REC Silicon ASA

OSE:RECSI

Earnings Call Transcript 2020-Q1

[Operator]

[Audio Gap] Silicon Conference Call. [Operator Instructions] I will now hand the word over to the speakers. Please begin with your meeting.

[Tore Torvund, CEO & President]

Good morning. This is Tore Torvund. I'm here in Moses Lake, together with James May, our CFO. And this morning, we released our numbers for the first quarter 2020. And if you would like to follow us on the slides we have sent out, I will start with page or Slide #4.And the revenue in Q1 was USD 24.7 million. And again, let's say, first time since Q2 in 2019, we had a positive EBITDA of $1 million in this quarter. The cash balance as of March 31 is 30.1 -- $30.2 million, which is up from $29.4 million in last quarter. We sold 730 metric ton of silicon gas, which is somewhat lower than the guidance of 850. However, the price of silane gas remained stable from the last quarter. We also sold 85 metric ton of semiconductor-grade polysilicon, and we saw some increase in price of polysilicon of some 14% versus Q4 of '19.Last time we talked about to restart the FBR production here in Moses Lake or prepare for the start-up. We have not yet made any decision concerning this. This is mainly due to the fact that the trade -- Phase 1 trade agreement has not yet been implemented. And also the market for PV polysilicon is relatively uncertain, and we'll come back to that, due to this coronavirus outbreak.And the same thing for the sale of Butte. We have still interested parties, which have signed up, but we have not been able to do the due diligence, which then means that people need to come to our plant due to, again, the coronavirus.When it comes to the response to the COVID-19, we definitely have introduced several measures here in Moses Lake and in Butte to keep our workforce safe. We have had no cases of anybody having the COVID-19. And we have had no operational issues during this time. So we have been running normally during this period.When we go to Page 5, the guidance or the metrics -- actual metrics versus guidance. You will see that we built an inventory of 151 metric tons of polysilicon during this period. This means that we are now only producing based upon orders from our customers. So this 151 increase in inventory will be or have already been sold, that will be then shipped later in the year. On the polysilicon production, we were 13% below the guidance, semiconductor was 6.9% below and as I said, the actual silicon gas came in 14% below our guidance.If you then move to Page 7, and this is a more general view on the semiconductor market. Definitely, the macro trends are still there. 5G mobility, Internet of Things, artificial intelligence, electrification of the automotive, and renewable energy and power control are still very much intact. But definitely, there is a short-term uncertainty due to the COVID-19. The U.S.-China trade issue is still not resolved. We see some market shift, both technology and geographically, on the flat panel side, and there is some oversupply out of China.On the other hand, we see that our end customers, TSMC in Taiwan, Intel here in the U.S., Samsung in Korea, they all reported a relatively strong Q1, but they are also very uncertain what will be the rest -- the -- let's say, outlook for the rest of the year due to the pandemic we all are talking about.Page 8. As you know, silane and silicon gas is definitely our most important product as of today. We still keep a very strong position in that market. We have not seen any, let's say, major issues in the semiconductor market outside of China. And definitely, we are the largest producer of silane gas, silicon gas, we have an unmatched experience, and we are recognized as the most reliable and high-quality company in this space. We do have also -- it is a relatively high barrier to entry into this market. So we have been able to keep up our market share towards our semiconductor customers. And as you will see on the right-hand side, almost all the largest semiconductor companies are our customers, where we are the major supplier of silicon gas to these customers.When we look to the actual numbers, as I said, we came in at 730 compared to 850 on the -- guided. We have had some issues on the logistics side. As you will understand, there is way less import from Asia to the U.S. or West Coast of the U.S. today. That means that we have had some issues to get our modules back from Asia and also to ship to Asia. All our customers mainly -- are mainly now in Japan, South Korea, China and Taiwan. We also see that -- let's say, we have had a relatively strong April because it seems that the inventory has been depleted. We are more than certain about what will be the end shipping quantity for May and June and definitely for the second half. But so far, it seems relatively solid, the market for silicon gas. But again, the uncertainty still remains for Q2 and for the second half of the year.If you go to Page 10, we -- you will see that we still guide on the semiconductor side there at 800 metric ton, which is a little bit up compared to 2019, but again, there is some uncertainty. The focus is definitely on Float Zone, where we are one of the 2 global producers of Float Zone. And as you will see on the graph on the right-hand side, we believe that 2020 will be somewhat stronger than 2019, but again with the uncertainty of what would be the market development in the semiconductor business in the second half.Then I will hand over to James to go through the financial numbers.

[James A. May, Chief Financial Officer]

Thank you, Tore, and good morning. I'm on Slide #12. As Tore indicated a moment ago, total revenues for the first quarter were $24.7 million, which represents a $7.1 million decrease compared to revenues of $31.8 million for the fourth quarter of 2019. In total, this decrease can primarily be attributed to lower sales volumes caused by seasonally lower sales of polysilicon and the impact of uncertainty caused by the effects of COVID-19 on shipments of silicon gases.Total EBITDA for the quarter was income of $1 million compared to an EBITDA loss of $3 million in the prior quarter. As Tore said, this is the first quarter that we've had a positive EBITDA since the second quarter of 2019, and this continues to demonstrate our successful efforts to adjust to a changing business environment to maintain the company's liquidity.Moving on to Slide #13. In the Semiconductor Materials segment, revenues for the first quarter were $24.5 million compared to $30 million for the fourth quarter of 2019. Virtually all of our sales for the first quarter occurred within the Semiconductor Materials segment. And as I explained a moment ago, the decrease was primarily due to lower volumes. In terms of total polysilicon sales volumes within this segment, there were 88 metric tons compared to 303 metric tons in the prior quarter. Solar-grade sales declined from 112 metric tons to only 3 metric tons in the current quarter. Semiconductor-grade polysilicon sales were seasonally low, but near our expectations at 85 metric tons compared to 191 metric tons in the prior quarter.Overall, average polysilicon prices increased substantially due to the lower product mix of solar-grade polysilicon. For semiconductor-grade polysilicon, average price has increased by 14% -- by about 14%. However, this was also due to mix where we had higher shipments of the highest price Float Zone grades of polysilicon, while the underlying prices for any specific grade remained largely unchanged from the prior quarter.Silicon gas sales were 730 metric tons for the quarter compared to 857 metric tons during the prior quarter and 850 metric tons for the guidance provided with the fourth quarter earnings release. Average sales prices remained relatively stable compared to the prior period.EBITDA contributed by the Semiconductor Materials segment was $8 million, up from $5.3 million in the prior quarter. The increase can be attributed primarily to lower fixed cost spending, lower electricity prices and higher average polysilicon prices, which were partially offset by the lower sales volumes of silicon gas.Moving on to Slide #14. Within the Solar Materials segment, there were $200,000 in revenue for the quarter. This represents only small amounts of sales of the remaining inventory of the granular solar polysilicon. We expect to see small quantities as we go forward as well. The EBITDA loss for Solar Materials was $2.8 million. We continue to see reduced expenditures as we identify opportunities to save costs and as activity levels decline at Moses Lake. Changes in expense levels from the prior quarter are primarily due to the timing of expenses only. Within Other and Eliminations, there was a net cost of $4.1 million. Net costs were within expectations and changes compared to prior periods were, again, largely due to timing.On Slide #15, cash flows. The cash balance increased by $800,000 during the first quarter. Cash inflows from operations were $2.2 million, included the EBITDA of $1 million, and change in working capital of $5.4 million. The large change there was a decrease in receivables of $7 million and an increase in payables and accruals of $3.6 million, while inventories increased by $5.2 million. Interest payments included $1.5 million on equipment leases under IFRS 16, and we also experienced a $2.7 million loss -- currency loss due to the impact of a stronger U.S. dollar on cash deposits in Norwegian kroner. In investing activities, cash inflows were $300,000 and that was capital expenditures of $300,000 offset by a decrease in restricted cash balances of $600,000.Cash outflows from investing -- from financing activities, excuse me, were $1.6 million, and this was all a decrease in lease liabilities under IFRS 16. Total cash balances increased by $800,000 to $30.2 million on March 31, 2020.Slide #16, debt. There were no underlying changes to our debt during the quarter. The changes can be attributed to the payment of long-term lease liabilities, and I indicated a moment ago, the impact of a stronger U.S. dollar on debt denominated in NOK, which is primarily -- or is the indemnity loan and the increase in the cash balances that I talked about a few minutes ago. The stronger U.S. dollar caused a decrease in the contingent liabilities faced by the company as well. The reassessment of tax in Norway decreased from $29.3 to $20.3 million, and the indemnity loan decreased from $22.8 million to $19 million.With respect to the property tax appeal, we expect an appeal hearing to be scheduled at the beginning of the third quarter, do not expect any ruling before the fourth quarter of 2020. So development is within the time frames that we've previously presented. There are no other significant changes with respect to the tax examination in Norway or with the indemnity loan.And with that, I'll turn it back to Tore. Thank you.

[Tore Torvund, CEO & President]

Thank you, James. And short updates on the never-ending trade issue. And what we have written here is maybe not completely up to date because it has been, as you probably know, new developments on the trade issue between the U.S. and China. On Friday, Vice Premier Liu He from China, a phone call together with Steven Mnuchin and Robert Lighthizer, and they agreed that the Phase 1 deal was still ongoing, and they were going to implement. It has been not implemented due to the COVID-19, but they agree that it should be implemented.On the other hand, Global Times yesterday said that -- and the Global Times is a nonauthorized newspaper in China, but let's say, assumed to be very close to the Chinese Communist Party. They said that China would like to renegotiate the trade deal between the U.S. and China, while President Trump this morning, or probably last night for you, said that it is completely unrealistic to have any renegotiation on the Phase 1. The fact is that it is not implemented. We, as a company, have tried twice. We have had contracts with companies in China. But when we have tried to export, our customer has been told by the Chinese customs that they would still have to pay 57% duty on polysilicon -- solar polysilicon made in the U.S. So it is not implemented. And also one of our -- let's say, one of the other companies here in the U.S. has had the same experience. So it's still not yet implemented.We have had meetings and discussions with USTR, and we have proposed that if it is not going to be implemented, U.S. should implement something like that every solar panels imported to the U.S. -- as you know, U.S. is the second largest market on a global basis for solar panels, that the solar panels imported to the U.S. should have content of U.S. polysilicon. We don't know if the USTR is going to do that, but at least that's a way to force China to implement the Phase 1 deal. So we are still hopeful that it will occur, but still uncertainty when it will occur.We then go to the market for solar panels, go to Slide 20. It is -- for the first time, it is believed that there will be a decline in the demand for solar panels in 2020 compared to previous years. In 2019, 123 gigawatt of solar panels were installed, while 2020 is then assumed to be about 105. So it's 20 gigawatt lower compared to 2019. As you will see also from the graph there, let's say, installation in China has continuously declined since 2017 to 2019. It is now assumed that China will increase their installations to give some stimulus to the industry in China. So it is anticipated that China will install 55 gigawatt in 2020, while 50 gigawatts -- while outside of China, we go down from 85 gigawatt to 55 gigawatt. So even if the Chinese manufacturers have continued to be running at relatively high capacity, there is now a demand decline for solar panels on a global basis, and that means basically that there is way oversupply along the PV value chain due to this coronavirus consequences.If you go to Page 21. This decline means that there will be -- demand for polysilicon will go down to 75,000 metric ton from 2019. And that, again, will mean that there is a massive oversupply of polysilicon, but also a massive oversupply along the value chain, and this will definitely mainly hurt the Chinese industry since they control more or less all of the production of solar panels now on a global basis.We see that then on the polysilicon side, a non-Chinese company has already said that they permanently shut down their production. That happened in February this year. And 50,000 metric ton will be taken off in that company. Another non-Chinese company indicated just recently that they will reduce their production by 30% from May 1, so that we take off about 20,000 metric tons. And there is a lot of companies in China, which now have said that they are going to go into what they call extended maintenance, which again is a temporary shutdown. And so there will be, let's say, a drastic reduction of production of polysilicon in the coming months. And basically, we then think that it will be down to some 390,000 metric tons compared to 465,000 metric tons in 2019.If you go to Page 22. If you look to the slide -- or the graph on the right-hand side, you will see that the import, which is the light blue there, to China will go down from 120,000 metric ton down to 70,000 metric ton in 2020, while the remainder of the production cut will then be in Chinese polysilicon producers. When we come to 2022, we believe that the market will be then back to a more normal trajectory and 150 gigawatt. And at that time, there should be relatively good balance in the marketplace, except for -- it has been some Chinese companies, which continue to announce that they are going to invest in new capacity. Our view is that, that will not happen until the polysilicon price in the long term will reach some $15 a kg, which is twice the price out in the market as of today. But the uncertainty again will be how much the Chinese government will subsidize the industry to continue to invest in polysilicon.In Page 23, we have then given you an overview of, basically, the companies, which will deliver 390,000 metric ton in 2020, what will be the restarted capacity in 2022 and the potential added capacity by new investments also in 2022 to reach the necessary capacity of 535,000 metric ton as such. We then assume that we will be operating and delivering this when the market is going to be more healthy. We don't know exactly when it will happen. But today, in fact, is -- the best situation for REC will be not to produce PV material. And there will be a lot of other companies which do have negative cash flow during this period of time with today's prices. We have seen that both -- from both these companies outside of China reporting and our knowledge about what's going on in China is that there is a tremendous negative cash flow also in polysilicon producers in China.If you go to Page 24, you will then see, basically, that the cash costs versus capacity. And as you will see, most of the companies are now operating at negative cash flow with today's prices of about $7 kg. If we come up back to 150 gigawatt in 2022, we anticipate that REC here in Moses Lake will have a cash cost around $7.50 to $8 a kg, and we should be well within those companies which may make money on what is the price assumed for 2022. Then let me shortly give you a short update on Yulin, Page 26. We loaded 22 metric ton this quarter in -- of silane in Yulin. We produced 1,600 metric ton of FBR of high quality. The FBR now is comparable with a high-quality Siemens and is now used for mono application in China. We produced 22 metric tons of Siemens production over there. The plant is not running full capacity. It has been -- let's say, we have had issues with getting MGS and other supplies into the facility due to the coronavirus outbreak in Q1 in China, but also the fact that, let's say, we are not able to make money on today's market out of a Chinese plant in China. So we are running at reduced capacity, but we are focusing on preparing that the whole plant will produce very high-quality FBR and Siemens polysilicon.Concerning Page 28, on the battery side, we are still working with 3 different companies there, which then -- looking into using silane. On the anode side on the batteries, relatively limited activity here in the U.S. based upon -- then again that most of the business has been shut down. But still these 3 companies have an interest to work on -- to work with REC to utilize our silane to add to the graphite to increase the efficiency of the lithium batteries. So if you go to the final Page 30, the 2020 business plan for REC. First of all, it definitely will be to continue to operate stable and profitable Butte facility. As I said, it has been no issues during the first quarter, and the market still seems to be relatively resilient, but with definitely uncertainty due to the pandemic.The restart of Moses Lake will not be decided until we see what will happen with the Phase 1 or an alternative to a trade deal with China. We also continue to monitor the PV market. And as you see, we don't think 2020 or 2021 might be a strong PV market. We believe that at the second half of 2021, we will be back to a more normal market development. And we -- definitely, as we have told earlier, before we make a decision to restart, we will then require additional capital to prepare for the restart. We said $30 million will be necessary for -- in expense just to prepare for the restart of Moses Lake. But the timing of this additional capital will then be dependent upon when we decide to restart.The divestment of the Butte facility is still ongoing. We have said that we will divest Butte if we get an acceptable offer. We have interested parties, and they are waiting to get access to the plant when business open up again in the U.S. We continue to support from Moses Lake now the start-up and the improvement in the Yulin JV. We do not have people in China. We patriated the people from China back in January, and it will be uncertain when we will be able to move back, probably not before mid-summer at the earliest. The Chinese would like us very much to come back. And they have said that it's safer to be in China than in the U.S., but our people have said that they prefer to stay in the U.S. until this has been resolved. And we continue the dialogue with these silicon anode battery companies.So I think that's the short version of what has happened in Q1, and then we can open up for questions.

[Operator]

[Operator Instructions] It seems that we do not have any questions from the conference call at this time. So I'll hand it back to the speakers. Oh, we do have 1 question just now. It is from the line of [ Orville Gusmid ].

[Unknown Analyst]

I just had a question regarding the added PV capacity that you expect from East Hope and Tongwei on Page 23 in your presentation. Perhaps a bit interesting, but do you see this change their competitive position in terms of the cost curve? Or do you expect them to be on the same cost curve in terms of this added production that you expect into 2022? Do you have any sort of observations or thinking around that? Could be interesting to hear.

[Tore Torvund, CEO & President]

What we observe in China is that at least the companies we are working with, we see that they are, let's say, running; let's say, their cash cost is probably not comparable in terms of what is included compared to what we normally include in our cash cost. So we see that some of these companies are still getting capital from outside sources, even though from at least those companies, which then announced their cash cost and said that they are very, very low compared to what we think they are.Concerning, let's say, will there be new investment in China, I don't think we can rule out this. On the other hand, I think I said in one of my slides that there will be and there is more and more outside customers who basically ask for lower footprint polysilicon in their panels. And that's why we believe that at least some of the polysilicon needs to be imported because there is a very high footprint of the polysilicon made in China. All these companies we are now listing. 5 or 6 of the large companies are now operating in either in Mongolia or in Xinjiang, where they have access to subsidized coal-fired power. So -- but it is very difficult to compare cash costs in China with what is the cash cost on western producers because they have not included the same in the cash cost as we normally would include in cash cost.

[Unknown Analyst]

Obviously, sad to hear they are producing this with coal-fired power plants, but that's, I guess, one of the challenges you have. Thank you very much.

[Operator]

[Operator Instructions] As there are no more questions from the conference call, I will hand the word back to the speakers.

[Tore Torvund, CEO & President]

Okay. I would just then like to thank you so much for attending our conference call. We are -- for the first time, we are not able to get to Oslo this time or maybe I will say would be able to get in, but James wouldn't be able to get there. And if I went to Oslo, I wouldn't be able to get back to the U.S. So that's why we have done it from here from Moses Lake this time. But thank you so much for attending. And then we will release the next Q2 on July 23. Hopefully, at least, I will be then in Oslo. Okay. Thank you so much for your attendance.

[Operator]

This now concludes this conference call, and you may now all disconnect your lines.