REC Silicon ASA

Welcome to the REC Silicon fourth quarter 2021 earnings release presentation. I'm James May. I'm the current CEO of REC Silicon. And today I have with me Douglas Moore, our new CFO, who will review the company's financial performance during the fourth quarter. Kurt Levins, the vice president and general manager of our semiconductor materials business, who will review the performance and the prospects for the semiconductor materials segment, and Chuck Sutton, the vice president of sales for FBR PolySilicon, who will review the prospects for our solar materials business. I will then cover the remaining topics on this morning's agenda. There's really no possible way that I can place the fourth quarter highlights on a slide and give each one of them adequate coverage. First, I'd like to recognize our long-term CEO, Tor Torben. He was the CEO of REC Silicon for some 15 years. He joined the company at a time when we were completing the construction of the FBR facility in Moats Lake. He helped us bring this plant up and prove the benefits of the FBR technology, then guided the company through some pretty rough times as we lost access to markets and were forced to shut down our operations in Moats Lake. Now he has played no small part setting up the circumstances which we believe will allow us to restart this facility he leaves a very large void and will be greatly missed now in terms of the fourth quarter results we generated 43.2 million dollars in revenue increased compared to 36.2 million during the prior quarter largely a result of higher sales volume evita for the quarter was a loss of compared to a loss of 3.7 million in the prior quarter. This increase was due primarily to the impact of planned maintenance activities in the prior quarter. Doug will provide additional information regarding our financial results in a few minutes. Our semiconductor materials segment, we shipped 750 metric tons of silicon gases and 481 metric tons of polysilicon. Kurt Levin's We'll provide additional details regarding the markets for our semiconductor materials products in a few moments as well. As we announced during our last earnings release, we reached a settlement regarding the indemnification loans in October. We expect to make a payment of $10.8 million prior to the end of February to resolve all remaining claims under these loans. Doug will talk about this payment specifically and the company's liquidity position in a few minutes. Finally, we completed a private placement of equity that resulted in the issuance of approximately 48.2 million shares and proceeds to the company of approximately 964 million kroner on January 19, 2022. This will be reflected in our cash balances for first quarter 2022 results. This transaction improves the company's liquidity position and is expected to give us the capital necessary to restart the FBAR facility in Moses Lake and to make targeted investments to improve our product portfolio in the semiconductor materials segment. With that, I will turn the presentation over to Doug Moore to review our financial results.

James, good morning. As James mentioned, my name is Douglas Moore, and I'll be reviewing the company's financial performance for the fourth quarter. As James mentioned, total revenues for the fourth quarter were $43.2 million, which represents an approximate 19% increase compared to the $35.6 million reported for the third quarter. This increase is primarily the result of increased sales volume of polysilicon. We're reporting an EBITDA loss for the fourth quarter of 0.4 million compared to a loss of 3.7 million for the third quarter. This is an EBITDA increase of 3.3 million when comparing to the prior quarter. This increase can be attributed to higher EBITDA contribution from the semiconductor material segment, which I will talk about next. All revenues reported by the company for the fourth quarter in the semiconductor material segment. Total polysilicon sales volumes were 481 metric ton, or 84 metric ton higher than the prior quarter. Total average polysilicon prices realized during the fourth quarter increased by 15% from the third quarter, primarily due to an increase in sales mix of higher value products. Prices for each individual grade of semiconductor polysilicon increased slightly. Silicon gas sales volume increased 3% to 750 metric tons in the fourth quarter, up from 728 metric tons in the third quarter. Feedback contributed by the semiconductor material segment was $9.3 million for the fourth quarter, compared to $1.8 million for the third quarter. As James mentioned, we must recall that during the third quarter, the company completed planned maintenance outage, which contributed to the lower EBITDA. Later in the presentation, Kurt will provide additional information with respect to our semiconductor segment. Cash balance has decreased by $15.9 million during the fourth quarter. ending at 110.5 million cash outflow from operations were negative 11 million and the result of a 1.1 decrease in working capital which consisted of a 5.2 million dollar decrease in inventory 5.5 million dollar decrease in trade receivables offset by a 1.4 million dollar increase in accounts payable The decrease in working capital was offset by cash outflows, which included even a loss of 0.4 million. Interest payments totaling 9.4 million, which was associated with payments on a long-term debt and the interest on leases. Previously received customer payments of 1.9 million that were recognized as revenue during the fourth quarter. and also contributions to the pension plan of 0.6 million. The remaining cash outflows can be attributed to changes in other assets and liabilities. Cash outflows from investing activities were 3.4 million and consisted of capital expenditures. Cash outflows from financing activities were 1.4 million and were the result of the repayment of long-term lease liabilities and the annual payment for the grant county property tax note again cash balance is decreased by 15.9 million during the quarter down to 110.5 million on december 31st 2021. Nominal debt decreased by $1 million during Q4 to $197.5 million. Nominal net debt increased by $14.9 million to $87.1 million due to the decrease in cash of the $15.9 million and the decrease of nominal net debt. I will now turn the presentation over to Curt Levins to discuss our semiconductor segment business.

Thank you. Hi, this is Curt Levins, and I'm going to cover some items relating to the market going forward, as well as our performance in the last quarter. Semiconductor wafer production is forecasted to continue its relatively strong growth rate This is a key driver for our business from both the silicon gases standpoint and that wafer fabs have a demand and therefore throughput which drives gas consumption as well as polysilicon where in wafer production drives the consumption of our polysilicon. Key demand drivers are similar to what they've been and in fact in some cases We're seeing stronger trends towards an even heavier emphasis on that application. Data, 5G, automotive, Internet of Things, as well as general electrification and electricity consumption trends. the estimated demand growth for waivers is 6.4 percent compounded annual growth rate from 21 through 26. there is something that that i would like to note though and that is that there's not in general a lot of new capacity that is slated to come on regarding wafers there have been recently some announcements However, third parties, as well as semiconductor industry analysts, have raised the specter that perhaps wafer tightness could cause at some point a further bottleneck down the line. Semiconductor-grade polysilicon for us in Q4 was a relatively strong quarter. This was aided in some senses by a pull forward from customer at their request. And this was a clear sign in terms of how strong demand is from our perspective. Price decrease, however, that is mainly due to mix effect. And not necessarily because underlying. Prices are going down, in fact. prices are increasing across the board and that will be a general trend for the remainder of this year. Demand is expected to remain strong. When we look at right now our visibility on commitments, we have a very high level of backlog and assured commitments from our customers. Approximately 90% of our production is sold out at this point, and we are working on various methods to increase our production where applicable on an incremental basis. In addition to that, we are executing on projects to increase our highest value product in the polysilicon portfolio and that's floats on we had discussed this at last quarter and work continues on that project and we hope to have more production out of that in due time silicon gases again was a strong quarter unfortunately not as strong as it could have been and this was related to the primary drag related to the logistics. Right now, global logistics bottlenecks are, in fact, affecting our ability to put product into our customers hands. And we find that the demand flow is much stronger than our ability at this point to service it. So that means that in reality, the bottleneck ends up being booking and availability of our packages. What we see right now, we see that demand is going to continue to be strong based upon our customer forecasts as well as customer commitments. In addition to that, we have very good visibility in terms of new wafer fab investments and when they're coming online and our involvement in that. We are also continuing our program that we had discussed in the last quarter about increasing our production capacity of key molecules, as well as our distribution capacity of key molecules, including our silane molecule. And this will help us to mitigate some of the effects of the logistics bottleneck. Now hand this over to Chuck Sutton.

Thank you, Kurt. Looking at the chart, it's converting PV module production to polysilicon equivalents. You can see that module production consuming polysilicon in the 2017 to 2020 time period did not increase to a large degree. In 2021, demand has finally surpassed the available polysilicon in China. which has now led to the highest prices we've seen in years. In 2021, global module production looked to be around 200 gigawatts, consuming an estimated 575,000 metric tons of polysilicon. In 2022, module production is expected to be around 240-250 gigawatts, consuming an estimated 650,000 metric tons of polysilicon. We all understand that China dominates the polysilicon supply, accounting for the majority in the past years. As we look at the announced expansions and what has been built and starting up this year, we believe the balance will stay throughout 2022 due to the rampant of the new capacity and the historical factory utilization rates. For the next few years, we see PV installations growing around 11% annually, and if all the announced poly expansion happen, we could see an oversupply in 2023. We see polysilicon prices dropping down in the range of investment returns as that happens. It still remains to be seen whether all this capacity is built and brought online. In the US, as we look at that, the Build Back Better Act is not going to pass in its current form. There is strong support for portions of the bill, including the climate section, that has the SEMA Act to support US solar manufacturing. What is being discussed now is what portions of the bill will be moved forward and how it will be done. The US Senate is currently working on other issues around continuing the government funding budget. You know how to work on the next Supreme Court nomination. All this has been moving the efforts on the build back better portions to the side. This uncertainty may delay the restart of the most Lake FBR facility. Currently, currently we're working the business case for restarting Moses Lake. Those efforts include what demand for our products would need to be, and as we continue to develop the business case, we'll maintain our flexibility to enable a restart for the plant in 2023. The timing of the restart is depending on market conditions for our products as those various opportunities unfold. With that, I will pass it back to James.

Thanks, Chuck. Next few slides, I'll cover battery materials. In large part, the proliferation of electronic vehicles will drive the large-scale demand for highly efficient batteries. There are several companies that are pursuing initiatives to develop silicon anode materials for use in lithium ion batteries. For most of these companies, silane has become the raw material of choice to introduce silicon and substantially improve the efficiency and performance of batteries that use this material. Some of these companies are in the process of qualifying their products for commercial use. In October of 2020, we announced that Group 14 Technologies and REC Silicon were collaborating to develop a facility co-located with REC Silicon's operations in Moses Lake to produce silicon anode materials. Cooperation between our companies has been ongoing, and we are continuing to work with Group 14 to define requirements. Group 14 is currently using REC silicon silane gas to produce silicon anodes at a facility in Woodinville, Washington for trials and commercial uses. While the specific timing of commissioning a battery materials plant in Moses Lake continues to be uncertain, Battery materials forecasts indicate that large scale manufacturing will be required by 2025 and that very quickly the current capacity of silane gas production will not be sufficient to meet demand. It is expected to create a very good opportunity to deploy REC Silicon's current production capacity as well as our expertise to meet this demand. We'll continue to work to develop these opportunities and ensure that REC silicon has a seat at the table when the market takes off. Now I'll provide a short update with respect to our investment in the Yulin JV in China. The JV continues to increase capacity utilization and produce some 3,400 metric tons of granular polysilicon during the fourth quarter and approximately 13,700 metric tons for the full year of 2021. Currently, the facility is sold out and sales are limited by production volume. The granular product being produced by this facility has been qualified and is being used in monocrystalline PV application. There have been no real changes with respect to our strategy with the ULIN-JV. The $4.7 million equity settlement payment by REC continues to be delayed, and we are continuing to work to resolve the outstanding issues. As a reminder, the option to increase REC silicon's ownership in the JV expired in Q3 of 2021. We currently expect to maintain our 15% ownership share. In closing, I'd like to provide a high-level review of our strategic plan. First, our semiconductor business has provided us with stable cash flows and serves markets that are expected to exhibit strong growth going forward. As Kurt indicated, we're working to position our product portfolio to ensure that we can reap the benefits of this growth. Next, our FBR technology affords low-cost, high-quality solar-grade polysilicon with an ultra-low carbon footprint. These are all characteristics that PV markets are looking for. While there is strong support to pass the CEMA Act as Chuck discussed, the trend towards creating independent supply chains outside of China is not wholly dependent upon the passage of this Act. Companies are currently constructing wafer manufacturing outside of China, which may create opportunities for REC silicon to restart the FVR facility. Lastly, REC silicon is uniquely positioned to capture silane demand to produce silicon anode. We are the only large-scale silane production facility in North America or in Europe. In summary, we're well positioned to benefit from the megatrend that will drive markets in which we participate. Our semiconductor business produces materials that will be required to produce products that utilize new technologies as the elective Electrification of everything continues. Renewable energy. Our facility in Moses Lake is capable of producing low cost, low carbon, high quality polysilicon, which can be used to produce sustainable energy from the sun. And our silane gas is well positioned to support the production of silicon anodes to store and transport that energy. We believe that these characteristics will help us achieve the restart of our manufacturing facility in Moses Lake. Make no mistake about it, we understand what our assignment is. Our prime objective is to restart this facility, and we believe that we can put the necessary building blocks in place and accomplish this task. With that, we'll now take any questions that you might have. First couple questions involve the bill that Senator Mornick has introduced and the incentives in the bill be sufficient to reopen the Moses Lake facility. And then why are we waiting to open for the Mornick bill to pass? So if you'd address that, Chuck, I'd appreciate it.

Okay. Thank you, James. In itself, the bill is not enough to open up the plant. What the bill is focused on is providing incentives to grow that manufacturing base. As you mentioned, there's several folks that would like to build manufacturing around our facility. And so this bill supports that and helps them get a start to doing that. In waiting for that bill to pass, you know, you want to make sure you get the proper incentives to help that foundation of manufacturing build out. So until that passes, I don't expect anything to happen.

Thank you, Chuck. Next question involves discussion on forums that have been digging into the Internet and come across things that are happening in Moses Lake with respect to to the restart and the expansion of the FDR project. I've taken several questions about this in the interim. We have normal ongoing activities to rezone land to make sure that we have the power necessary to to. conduct business in the way that we have in the past, and this is really no indication that there's an expansion or an imminent restart of the facility. So from that standpoint, those are things that we take care of as we go along to make sure that we have the land, the power, the water available to conduct business. There's a question about America competes in the CHIPS Act containing provisions that support domestic supply chain. Could you talk about that just a little bit, Chuck?

So they the chips act. There's two different ones that you seek a bill that was passed last year by the Senate and then the current one that was passed by the House. Those need to go back to the Senate and being reconciled before they're finally passed. Once that's done, we will look at the opportunities as will everybody else to see what can be done to expand semiconductor manufacturing in the US and how that will already see can support that. With the America Competes Act, that's a smaller portion of a solar loan and grant funding. That's more on the investment side of things, which is we've had similar those in the past, and we don't see that or perceive that to be a large catalyst to start manufacturing in the US. Thank you, Chuck.

Take the next question. Many, many countries are seeking to establish domestic PV value chains, including polished silicon production production. For example, in India, this is already see silicon see any international opportunities for its FBR technology through licensing of joint ventures. We've already got the joint venture in China that we're working with. We haven't investigated any additional opportunities. We're always open to speaking to them. I think it's very, inefficient for each country to invest all the assets necessary to complete a supply chain. We've got a plant that's located in the United States that's very competitive on a world basis that can be used in those instances. So that's the best way to do it is to to spread the supply chain across the globe and get the economies of scale that come with large scale manufacturing to supply PV to the globe. Next question is, REC silicon sales of semiconductor grade and flood zone polysilicon have been on fixed price contracts. Have these contracts been renegotiated? And if so, what are the improvements in prices that they achieved? And if you could address that a little bit.

Yes, without being specific about the price increases, I will say that we have increased the price of our flow zone offering this year. We started that process in Q4 and we've continued that for the majority of our commitments for this year. So the price increase level is sufficient to help us mitigate some of the cost input increases that we can see.

I appreciate it. We've mentioned well, it says that we've mentioned discussions with the US military in past years in regards to battery technology. We've never held discussions with the US military regarding the development of the battery. What we do know is that the military is very much involved in the development of batteries and has the potential to drive the demand. So from that perspective, they will have an influence on the market, but we haven't worked directly with them. What we do is we'll work with the companies that demand the silane. or the polysilicon in order to meet this new technology and ensure that they have the necessary raw materials. How do you see the polysilicon oversupply starting in 2023 impacting REC, keeping in mind Moses Lake production? This industry has very much a history of announcing expansions and not following throughout it. Clearly, with the expansions that have been announced, there's enough polysilicon additions that create a substantial oversupply of polysilicon. It looks to begin in 2023. There are several of those announcements from credible companies. that have announced expansions, but they've announced expansions only if the market supports those expansions. Clearly, if you more than double the demand for polysilicon, the price will come down and it won't support that. I think the other thing is that what we see going forward is a bifurcation of the markets, more or less, that we'll have a market inside China and a market outside China. with some protection, especially if the SEMA Act passes. So in those terms, what we want to do is use SEMA as a springboard and then create a very competitive supply chain that can compete on a global basis. With that, I think we've answered the questions. I appreciate your time. Thank you for attending the call. need additional information please contact the ir contacts on our release materials we look forward to seeing you next time on may 11th thank you