REC Silicon ASA

Good morning, and welcome to REC Silicon's first quarter 2022 earnings release presentation. I'm James May, the CEO of REC Silicon, and today I have with me Douglas Moore, our CFO, who will review the company's financial performance during the first quarter. I will then cover the remaining topics on our agenda this morning. As you can see, we were reporting revenues of $34.6 million for the first quarter of 2022. This represents a decline of approximately 8.6 million compared to the fourth quarter of 2021. This decline is the result of lower polysilicon shipment volumes, which decreased from 481 metric tons in the fourth quarter to 267 metric tons in the current quarter. This decline is the result of two occurrences. First, we accelerated shipments of semiconductor grade polysilicon into the fourth quarter of 2021, about 65 metric tons, which resulted in relatively lower polysilicon shipment volumes during the first quarter. And then secondly, we have normal seasonal fluctuations, which generally result in lower first quarter sales volumes due to the rush to finish the prior year in a strong fashion, planned maintenance activities, and then other events since the Chinese New Year. The pause production schedules will result in lower shipment volumes. You will see that our sales will increase according to the seasonal pattern during the second quarter. EBITDA for the first quarter was $3.6 million compared to a loss of $400,000 during the prior quarter. This increase is a result of higher production volumes, which resulted in increased manufacturing efficiency, lower electricity prices relative to the prior quarter, and higher average sales prices. At the same time, we continue to face challenges associated with the global supply chain disruption and higher than normal energy costs. In January, we completed a private placement of equity that resulted in net cash received of approximately $109.5 million. This drove the overall increase in cash for the quarter of $93.5 million and resulted in a cash balance of $204 million at March 31st. As Doug will point out in a few moments, this is some very positive impacts on our liquidity position as we now have cash in excess of debt or a negative nominal debt of some $17.5 million. Now for the big news. Today we are announcing that we are restarting the FBR facility in Moses Lake, Washington. It's a restart as a direct result of Hanwha's commitment to REC Silicon demonstrated by their investment in the company that resulted in the large cash increase that I just discussed. This investment will allow us to restart the facility and work towards a capacity utilization that is targeted at 100% of capacity by the end of 2024. This is in contrast to plans previously expressed by the company, which have targeted utilization rates of only 50%. Yesterday, the company's board of directors approved the commitment of the capital necessary to accomplish the restart. And we have begun to execute projects to meet a goal of first production during the fourth quarter of 2023. And I will provide some additional information regarding our plans with this restart a little later in the presentation. With that, I'll turn the presentation over to Doug Moore to review our financial results.

Thank you, James. Good morning. My name is Douglas Moore, and I will be reviewing the company's financial performance for the first quarter of 2022. As James just mentioned, total revenues for the first quarter were $34.6 million, which represents a decrease of approximately 20% when compared to the $43.2 million reported for the fourth quarter. This decrease is primarily the result of a decreased sales volume for polysilicon. To reiterate what James mentioned, we are reporting EBITDA for the first quarter of $3.6 million compared to a loss of 0.4 million for the fourth quarter. EBITDA increased by 4 million compared to the prior quarter. This increase can be attributed to a higher contribution from the semiconductor material segment, as well as decreased expenses in the segment other. Recall that EBITDA for the fourth quarter included costs for accruals related to variable compensation plans. Effectively, all revenues reported by the company for the first quarter were in the semiconductor material segment. Total polysilicon sales volumes were 267 metric tons or 214 metric tons less than the prior quarter. Total average polysilicon prices realized during the first quarter decreased by 3% from the fourth quarter, primarily due to sales mix of products. Prices for semiconductor-grade polysilicon increased by 7% to 10%. Silicon gas sales volumes increased by 2% to 764 metric tons in the first quarter, up from 750 metric tons in the fourth quarter. EBITDA contributed by the semiconductor material segment was $10.7 million for the first quarter, compared to $9.3 million for the fourth quarter. The increase compared to the previous quarter as the result of increased production efficiency and higher average sales prices for both semiconductor-grade polysilicon and silane gas. Later in the presentation, James will provide some additional information with respect to our semiconductor segment. For cash flows, the cash balances increased by $93.5 million during the first quarter. Cash outflows from operation were $2.6 million and were the result of a positive EBITDA of $3.6 million, which was offset by a $4.5 million decrease in working capital. This working capital consisted of a $7 million increase in inventories, a $3.3 million decrease in trade receivables offset by a $0.8 million decrease in accounts payable. Additionally, interest payments related to leases were $2.2 million and the remaining cash inflow of $0.6 million can be attributed to changes in other assets and liabilities. Cash outflows from investing activities were $5.7 million and are primarily associated with the dichlorosilane or DCS gas expansion project and for FBR upgrades for ultra high purity granular production. Cash inflows from financing activities were $101.8 million and were the result of the repayment of lease liabilities of $0.6 million, the net repayment of the indemnity loan in the amount of $7.1 million And the previously mentioned settlement of private placement of equity of $109.5 million. So again, cash balances for the quarter increased by $93.5 million up to 204 million on March 31st. For debt, nominal debt decreased by $11 million during the first quarter to $186.5 million. This is due to the payment of the indemnity loan, as well as changes in lease liabilities. It is important to note that the nominal net debt is now negative 17.5 million. This means that we're reporting more cash on hand than interest bearing debt. Nominal net debt is a contractual repayment amounts of interest bearing debt, including our finance leases, minus cash on hand. During the first quarter, nominal net debt decreased by $104.5 million. The decrease of $104.5 million is due to the increase in cash of $93.5 million and the decrease in nominal debt of $11 million. I will now turn the presentation back over to James to discuss our semiconductor business.

Thanks Doug. As we've indicated, our semiconductor polysilicon shipments declined due to the result of seasonal patterns of shipments, as well as shipments that were accelerated into Q4 of 2021. This resulted in total shipments volumes of 267 metric tons during the quarter. Of that, approximately 188 metric tons depicted here on the graph the high value semiconductor grades of polysilicon. It represents a 43% reduction compared to the prior quarter in volume due to the two reasons that we discussed earlier. Overall average polysilicon prices declined by about 3%, but this was due only to the mix of products sold. We had a higher mix of solar products. Prices for our higher value semiconductor grades of polysilicon increased by seven to 10%, depending upon the particular grade of polysilicon. The current time, we have a very high order visibility for the remainder of the year and have effectively sold out some 90% of our available production volume for 2022, based on equipment capabilities and plant configuration. We anticipate that we will see increases in prices in the coming quarters, which reflect the continued tightness in the supply and demand balance. As you can see by the anticipated shipment volumes in this graph for Q2, sales are expected to increase consistent with our explanations regarding the timing of shipments and the seasonality and shipment patterns. Overall, this graph shows that we've been able to consistently increase shipment volumes over the previous two years. I'd like to point out that we continue to face higher than normal energy costs We have planned maintenance activities scheduled for early and Q3, which we may use to mitigate the higher periods of energy costs. This is similar to the actions that we've taken in prior years and may represent a change in the timing of production and shipment patterns in order to mitigate the impact of higher energy costs. Demand for our silicon gas products remains consistently strong. However, global supply chain constraints are limiting our ability to fill available orders. This is a result of the increased shipment time that is taken to return empty modules from customer sites so that they are available to be refilled, as well as the available bookings to ship out the modules as they are refilled. On a more positive note, we're experiencing increases in sales price realizations. During the first quarter, average sales prices for silane gas increased by some 10% compared to the prior quarter. In part, this is due to the rationalization of available shipments towards higher value sales because of the supply chain disruption. However, we're also seeing the underlying price increase due to market conditions and the resulting supply-demand balance tightness. Currently, we are seeing some temporary easing of the supply chain situation that could result in some additional volumes of about 50 metric tons during Q2. However, we expect the supply chain constraints to continue to be a challenge at least through the end of the year. We will continue to do everything within our power to mitigate the impact of these constraints. Over the long run, we expect demand growth for silicon gases to remain relatively robust due to the startup of new semiconductor wafer production facilities, as well as the overall strong anticipated demand due to the proliferation of electronic devices. We're continuing to execute projects to allow us to increase our production capacity for silicon gases and take advantage of anticipated market growth. Within the PV polysilicon segment, I'll provide a short update on markets. This slide shows the continued strong anticipated growth for PV modules over the long run. At year-end 2021, most analysts predicted a sharp decline in polysilicon prices during 2022 due to anticipated increases in production capacity utilization and the commissioning of new capacity. However, polysilicon prices in the solar space have continued to increase. They increased by some 12% during the first quarter and are expected to remain relatively high throughout 2022 due to lower than anticipated utilization rates, which tends to indicate that estimates of global polysilicon capacity may be overstated somewhat and delays in the commissioning of announced expansions. In addition, there continues to be strong indications of support for supply chains outside of China, including anticipated clean energy initiatives by the U.S. government, all of which bode well for REC silicon. Because of these market conditions, REC silicon has received an increasing number of inquiries regarding the availability of solar-grade polysilicon produced in our Moses Lake facility. In turn, these conditions have led us to announce the restart of the Moses Lake facility. We are currently targeting first production during the fourth quarter of 2023, and we expect to reach 50% capacity utilization during the first half of 2024, and then 100% capacity utilization during the second half of 2024. The REC Silicon Board of Directors approved projects and the commitment of capital necessary to accomplish this schedule within the last 24 hours. And we have already begun to execute activities associated with engineering, procurement, and construction of equipment and facilities necessary to successfully achieve our targeted schedule. We recognize the current economic environment and disruption to the global supply chains represent certain risks regarding potential cost increases and delays in scheduling. However, we've formulated our estimates and plans with these potential constraints in mind and believe that we can successfully execute our plans according to the schedule that I've just announced. I'd like to point out that relative to previous restart plans announced by the company, which assume less than full capacity utilization, we're now targeting a restart of 100% of the production capability. In addition, changes to customer requirements and the requirement to reduce monocrystalline capable polysilicon rule requires to enhance the product handling and packaging capability at the Moses Lake facility. These increases in scope will entail higher capital expenditures and we expect that we will have to raise capital in order to complete the restart in the facility. On the other hand, The project returns are substantially enhanced due to the targeted increases in scope and production capacity utilization. The exact amounts and the timing of capital requirements are somewhat fluid due to ranges in working capital requirements, specific timing of project cash flows, and the possibility of relatively large prepayments to securitize long-term contracts. Therefore, I will not provide more precise estimates today, and we will keep you informed as we move forward. Suffice it to say that we are very confident that we will be able to obtain the necessary funding to successfully execute our plans. Now with respect to markets for our products, Hanwha Solutions and Hanwha Corporation have proposed off-contact contracts for all production from the Moses Lake facility. Discussions indicate that these potential contacts will favorably compare to any other opportunities currently available in the overall market. When you consider the substantial credibility that Hanwha brings to the table, these This represents a very, very valuable opportunity for REC Silicon. While we are continuing to discuss sales opportunities with other customers, the priority right now is to work out sales agreements with the Hanwha companies for all products produced in Moses Lake. We will keep you informed as these contracts are finalized. And then finally, In closing, I'd like to remind everyone of the key megatrends which will support our strategic plans. First, our semiconductor business serves markets that are expected to exhibit strong growth going forward. The products and solutions provided by our semiconductor materials segment will be subject to increasing demand to support the electrification of everything and the increasing trend toward technological solutions in our global society. Secondly, our FBR facility in Moses Lake, Washington is a world-class manufacturing platform that is capable of producing high quality, low carbon polysilicon to produce sustainable energy from the sun. These are all characteristics that the PV markets are currently demanding. And third, REC silicon is uniquely positioned to capture silane demand to produce silicon anodes. We are the only large-scale silane production facility in North America or in Europe. Summary. We're well positioned to benefit from the megatrends that will drive the markets in which we participate. These characteristics will help us successfully restart the facility in Moses Lake, Washington, and will drive REC Silicon's success as we move forward. With that, we'll now take any questions that you might have. Thank you.

Go ahead, Seth. Okay. Some of the questions that I'm seeing, some of them are similar in nature. So how much capital do you expect you need to restart Moses Lake, and what will the capital be used for?

Yeah, I've already indicated I'm not going to give an exact amount at this time. There's kind of a wide range to what will be required simply because of estimates regarding working capital. which very specifically that's associated with accounts receivable, which the current trend in the marketplace is towards very short receivables terms. So we'll have to work that out as well as the overall capital spend for the project itself. And then as we go forward and complete the project, given our current liquidity situation, we have plenty of time in order to react. to the capital needs required to complete the project.

OK, next question is what are the prices for the silent and poly in the off tape contracts with Hanwha and to go along with that will all products sold or manufactured by Moses Lake on restart be to Hanwha?

Well, first of all, whether or not all products are sold to Hanwha are dependent upon negotiations. These are related party contracts that will have to be valued and accepted in the marketplace. I'm not going to specifically talk about the exact prices that we're charging. Suffice it to say that these contracts will be market-based, long-term contracts with adjusters to price so that the contract prices will reflect the market as we go forward. It won't be a situation that Hanwha is going to pay substantially higher than the market rate for the products. What it will be is that we'll be able to be exposed to the market forces, sell all of our products and realize the financial stability because of full utilization of the facility. Go ahead, Doug.

The next one, I guess, back to the capital requirements. Can we give a ballpark figure on total capital required?

No, again, it's a little early in the process. We're still working out the precise schedule. We know what our targets are, and we're working to expedite all activities so that we can meet or beat that schedule. And as we have more refined estimates and have the opportunity to raise the necessary capital, we'll announce that in the marketplace. Okay.

We mentioned in today's release that we will supply Hanwha with silane gas. Is Hanwha also venturing into the battery space?

That's a question that you're going to have to ask Hanwha. There's several companies that are looking into it. My understanding is that Hanwha will participate in that market.

The next one. We'll stick, I guess, with the battery theme. What can we say with regards to opportunities with Scylla Nano establishing in Moses Lake?

What this question refers to is there was an announcement that Scylla Nano purchased some real estate adjacent to our facility. We have held discussions with Scylla Nano as well as other companies at various times throughout the last several years. However, in this instance, we weren't consulted by Silanano. We had no specific talks with respect to their purchase of this land. What this goes to show is that REC silicon is that primary source of silane that will be required by these companies in order to operate their technologies.

Okay. What was the reason for the Delay of the Q1 release, and did the board have to vote in the opening of Moses Lake first?

Yeah, this is just normal business of the board. The timing of the transaction with Hanwha made the time short between when the board was empaneled relative to the Q1 release date. So what we did is we delayed it to give the board an opportunity to form and to conduct a business necessary to approve the Q1 release. There was no delay because financial results weren't ready or anything like that. And then as we went through the process to prepare the board and put the question before the board with respect to the reopening of Moses Lake That was the timing of when the board met and then we've announced it as soon as we could after that was determined.

We've got multiple questions related to Group 14 and Silla Nano, both announcing that they have interest in coming to Moses Lake and people just like to know our comments surrounding that.

I think, you know, we've kind of telegraphed our intentions there. At the same time, we welcome the... The building of battery facilities here in Moses Lake that you know looks to provide a good offtake for the plant over the long run, but will determine how we address that as time goes on.

The next one. The earth. as far as financing upfront payment options or bank financing or equity?

Yeah, basically at this point, we're looking into the various possibilities. We're not going to rule out anything. It could be debt. It could be equity. We'll keep the possibility open to use bank financing or a private placement of debt. And then what was the other part of that question? Oh, the... the prepayment of long-term contracts. It's really common in our industry. Anytime you have a long-term contract, you've got to set up some kind of security to securitize the future purchase against that contract. So depending upon the length of the contract, the anticipated sales price is a certain percentage of that would be paid up front in order to securitize that contract. With a long-term contract, that could be a sizable amount that would be used to offset any of the capital needs faced by the company.

We've got quite a few questions here.

Yeah, no, I'm not going to address any more with capital. We've already addressed that one. It looks like we've addressed the majority of the questions in the queue. So at this time, we'll go ahead and close the conference call. And I'd like to thank you for your participation. We haven't answered your particular question. Please use the contact information on our market releases, and we'd be happy to respond to your questions at a later time. Thank you very much.