REC Silicon ASA

Good morning, and welcome to the REC Silicon Q1 2023 results presentation. My name is Kurt Levins. I'm the CEO of REC Silicon, and with me today is Jack Yoon, who is the CFO of REC Silicon. If you've probably already seen, there's some brief things to go through on the slides. It will not be too I'll try not to drag it out too long. I'm sure there might be questions afterwards, so we'll get going. So in the first quarter, our revenues were 29.1 million. Our EBITDA was negative 23 million. This was a slight improvement from last quarter. Our cash balance is 49.1. drawdowns mainly related to operating activities loss as well as our ongoing investment opportunities both in Moses Lake and Butte. Our gas sales increased slightly, but that was at the cost of some lower ASPs as we moved material into some lower-end markets as a result of demand in the higher-end market being soft, as I've indicated before, and that continues. So there were some dilutive effects on our price. In terms of semiconductor polysilicon, we ended up selling less. We also produced less. The reason for selling less was primarily driven by the fact that in Q1, as I'll show you on later slides, It's traditionally a lower period for shipments. We have some seasonality effects. But there were also some pushouts that will allow us to recapture that revenue in subsequent quarters. Moses Lake, construction actually started. So we've been doing a lot of testing. We've been doing a lot of inspecting. We've been doing a lot of upgrading to facilities. But this, some of the equipment that we're putting in actually requires some physical groundbreaking structural steel footings. So it's progressing along at this point. We still have the same ambition to be online in Q4, and there's nothing right now that views to us being off of that timeline. Market-wise, as I had indicated, semiconductor markets still remain somewhat challenged. This is primarily because of the excessive inventory that's in the channels. Recently, though, there are some signs that things could be bottoming, courtesy of information that's come to us from third-party economists who cover the sector, as well as analysts, as well as from the individual companies themselves, such as Micron and Samsung and Intel, based upon what actions they're taking We're hoping that this is going to be maybe a stabilization period followed by increasing as we get towards the end of the year. And in the anode materials, we've started to see real progress from silicon anode producers. By this, I mean we've seen physically groundbreaking dirt being moved around. So things are starting to commence with that. have discussions with others which are heavily into planning and engineering. So I think that that opportunity is moving closer to actually being a reality for us. And then financing, we did have $110 million corporate bank loan that was finalized during the period. Well, that's interesting. That's actually not coming from my presentation, just so you know. It's not a hook. So in any case, just so I'm not having to fight against the inspiring music, I'll take a breath here for a second. Thank you. Yeah. It was like a game show as you were waiting for me to launch the next slide here. So as I said, in terms of our highlights, I hit upon it a little bit, but revenues were down. There was mainly driven by a polysilicon sales volume, which is partially seasonal, partially related to the fact that we produce less due to some effects of electricity. And then on silicon gases, while volumes were stronger, Again, we trade it off. So some of our higher-end materials, where it's been slower due to the semiconductor industry, we ship less of other materials that go into markets that we can more easily access in situations like this where there's market weakness. In terms of our EBITDA, as I said, the main issues around that were the fact that we did have some shipment deferrals slightly lower ASPs on our gases and higher electricity costs that then caused us to make sure we optimized our reactors in the beginning of the quarter, the very beginning of the quarter. And semiconductor materials, you know, some of this I've covered, but just to say again, if you look at it from the sales volume-wise, This is a decrease, which is not unexpected for this particular part of the year. I'll show you on a separate slide. Sales price, there was quite a bit of increase in terms of our semiconductor grade polysilicon. That increase is a function of two things. One is the fact that we have increased prices due to make up for input costs to our customers, and we'll have further price increases coming in the second half of the year. But then beyond that, The issue there is one of the fact that because we moved a certain amount, it's a mixed effect between our lower qualities and our higher qualities. And then Butte had an EBITDA of 3.4, which again, negative 3.4, which again was an increase from last quarter. Cash flow, we've covered that again, but the main thing here is the fact that it was impacted, of course, by our operational performance and as well as our startup activities and then our CapEx efforts. Nominal debt was 183.8. Nominal net debt was 134.7. Silicon gases, if you look and see how that curve is, you can see where we hit the brakes last year in Q3. This is when the signals came down to us through the value chain. Basically what happened is that the TFT industry started turning down. That's where we first saw it. So there were shipment deferrals and cancellations, followed by the semiconductor industry as we moved into Q4. And you can see that it dropped. There was kind of a step change from our run rate down to a lower one. Q1 came up a little bit. And while, you know, Q2, there's still uncertainties, I can say that we expect it to be on par with this quarter, potentially this past quarter, potentially see some increases as the situation stabilizes. And one of the things that we've done is utilize this relatively strong PV market to move our silane gases into during this time period so that we can make sure to make up volume, keep proper utilization on our plant. That, in effect, though, has a dilutive effect on our overall ASP because that particular product qualities do not command the premium that our high-end material does. So the one thing I've kept harping on the fact that the semiconductor industry is down, that's our primary focus for operating assets right now. However, I want to say that it hasn't changed where it's going. I mean, the fundamentals for us are still there. There's still more silicon used in everyday uses, everyday devices, vehicles. That's going to continue. The advanced technology nodes are going to use more of our material. and some of our new materials per unit of area. And again, most of the investments are in leading-edge advanced technology. So that is still there. Those expansions are happening. Silane-based silicon anode material producers are starting to move forward for their next phase of expansion, so where they're moving from very small bench scale, pilot type operations to not full scale, full ambition production, but production that's significant enough that it's going to utilize a fair amount of siloing. And we're using this time to finish up on our investments, high value investments, in terms of the ability to move our materials, store our materials, get them to the customers, as well as produce more material, particularly some of our higher end gases. So we're not wasting the time as we move through this, and we're looking for ways that we can continue to improve the financial performance in light of those challenges. On polysilicon, as we said, you can see the seasonality effect. It is lower this year because, for one sense, demand itself is a little bit lower. However, the other thing is we did turned down some of the production in the beginning, and that was simply to avoid higher electricity costs that arose. So in avoiding that, we produced a little less material, but we have plans to try to make that up later on in the year during more favorable regimes and when we get our mitigating activities in place that we're working on right now for that. However, the price did increase, but that was, again, due to mix. The activities towards the electricity issue that I've talked about are ongoing, and as I said before, I think by end of Q3, we should have some firm solutions. So we're already working on things right now, and I think that some of those will go in place, but then there should be more visible to you in subsequent quarters, starting maybe Q4 and into early next year. This includes everything from, as I said, another tranche of price increases to how we're procuring electricity to even looking at on a reactor-by-reactor basis what are we going to run or not run. In terms of solar materials, although we are not currently selling into this, obviously, this is our ambition with the Moses Lake restart. And right now, the solar industry is rather robust, particularly in China. The forecast itself is predicted to be above 300 gigawatts. What we are seeing, though, is that prices are coming down some, not as fast as you would expect, given some of the levels of overcapacity. that one would expect if you try to butt it up with the announced expansions. So that's something we'll be tracking. But right now, the price that is in effect in China is still, you know, well within the band that we would contemplate being a profitable band for companies to operate in. And then outside of China, the price for polysilicon from producers outside of China is still remaining very high. And it's very, it has not come down to the same degree that the price in China has come down. But again, that's from a higher point. And although the 16% looks somewhat significant, it still lands that material, again, well within the band that we would consider, you know, to be a profitable band to operate in. We'll just have to continue to monitor that. And of course, as we had noted before, in one sense, this is important to us because obviously, you know, we're sensitive to the pricing in the market. However, the contract that we have, you know, that we agreed to in terms of the MOU as well as the contract will allow us to make sure that even if the China market does go all the way down, we will not be in a position where we're below what our operating costs are. So we can still remain profitable even at the bottom of the floor. Moses Lake, as I said, we are currently under construction, which is nice to see after a lot of planning. And this continues along schedule. We've ordered all primary equipment. Our hiring activities are in line. We're not having major challenges in terms of either bringing back talent that used to work for us or hiring new talent. We've been able to secure all of our key process inputs, things like our metallurgical grade silicon, silicon tetrachloride, so we don't have any issues around visibility towards what costs are going to be in that sense for the startup period, as well as our access to them. And we're already working on next year. We have some very ambitious cost reduction targets on all of those materials. And 75% of our purchase commitments will be done by the end of this month. So if you look at the CapEx overrun risk itself, It is not, it's what we consider to be within a manageable band, given that what's left are things that are mainly commodities, such as pipe, structural steel, as well as just labor for installation. So all the major long lead time, all the things where we felt we could have a lot of exposure to fluctuations in a, sort of unstable input environment we were able to secure earlier. Foundational activities. So this is, you know, what we define as the main part of our activity here over the past six to nine months. Some of these, you know, we've come out with information on. Others, there's going to be more to follow. But this is where we're really focusing on. I think, seeing from my perspective, the best way for us to create value for our shareholders is going to be actually doing what we said we were going to do. It seems like there might be some levels of skepticism given our past experience. around that, which I understand wholly. So what I want to do is make sure that we move towards a culture, well, we are a culture of saying what we're going to do and then we do it. Hence, we tend to focus more like a little less talk and a lot more action. The idea here is we work through these things to put the building blocks in place and set it up so that we're able to move forward, create value, higher revenues, higher profit, real cash flow. I think that is what's going to create value for our shareholders versus me making pronouncements about things that may or may not be. And I'm just not wired that way. And I don't think it's the best thing professionally for us to do for our shareholders. So on contracts, we're continuing on a polysilicon and silane offtake contract. We're getting very close. I think you're going to see a number on all these activities. I would say over the next period before we get out of this year, I think we will have all of these things resolved. For sure, we have to. Supply discussions are occurring with multiple silane-based silicon anode material producers. We have two fairly large multi-year distribution agreements we're discussing with large industrial companies. gas companies. Our bond refinancing is complete. Further refinancing is underway right now in terms of finalizing the options and what we're going to do. And that could be potentially in more than one sort of transaction, one sort of tranche, so to speak. But we're continuing on that and we expect that we will have the money that we need in time for us to employ it. Operationally, the Moses Lake startup is still on track, as I've said. We're still working on the Butte energy mitigation. Our capacity expansion is ongoing in Butte, and we'll be finished with that and ready, qualified towards the end of this year and ready to go when the market turns up. On ULINJV, discussions are underway with how they – around how they are going to potentially expand. As you know that – and I've disclosed before, they had indicated that they wanted to expand. However, you know, there's several things that need to be overcome there, primarily around – primarily around financing as well as around final capacity. That's ongoing. We expect that's going to be resolved here before the end of the year. Reshoring continues in the United States. I think this is something that even though there's a lot of discussion about, it will not just let it spoon back up there. So, the CHIPS Act, the IRA, and the Infrastructure Act continue to be clarified and reinforced. They subsequently keep coming out with more information about how to participate, what to do. We're having discussions. We have a third party that we work with who is a government relations specialist, and they also work with others in our industry to make sure that we're positioned well. So all of those activities that we've talked about, like on the CHIPS Act, both the indirect meaning that we're going to be able to supply to these 18 fabs that get built, which could mean in excess of 500 metric tons of demand for us on our gases product on a yearly basis. There's also potentially direct benefit because part of this is they want to secure critical materials for the semiconductor market within the United States. And that is still being defined. So that's potential later on. The customer production expansion continues. I said it's 10-plus semi-fabs over the next few years, 18-plus if we want to go out to, say, five years. So there's going to be quite a bit of expansion. There's going to be a need for our gases. There's going to be a need for those in a local fashion. And as we've stated... When it comes to our particular gases, particularly on a global presence, obviously we're number one in a number of them. But in the United States, not only are we number one in each and every one of them, but we are also the only one in two of them. So if you look at silane, we're the only producer. If you look at dichlorosilane, we're the largest. There are two producers, but we're the largest by far. And then in monochlorosilane, we're the only producer. So these are materials that are going to be key for next generation semiconductor devices. It's the same thing when it comes to the PV and ingot and wafers. We are the only one with appreciable capacity right now. And obviously that was part of the reason why our offtake agreement with with Hanwha Q-cells, Hanwha Solutions, was something that was desirable to them, and for us to be able to get the plant back up and running, very desirable. There's also multiple silicon anode facilities that are on the way and actually being built. So when we look at the framework, the framework is still there. As I've said, we have the right assets, we're in the right place, and the timing is correct right now. So this is really important for us to focus on these foundational activities and make sure that we put these things in place so that we can harvest on behalf of our shareholders and to move our company forward from being the company that is dreams and optionality to the company that executes and produces. That's all I have for you today. Thank you.

Thank you, Kirk. Gareth from Pareto. I have a couple of questions. So first one on the financing plan, you're stating that you obviously will have it ahead of capital requirement needs, but looking at the cash balance at the end of the quarter and the cash drain suggests that you will need it sooner rather than later. So what can you say both in terms of expected cash movements in Q2 and yeah, what we should think about timing there. Okay. Jack, do you want to cover that?

Hi. So we are the BOD that confirmed our total capex budget and so we are working on the subsequent financing. So we think we can get all of them done over Q2 and Q3 so that we can, I mean, support our older, I mean, CapEx requirement. So it's our financing plan includes, I mean, the loans mostly, and also the prepayment from the update contract.