. There is a $6 billion allocation for developing batteries in the US. That might be of huge interest also for RAC silicon. Next. As you know, silent is the most efficient way to put silicon into silicon anodes. Silicon anodes might increase the capacity by some 40%. We are still negotiating with several silicon anode companies for silent supply, but we have put as a requirement that we need some prepayment for entering into long-term silent supply contracts. The reason for that is that the silicon anode market will be uncertain to tie up capacity in Moses Lake, and then without any financial commitment from the silicon anode companies, it's not very attractive from REC. That is why we have said that to enter into a contract of this kind, we need some upfront payment through pre-payment. Negotiations are ongoing with several of these companies. Next. On the ULIN side, there is nothing new to report. ULIN has made relatively good money in Q3. There is a plant maintenance ongoing for the moment. And there is some indications that also Yulin will have to reduce its capacity due to the power outage issue and the power strain issue in China. The product is well received among the biggest ingot and wafer companies, and the quality is on the level of Siemens, and the form factor is giving some advantages, which is paid for by the wafer companies. So, just to focus on the short term. Next. We are maintaining the opportunity to start up Mosaic. in 2023. It will probably require that we both have an outlet for our polysilicon to the solar market and at the same time that we have some kind of an agreement when it comes to silicon out of supply. There is no doubt that for the moment, there is a very tight market. The product is not in demand. It is to find customers, which is not in China, due to the fact that we have this duty by exporting to China. FPR would be very competitive in today's market with high power prices. since we only use 10% of the power compared to a Siemens reactor. We have been approached by several companies for polysilicon supply. These companies are willing to make investments outside of China under given circumstances. What we are now waiting for, the positive outcome of the discussion concerning the tax credit. If that is a positive outcome, there is no doubt that the non-Chinese value chain will be put in place. That's what we are. We still maintain the opportunity for a startup in 2023. but there is not any decision made if that's going to happen in 2023 or later. I think that concludes our presentation, so then we are open for Q&A. Thank you.

Okay, we have several questions from the web. The first one, are there any indication of China easing tariffs on polysilicon?

It seems to me, and you might add on, Kurt or James, that the tension between the US and China has not eased with the new administration. So we are not working on that to find a solution with China. Our advice to the USDR has been that let's focus on creating a value chain outside of China because it is unpredictable. Even if China eased its policy for the moment, we would be very uncertain for how long the long-term solution needs to be done without China as part of the solution.

Okay, the next question, I think we've answered part of it. When will Moses Lake start up and what kind of revenues do you expect it to generate?

I think we have given the information we can respect to Moses Lake.

Okay. How long are the typical contracts with clients, with customers in the semiconductor market? And can you give any indication of what your expectations are of the price developments and when contracts will be renegotiated?

Yeah, currently there's two forms of contracts. The first one is the longer term engagement, which can be for multiple years. We do have several of those. The second one is a contract that that then goes for some defined period less than that. And whereas before, shorter-term engagements were the norm in the recent past, meaning a quarter to, say, half a year, now it's a year. So right now the discussions we're having with our customers is to lock in volumes for 2022. We expect to have that done here within the next – a month to two months, that should all be completed. In terms of what we see in the marketplace for pricing power or pricing pressure, there is a general trend towards increasing prices as we look forward into 2022. This is driven both by increasing from suppliers, increasing input costs, but in addition to this, general tightness in the market. There is, in most cases, customer demands are greater than the ability, than our ability to fulfill them. And in some cases, then maybe the ability of the supply chain to fulfill.

Okay. There seems to be massive support around the U.S., solar supply chain. However, there's not any concrete progress on investment in new wafer capacity. Can you comment on the challenge the industry is facing? And also, if REC silicon is considering such an investment, what you would view the risk and opportunities would be if such an investment were made?

There is a lot of optimistic views. We all wait for what will be the US government final decision concerning the tax credit. If the tax credit will be approved, I don't think there is any doubt that you will see necessary investments to be done, both on the wafer side and also on the sell side. When it comes to RSE, our focus has been still will be on the polysilicon side. So for the moment, we are not considering investing in ingot production, ingot of wafer production.

Given that polysilicon prices are so high, can Moses Lake procure long-term polycontracts in order to de-risk a restart decision?

Those companies we have been approached by, they definitely want to have some kind of a long-term relationship. This is, let's say, first of all, very initial discussions, because at the same time as we now discuss the tax credit, you also see that the Polysilicon price has come up. There is two now driving forces behind to start a Polysilicon project. as such. On the other hand, the companies we are talking to are still waiting for the decision by the US government on the tax credit. Nothing will happen before that decision is made. If that decision is either negative, that we are not included in the infrastructure package, I wouldn't rule out that still there might be investments in ingot and wafers because of the huge demand for new capacity, but nothing will be done before the US government have made its final decision. It goes with what we are doing and it goes with all our potential customers are doing.

Okay. We've mentioned a large adverse impact on the semiconductor operation from higher electricity prices. Can you comment on how electricity prices have developed into Q4?

Kurt, can you take that one?

Yes. Currently, electricity prices into Q4 are in fact lower than what the average was in Q3. Forwards are not indicating anything close to what occurred in Q3, but again, it's an open market, and what will happen will happen in that particular sense. So, so far, less than what we saw in Q3, but we monitor it daily.

Maybe I should add a little bit to it. The power in the US is mainly coal-fired and natural gas-fired power, in addition to some hydroelectric and some nuclear. The fact that, let's say, natural gas prices, energy prices, has increased to the levels you talk about In Europe, the fact that coal prices has tripled over the last period also influence the power price here in the US. So energy prices is now more or less a global phenomenon. So basically, when you have high prices in Europe and Asia, that will also influence the US. It used not to be like this because there was no export facility for LNG out of the US. The US through its production of shale gas was somewhat isolated. That's not the reality any longer. At the same time, also coal from the US is now exported directly to China. So, it has also influenced power prices here in the US. So, power prices in the US will probably be heading somewhat higher, but still it will be lower, hopefully, than what we experience in Europe, and particularly in China, if you are looking beyond the subsidized prices of power in China.

Okay. Companies CapEx since about 2017 seems to be substantially below depreciation. Can you provide some insight into the maintenance activities at the Moses Lake facility and any updates around potential reactivation budgets?

I think the CFO will have to.

Okay, I can take that one. For the last few years, what we've done is we've only spent that capital necessary to keep our operation is running in a safe and efficient manner. We haven't invested in additional capacity or increased capabilities. That's changing now with the Butte facility where we're identifying opportunities to improve what's going on there. And then in Moses Lake at this point, what we've done is we've made those purchases necessary to maintain our ability to restart at the beginning of 2023, whether that comes from polysilicon or from the battery materials industry. And we have a high confidence level that we'll be able to restart in that time period. Okay. I think it's another one for the CFO. Can you comment on the customer prepayments of $2.1 million? During the quarter, we received really about $7 million of prepayments. And these are primarily from customers in the polysilicon. semiconductor polysilicon markets. And what's going on there is the increase in demand and changes in production schedule are pushing deliveries forward. So in order to ensure those shipments, the customers have been able or been willing to prepay for amounts. The $2.1 million relates to money that was received from customers on which we haven't shipped against that we expect to ship during Q4. I think that this indicates the increasing tightness in that market and bodes well for the demand in the future. For the newer investors, what are the issues related to the ULIN JV? Does REC receive any profits from ULIN and why? has the valuation and the ownership been valued at zero?

Yulin Investment. Let's say we definitely have had challenges working in China. This is state of the art. facility, but particularly during now the pandemic, it has been very difficult to give necessary support to the young operational staff in China to run in an efficient way a relatively advanced plant. Gradually, we have been through teams and other ways of communicating. We have given necessary advice. The operation has improved, and so has definitely the market. There is no restriction out of to sell into China. So today we are making relatively good profit or good cash flow in Jyllind. On the other hand, there is a lot of debt in the company. So we have not been able to, and will not be in the foreseeable future, be any cash flow coming back to REC out of our investment in Jyllind. Maybe you should add something about the valuation, James.

Yeah, the valuation is based on the long-term price expectations associated with polysilicon, which, as we all know, is subject to some uncertainty, although recent prices have increased and the JV is turning a cash flow at this point. Also, what needs to be considered is during the construction period, the JV incurred a great deal of debt. So the debt right now is what's covering up the potential equity value there. Next question is, is the option to increase ownership in the ULIN JV still on the table?

Most likely, we are not going to use that option to increase our ownership in ULIN.

Okay. The Wall Street Journal is reporting that the clean energy portion of the reconciliation bill will be deleted. Does this mean that the tax credits for domestic manufacturing in the U.S. will not be realized?

I think the answer from our side is that we don't know. There is a lot back and forth. There's a lot of rumors. I read the article in the Wall Street Journal. It didn't mention the tax credit specifically. There is a lot of other what they call renewable initiatives into that bill. But the answer is we have no idea what is in and what is out in the negotiation going on in the Congress.

Okay, with that, I believe that we've answered all the questions from the web. Thank you. I'll turn it back to you, Tor.

Okay. Thank you so much for joining us today. If there is any questions, please send us more questions and we will be able to give you a response on these questions as well. Thank you for participating and have a good day over in